Elizabeth Boris, coauthor of “Human Service Nonprofits and Government Collaboration: Findings from the 2010 National Survey of Nonprofit Government Contracting and Grants,” answers five questions about flaws in government contracting with human service nonprofits—and how these problems have intensified the recession’s toll on those organizations.
November 5, 2010
1. How significant are government contracts and grants with human service nonprofits?
In 2009, human service nonprofits held roughly 200,000 government contracts and grants totaling more than $100 billion. Nearly 33,000 human service nonprofits contracted with local, state, and federal governments—and for 60 percent of them, government contracts were the single largest source of revenue. So it’s a big chunk of money that quite a few organizations depend on.
For this study, a collaboration with the National Council of Nonprofits, we looked only at a sliver of the pie—specifically human service nonprofits, not all nonprofits. And even within that category, we mainly zeroed in on direct service organizations that help children, family, and elders—places like soup kitchens, the YMCA, and the American Red Cross. Also, we studied only nonprofits with $100,000 or more in revenue, thinking they’d be more likely to have government grants and contracts. This narrowed the group down to 55,785 nonprofits out of nearly 1 million public charities. I’m sure further study would show that the contracting problems reported would be bigger and more widespread since there’s no reason to assume that other nonprofits are doing any better than human service nonprofits.
2. What major government contracting problems did human service nonprofits report?
We found serious and widespread problems that hurt nonprofits’ capacity to deliver services. Sixty-eight percent of human service nonprofits said payments for grants and contracts didn’t cover the full cost of providing those services. Many nonprofits said they struggled with the complexity and time required to apply for contracts and grants and to report their results to funding agencies. Federal, state, and local governments—and their agencies—often have different reporting requirements, applications, and financial reports. All of this work can eat up a lot of an organization’s administrative budget, which is tough for nonprofits, especially when there’s a limit to how much of these overhead expenses they can recoup.
Nonprofits also reported a problem that wasn’t on my radar screen—governments changing contracts and grants mid-stream after they’ve been negotiated. Fifty-seven percent overall said this is a problem, and for 26 percent, it’s a big problem. One organization in New York said they got a letter announcing that all their contracts would be cut by more than 1 percent—no discussion, no commensurate cut in the services provided, just a one-sided decision that the contract would be worth less than the agreed-upon amount. Those changes play havoc with a nonprofit’s ability to plan ahead.
And then there are the late payments. Fifty-three percent of nonprofits in our survey cited late payments as a problem. And many nonprofits often don’t have resources to cover late payments, so they have to take out a line of credit or a loan. In the survey, nonprofits with this problem said that late payments kept them from paying their employees or delivering services on time. Larger nonprofits were more likely to report this problem.
"CONTRACTING PROBLEMS MADE THE RECESSION’S IMPACT WORSE, CREATING A DOUBLE WHAMMY FOR NONPROFITS THAT RELIED ON GOVERNMENT GRANTS."
3. Is the contracting system broken?
I can’t say that it’s broken, but it certainly seems to be functioning poorly. Contracting problems are undermining the very organizations government relies on to provide services. Let’s just say the contracting system is in need of repair and, maybe, some serious reengineering.
Also, I’d like to emphasize how important it is to cover overhead and administrative costs. Sure, government needs to be certain that its resources are paying for services and not high salaries or luxurious offices. But defining what’s reasonable for different kinds of programs isn’t easy. For example, a nonprofit hotline was barred from using its grant for technology, but it had to buy phones to do its job. You can get into bizarre situations where basic needs aren’t covered because they’re considered overhead. Also, given the requirements of reporting and applying for contracts and grants, nonprofits don’t get enough money to cover this time-intensive work. On the one hand, we want more professional services, but on the other hand, we don’t want to pay the costs of making that happen.
A Government Accountability Office study that we cite says that different government agencies use different definitions of overhead and administrative costs, so it’s like comparing apples with oranges. Just standardizing definitions, such as what counts as an administrative cost, would make reporting easier across the board and help nonprofits and government save money.
4. How has the recession affected nonprofits?
The nonprofits we surveyed reported that most sources of revenue fell during the recession. That includes corporate donations, individual donations, foundation revenue, fees, and government funding. This has been a tremendous recession. It’s called the Great Recession for a reason, so it’s not surprising that nonprofit revenue was down.
Nonprofits’ first line of defense was to freeze or cut back on salaries, so their employees took an early hit. Then they dipped into reserves, if they had any. Once they spent those down, they laid off staff. Staff cuts can damage a nonprofit’s infrastructure and ability to deliver services. They might borrow money. As almost a last resort, they cut back on the number of people they serve. Fifty percent of human service nonprofits froze or reduced employee salaries, 38 percent laid off staff, 17 percent served fewer people, 15 percent raised fees, and about 7 percent closed program sites. By the end of 2009, about 40 percent of human service nonprofits had deficits. It may take years to rebuild the organizational capacity lost.
Contracting problems made the recession’s impact worse, creating a double whammy for nonprofits that relied on government grants. Organizations that had problems with government contracts were more likely to reduce or freeze salaries, cut benefits, and lay off employees. Late or inadequate payments, contracting changes, and problems applying for and reporting on contracts and grants aggravated the financial stress of shrinking revenues and rising demand.
It’s unfortunate that this is the way the system works in downturns. The demand for services from these nonprofits goes up in a recession, but their resources go down, so they end up cutting staff and adding to unemployment. It seems to make more sense to put extra money into human service nonprofits, making them countercyclical forces that hire more people and provide more services when recessions hit.
5. What can we do to fix the contracting system?
The interesting thing is, it’s not rocket science. We know what needs to be done—standardize reporting requirements, pay contracts on time, and ensure that contracts cover the actual costs of delivering services, including administrative costs. These don’t seem to be difficult things to do, but they can’t be done without political will and administrative resources. Nonprofits, as well as small businesses with government contracts, must be heard so they can provide feedback on what works, how the system affects them, and what needs improving.
Our study is only a first step. Now the job is to go out and find out what to do if contracting doesn’t cover the full cost of services. Does it mean governments should issue fewer contracts? Does it mean that state and local governments should take less of a percentage from federal money that gets passed down to nonprofits? Or maybe we need a better way of costing out these services? The next steps will be crafting, testing, and adopting solutions.
Summary brief: “Contracts and Grants between Human Service Nonprofits and Governments”
State-by-state look at the data: “National Study of Nonprofit-Government Contracting: State Profiles”
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