Pass-through funding is the arrangement in which a primary recipient of a federal grant distributes those dollars to a secondary organization, called a sub-recipient, to carry out specific program activities. The primary recipient, known as the pass-through entity, is usually a state agency or large municipality that sits between the federal awarding agency and the organizations doing the work on the ground. This structure lets federal agencies fund thousands of local projects without managing each one directly, and it places real legal obligations on both the pass-through entity and every sub-recipient below it.
How the Money Moves
A federal department awards a grant to a prime recipient, which then becomes the pass-through entity. That entity identifies sub-recipients through formula allocations or competitive processes and issues sub-awards for specific programmatic work. The sub-recipient spends those funds to achieve the grant’s objectives, whether that means housing people, training workers, conducting research, or something else the program requires.
The financial relationship runs between the sub-recipient and the pass-through entity, not the federal government. Billing disputes, budget modifications, and reporting all go through the pass-through entity. The federal agency holds the pass-through entity accountable, and the pass-through entity holds the sub-recipient accountable.
Most sub-awards operate on a cost-reimbursement basis: the sub-recipient spends money, documents the expense, and submits invoices for repayment. Pass-through entities can also issue fixed-amount sub-awards of up to $500,000 with prior written approval from the federal agency, which shifts the focus from tracking every expense to whether milestones were met.1eCFR. 2 CFR 200.333 – Fixed Amount Subawards
Sub-recipient or Contractor
Before any money changes hands, the pass-through entity has to decide whether the downstream organization is a sub-recipient or a contractor. The label determines which compliance rules apply, and the substance of the relationship controls, not what the agreement is called on paper.2eCFR. 2 CFR 200.331 – Subrecipient and Contractor Determinations
A sub-recipient carries out a portion of the federal program. It makes decisions about who receives services, is measured against the program’s objectives, and must follow the same federal requirements as the pass-through entity. A contractor provides goods or services for the pass-through entity’s own use, such as an IT vendor, an office supply company, or a CPA firm hired to audit the books. Contractors operate within their normal business, serve many customers, and compete in a marketplace.2eCFR. 2 CFR 200.331 – Subrecipient and Contractor Determinations
Sub-recipients face the full weight of the Uniform Guidance (2 CFR 200), including audit requirements, cost principles, and performance reporting. Contractors follow procurement rules but are not subject to federal grant compliance. Misclassifying a sub-recipient as a contractor means the required monitoring and flow-down of federal terms never happens, and the pass-through entity absorbs the liability.
What the Pass-Through Entity Must Do
Risk Assessment Before Awarding
Before issuing a sub-award, the pass-through entity must evaluate the sub-recipient’s risk of fraud and noncompliance. This is a regulatory requirement under 2 CFR 200.332. The assessment considers the sub-recipient’s prior experience with similar awards, results of previous audits, whether key personnel or financial systems have recently changed, and the extent of any direct federal monitoring the sub-recipient already receives.3eCFR. 2 CFR Part 200 Subpart D – Subrecipient Monitoring and Management
The risk assessment determines how closely the pass-through entity monitors the sub-recipient going forward. A brand-new nonprofit with no audit history will draw more scrutiny, potentially including site visits, desk reviews, and third-party evaluations, than an established university with clean single audits.
Required Sub-award Information
Every sub-award must clearly identify itself as a sub-award (not a contract) and include a defined set of data elements: the Federal Award Identification Number (FAIN), the total amount of the federal award committed to the sub-recipient, the Assistance Listings title and number, the sub-award period of performance, and the applicable indirect cost rate.4eCFR. 2 CFR 200.332 – Requirements for Pass-Through Entities The pass-through entity must also flow down all applicable federal requirements, so the sub-recipient knows what statutes, regulations, and award-specific terms it is bound by.
Ongoing Monitoring and Management Decisions
Once funds are awarded, the pass-through entity must monitor the sub-recipient’s activities for compliance with federal statutes, regulations, and the terms of the sub-award. If an audit turns up findings related to the sub-award, the pass-through entity must issue a management decision within six months of the Federal Audit Clearinghouse’s acceptance of the audit report.5eCFR. 2 CFR 200.521 – Management Decision That decision lays out what corrective actions the sub-recipient must take and the timeline for completion.
Internal Controls
Both pass-through entities and sub-recipients must establish, document, and maintain internal controls over their federal awards. Controls should align with the Green Book (Standards for Internal Control in the Federal Government) or the COSO Internal Control–Integrated Framework, and must provide reasonable assurance the organization is managing the award in compliance with applicable rules.6eCFR. 2 CFR 200.303 – Internal Controls
Controls are not only financial. Organizations must take reasonable cybersecurity measures to safeguard personally identifiable information and any data the federal agency or pass-through entity designates as sensitive.6eCFR. 2 CFR 200.303 – Internal Controls Identified noncompliance calls for prompt corrective action.
