Who This Page Is For
You work in programs, grants or partnerships at a nonprofit, and you have to pick the document that will govern a working relationship with another organization. Pick wrongly and the consequences follow the money. Misclassifying a relationship can delay subaward processing and throw off indirect cost calculations. Wrongly processing funds passed to outside entities can bring more frequent audits or, at worst, the loss of an award.
The vocabulary is loose. The word "partnership" was never defined in the Principles of Partnership, and MoU and agreement labels are often used interchangeably, so do not assume two people mean the same document.
The Short Answer
Follow the substance of the relationship, not the title on the paper. If you pass part of an award to another organization to carry out a portion of the program, you need a subgrant, and many funders require the terms of the main award to be flowed down. If two organizations are collaborating in good faith and no one is paying for services, an MoU or partnership agreement fits. If you are buying goods or services for your own use, that is a contract with a vendor.
Organizations usually sign an MoU when NGOs decide to cooperate among themselves or with a government body. It treats the parties as equals, and it differs from a contract under which one organization pays another to supply goods or services. A memorandum of agreement is a further variant: it can be a binding legal document that holds the parties to their commitment, or it can be just a partnership agreement. Read the text before you rely on the name.
How They Differ
| MoU | Partnership agreement | Subgrant | |
|---|---|---|---|
| Purpose | Simple common-cause agreement, often a first step toward a formal contract | Sets out roles, responsibilities and expectations | Carries out a portion of an award |
| Legal effect | Tends to be non-binding, but the text decides | Depends on what the document says | Often includes the terms and conditions of the main award |
| Money moving | Not payment for goods or services | May cover payments or benefits to partners | Award funds pass to the subrecipient |
| Who controls the work | Equals working in good faith | Roles and decision-making as agreed | The subrecipient has some programmatic control and discretion |
| Monitoring and reporting | As the parties agree in the text | Partners hold each other accountable | Monitoring for compliance, invoice review, closeout reports |
The difference that matters most is between an assistance relationship and a procurement one. In a subgrant the partner has discretion over how the work is done. A vendor supplies goods or services the buyer will use itself. Since the substance outweighs the form, look at how the work will actually be managed.
A partnership agreement is a written document describing the partnership. It helps partners get on the same page, raise hard questions early and hold each other accountable. A good one is a living document that changes as the partners see the need. It should settle roles, responsibilities and expectations, how decisions are made, what payments or benefits partners receive, how data is owned, and who is credited as author of products.
How to Decide
Work through these in order. You will usually know the answer before the end.
- Is the other organization a vendor selling you goods or services for your own use? A vendor tends to sell similar goods or services to many purchasers, works in a competitive setting, and would not expect to publish or co-author results. That points to a contract with a vendor.
- Does the partner carry out a separate scope of work with its own budget and approval? If yes, that points to a subaward.
- Does the partner have discretion over how the work is carried out? A subrecipient does.
- Is its performance measured against whether project objectives are met? If so, again think subaward.
- Do the terms of the main award have to pass down? Many funders and pass-through organizations require this when you pass part of an award on for programmatic effort, so check your own award. Under one university's rules, all terms and conditions go into the subaward document, and an authorized signatory of the receiving entity must accept them.
- Is it only cooperation, with no funds moving? Then an MoU is enough. If you also need to settle who decides what, how data is owned and who authors products, use a partnership agreement.
Worked Example
This is an illustration, not a real case. A large international NGO holds an award for a community health program. It wants a national NGO to run the clinic side of the work. Staff take the choice through the tests.
On buying versus selling, the national NGO is not a commercial supplier. It is contributing programmatic effort toward the project's goal. On control, the international NGO wants it to use its local knowledge to decide how best to reach communities, so the partner has real discretion. On scope, the national NGO would have its own scope of work and budget, which the international NGO must approve, and it will be judged on whether health objectives are met. Finally, the money comes from the main award, so its terms probably have to go down, and the team checks the award to confirm.
The answer is a subgrant. An MoU alone would leave out the flow-down and the signature that many funders require. The subgrant proposal needs objectives and a clear description of the work, plus a detailed budget with a justification tied to budget lines. The international NGO does a risk assessment of the national NGO before the agreement is entered into, as many pass-through organizations require, and an authorized signatory for the national NGO accepts the terms.
An MoU can still be useful earlier, as a first step while the two organizations work out whether to go further.
Common Mistakes
Trusting the title. MoU and agreement labels are often used interchangeably, so the label does not tell you whether a document binds. Whether a document is a binding contract depends on legal elements in the text: offer and acceptance, consideration, and intention to be legally bound. Read the text, and have a lawyer or specialist in your own country review the final version so it fits local law.
Using an MoU where funds and passed-down terms are involved. An MoU should not stand in for a legally binding contract, and its template is not appropriate where a funder is creating a contract for a recipient. If you are passing on award funds, use a subgrant.
Skipping the risk assessment and monitoring. Assess the subrecipient before you sign. Afterward, monitor for compliance. Review invoices for allocability, allowability and reasonableness, and payment can be withheld until you get a satisfactory explanation, if one is needed. At closeout, collect an accurate final invoice and final reports.
Mixing up vendors and subrecipients. Not all third-party work is a subaward. Treating a vendor as a subrecipient, or the reverse, can cause processing delays and errors in indirect cost calculations. Use the scope and control tests.
Treating the partnership label as a definition. Because partnership was never defined in the Principles of Partnership, they have been applied to funding documents, to agreements with no transfer of resources, and to MoUs. Equality, transparency, responsibility and complementarity are the basis for results-oriented partnerships, but they do not tell you which document to sign. Use the tests on this page for that.
Before You Decide
- I have decided whether this is procurement of goods or services or an assistance relationship for programmatic effort.
- If it is a subgrant, your funder's flow-down requirements have been checked, and the terms and conditions of the primary award are included where required.
- Where required, an authorized signatory of the receiving entity has accepted those terms.
- A risk assessment of the subrecipient is done before the agreement is signed.
- The subrecipient's proposal has a scope of work with objectives and a clear description of the work.
- The proposal has a detailed budget with a justification tied to budget lines.
- I have checked the text for offer, acceptance, consideration and intent to be bound, instead of relying on the title.
- A lawyer or specialist in the country has reviewed any MoU.
- I have monitoring in place to check that the subrecipient complies with the terms, and I know what it must submit at closeout.