What Sub-recipients Need to Have in Place
Before applying for a sub-award, an organization needs a Unique Entity Identifier (UEI), which replaced the DUNS number system in April 2022. The UEI is generated through SAM.gov as part of the registration process, and the entity must keep that registration active for the life of the award.7U.S. General Services Administration. Unique Entity Identifier Update Sub-recipients reporting only as sub-awardees may need only the UEI itself, but most pass-through entities require the full registration.
The pass-through entity will check the federal exclusion list in SAM.gov to confirm the applicant is not debarred or suspended. A detailed project budget is also required, with line items for personnel, equipment, travel, supplies, and administrative overhead, each justified by a narrative connecting the cost to the grant’s objectives.
If the organization has a federally negotiated indirect cost rate, that agreement should be provided. Organizations without one can elect to use a de minimis rate of up to 15% of modified total direct costs, a rate that increased from 10% in the 2024 Uniform Guidance revision.8eCFR. 2 CFR 200.414 – Indirect (F&A) Costs A pass-through entity cannot force a sub-recipient to use the de minimis rate if the sub-recipient already has an approved federally negotiated rate.4eCFR. 2 CFR 200.332 – Requirements for Pass-Through Entities
Cost Sharing and Match
Many federal programs require the sub-recipient to contribute a share of the project’s cost, either in cash or through in-kind contributions such as donated staff time, equipment, or office space. Valuation matters. Donated services must be valued at rates consistent with what the organization pays for similar work. Loaned equipment cannot be valued above fair rental rates. Donated space cannot exceed the fair rental value of comparable privately owned space in the same area. All match funds must be tracked so they can be verified during an audit.
Allowable Costs and What Cannot Be Charged
Every cost charged to a federal award must clear three hurdles: reasonable, allocable, and allowable. Missing any one turns the expense into a disallowed cost that the sub-recipient may have to repay from its own funds.
Reasonable and Allocable
A cost is reasonable if a prudent person would have incurred it under the same circumstances. The test looks at whether the cost is ordinary for the organization’s operations, consistent with market prices in the area, and in line with the organization’s written policies.9eCFR. 2 CFR 200.404 – Reasonable Costs Paying a consultant $500 an hour in a market where comparable expertise runs $150 will draw scrutiny.
A cost is allocable if it is incurred specifically for the award, or if it benefits multiple projects and can be distributed proportionally through a reasonable method.10eCFR. 2 CFR 200.405 – Allocable Costs A cost that belongs on one award cannot be shifted to another to cover a shortfall or dodge a spending restriction.
Categories That Are Always Off-Limits
The Uniform Guidance prohibits certain expenses from being charged to any federal award, no matter how well-documented:11eCFR. 2 CFR Part 200 Subpart E – Cost Principles
- Alcoholic beverages, without exception.
- Entertainment, including social activities and associated gifts, unless the award specifically authorizes them for a programmatic purpose.
- Lobbying costs at any level of government.
- Fundraising costs, endowment drives, and investment management staff.
- Fines and penalties from violations of law.
- Bad debts and related collection costs.
- Goods for personal use, whether or not reported as taxable income.
- Contingency reserves for events that cannot be predicted with certainty.
Some agencies add more restrictions. NIH caps the salary rate that can be charged to its grants at Executive Level II of the federal pay scale, or $228,000 for fiscal year 2026. No federal funds, direct or indirect, can be drawn down to pay anyone above that rate.12National Institutes of Health. Guidance on Salary Limitation for Grants and Cooperative Agreements FY 2026
Procurement Standards
When a sub-recipient buys goods or services with federal funds, it must follow federal procurement rules, not just its own purchasing policies. The level of competition required depends on dollar amount. As of October 2025, the federal micro-purchase threshold is $15,000; purchases at or below that amount can use simplified procedures without competitive bidding. Between $15,000 and the simplified acquisition threshold of $350,000, small purchase methods apply, requiring price quotes from multiple sources but not a full competitive solicitation.13FEMA. Grant Programs Directorate Information Bulletin No. 552 – Increases to the Federal Micro-Purchase and Simplified Acquisition Thresholds
State and local laws may set lower thresholds. The federal limits are ceilings, not floors. A sub-recipient in a state that requires competitive bidding above $10,000 must follow the state rule even though the federal threshold is higher.
Sub-recipients must maintain written conflict-of-interest standards covering anyone involved in selecting, awarding, or administering contracts. No employee, officer, or board member with a financial or personal interest in a potential vendor can participate in that procurement decision, and the written policy must include disciplinary actions for violations.14eCFR. 2 CFR 200.318 – General Procurement Standards
Reporting, Budget Changes, and Audits
Financial and Performance Reports
Once funds are flowing, sub-recipients enter a cycle of financial and performance reporting, typically monthly or quarterly depending on award terms. Financial reports detail expenditures against the approved budget. Performance reports quantify outcomes, whether people served, units built, or training sessions completed. Any deviation from the approved budget or scope generally requires written prior approval to avoid disallowed costs.15eCFR. 2 CFR 200.308 – Revision of Budget and Program Plans
Budget transfers warrant close attention. If the federal share of the award exceeds the simplified acquisition threshold ($350,000) and cumulative transfers between budget categories exceed 10% of the total approved budget, the federal agency may require prior approval.15eCFR. 2 CFR 200.308 – Revision of Budget and Program Plans Changes in scope, changes in key personnel named in the award, and transfers of funds out of participant support cost categories always require prior written approval.
The Single Audit
Any non-federal entity that spends $1,000,000 or more in federal awards during a fiscal year must have a single audit, a comprehensive financial and compliance audit conducted by an independent CPA. This threshold was raised from $750,000 in the 2024 revision to the Uniform Guidance.16eCFR. 2 CFR 200.501 – Audit Requirements Organizations spending below that amount are exempt from the federal audit requirement for the year, though the pass-through entity may still impose its own monitoring.
Failing to submit a required single audit, or receiving serious findings, can result in funding suspension and a high-risk designation that follows the organization into future applications. Smaller organizations sometimes hit the threshold through a combination of awards without realizing they’ve triggered the requirement until it’s too late to plan for it.
Program Income
Revenue generated through grant-funded activities, such as conference fees, service charges, or sales of products created under the award, is program income and comes with its own rules. Program income earned during the period of performance must be spent before requesting additional federal funds and can only be used for costs incurred during the period of performance or allowable closeout costs.17eCFR. 2 CFR 200.307 – Program Income
Unless the award specifies otherwise, the default treatment is deduction: program income reduces the total federal award amount. For awards to universities and nonprofit research institutions, the default flips to addition, meaning the income increases the total project budget. Using program income to meet cost-sharing requirements is a third option that requires prior approval unless the award already authorizes it.17eCFR. 2 CFR 200.307 – Program Income
Equipment Bought With Federal Funds
Equipment bought with grant dollars does not become the sub-recipient’s property to use however it pleases. Federal regulations require detailed property records for each item: description, serial number, funding source (with the FAIN), acquisition date, cost, federal contribution percentage, location, condition, and disposition data. A physical inventory must be conducted and reconciled with records at least every two years, and a control system must guard against loss, damage, or theft.18eCFR. 2 CFR 200.313 – Equipment
When equipment is no longer needed for the project, disposal rules turn on value. Items worth $10,000 or less per unit can be kept, sold, or disposed of freely. Items worth more than $10,000 trigger a federal interest: the awarding agency is entitled to a proportional share of current market value or sale proceeds. The sub-recipient may keep up to $1,000 from any sale to cover handling costs. If the sub-recipient asks for disposition instructions and doesn’t hear back within 120 days, it can proceed on its own.18eCFR. 2 CFR 200.313 – Equipment
Remedies When a Sub-recipient Falls Out of Compliance
If a sub-recipient fails to comply with federal requirements, the pass-through entity has a graduated set of enforcement tools. The first step is typically imposing specific conditions on the sub-award, such as additional reporting requirements, more frequent monitoring, or restrictions on spending authority. If those conditions don’t fix the problem, the Uniform Guidance authorizes stronger action:19eCFR. 2 CFR 200.339 – Remedies for Noncompliance
- Withholding payments until the sub-recipient takes corrective action.
- Disallowing costs, meaning the sub-recipient absorbs them.
- Suspending or terminating the sub-award in part or in full.
- Recommending debarment proceedings to the federal agency.
- Withholding new or continuation awards for the project or program.
Debarment removes an organization’s ability to receive any federal award, not just the one that triggered the problem. Grounds include fraud in connection with a federal award, embezzlement, bribery, falsification of records, and willful failure to perform under an award’s terms.20Acquisition.gov. FAR Subpart 9.4 – Debarment, Suspension, and Ineligibility Noncompliance caught early is a corrective action problem; noncompliance ignored becomes an existential one.
Closeout and Record Retention
Closeout Deadlines
When the period of performance ends, sub-recipients must submit all final reports (financial, performance, and any others required) to the pass-through entity no later than 90 calendar days after the end of the period of performance, unless the parties agreed to an earlier deadline. The pass-through entity has 120 calendar days to submit its own final reports to the federal agency.21eCFR. 2 CFR 200.344 – Closeout
Any unspent funds must be returned. Unused federal dollars sitting in an account after closeout create a debt. The federal agency can charge interest on unreturned balances, offset the debt against future reimbursement requests, or refer the debt to the U.S. Department of the Treasury for collection, which adds its own fees and penalties.
Record Retention
The standard retention period for all grant records is three years from the date the final financial report is submitted. For awards that renew quarterly or annually, the period runs from the date of submission of the quarterly or annual financial report.22eCFR. 2 CFR 200.334 – Record Retention Requirements
Several situations extend that window. If litigation, an unresolved claim, or an active audit is pending when the retention period would otherwise expire, records must be kept until the matter is fully resolved. Records for equipment purchased with federal funds must be retained for three years after the equipment’s final disposition, which could fall years after the grant itself closes. If the award requires reporting on program income earned after the period of performance, records supporting that income must be held for three years from the end of the fiscal year in which it was earned.22eCFR. 2 CFR 200.334 – Record Retention Requirements Build your retention schedule around the exceptions rather than the baseline.