Six Ways to Improve How Government Funds Nonprofits

Who pays the price for insufficient government contracts and late payments? It’s the Oakland resident living in a tent encampment, waiting to transition to an apartment where he can regroup and get back on his feet in safe, stable housing. And it’s the underpaid housing coordinator who’s working overtime to find landlords that accept Section 8 vouchers, and then checking her own bank account to make sure she can cover this month’s rent.

While the details may vary, these are familiar challenges for many human services providers working hard to help clients (and neighbors) survive and thrive by expanding successful approaches to chronic social challenges, like California’s growing housing and homelessness crisis.

Nonprofits serving the most vulnerable Californians are managing an increasing level of complexity and uncertainty, especially around unreliable government payments. Government counts on these organizations to provide invaluable services, but then undermines their stability and success with flawed contracting practices.  NFF met with four such human services organizations – Abode Services, Brilliant Corners, La Familia Counseling, and The Unity Council – to discuss the opportunities and challenges of growing rapidly in response to rising community need. Each are well-recognized for achieving positive outcomes and are highly sought after by local government partners who are looking for experienced organizations with smart solutions to offer. And all four have experienced multi-year growth (often exponential) – taking on more and larger service contracts within their resident counties and beyond.

With this tremendous growth comes a deep understanding of the pitfalls to avoid when scaling up, including when to say no to funding opportunities. One CEO turned down 12 potential contracts last year alone. They were underfunded and would have required finding too much additional revenue to subsidize the gap between what those contracts paid and what the work actually costs. Instead of supporting growth, traditional funding mechanisms like government contracts can destabilize – or even jeopardize – nonprofits because they don’t cover full cost, don’t pay on time, or simply aren’t reliable.

Following are six suggestions from NFF and these four high-performing human services providers about how nonprofits and government funders can work together to improve funding and contracting practices so that more organizations can achieve better outcomes while increasing their resiliency.

To grow sustainably and responsibly, organizations need reserves, ample cash flow, and the right systems in place. However, many government contracts don’t cover these types of expenses and already underpay what it costs just to deliver services. Nonprofits are left scrambling to make up the difference, and sometimes have to pause their growth plans to address the financial impact of chronic underfunding – this is particularly true for organizations that have grown largely on the basis of expanded government contracts.

What if instead of having to say no, the norm was for nonprofit leaders and government contractors to renegotiate contracts and ensure that nonprofits have the necessary resources to grow in a financially healthy and stable way?  

“We’re not magicians.”

Government relies on nonprofits’ expertise and ability to act nimbly to address pressing needs like housing, employment, mental health, food security, and more. In essence, the government has outsourced the nation’s social safety net to nonprofits. But in order for nonprofits to achieve results and better outcomes with their clients, they must be fully funded. 

What nonprofits can do:

• Know the full cost of doing business, including unfunded and/or under-funded costs.
• Articulate how these full costs allow them to achieve the results everyone wants (e.g., strong, healthy communities).
• Communicate the value of their work to government and other stakeholders (healthcare system, law enforcement, etc.).

What government can do: 

• Be open to hearing what nonprofits really need to do the work being asked of them and be willing to renegotiate contract terms.
• Recognize that administrative support is crucial to running successful programs and provide better admin rates on contracts. Right now, they’re grossly underestimated at around 10-12% (the auditors of one human services organization calculated their actual admin rate at 23%, which aligns with what NFF sees in clients across the country).
• Even better, allocate more of what’s currently classified as administrative cost into direct rates so that nonprofits have the flexibility to spend funds where they’re most needed.

Cost of living adjustment (COLA) rates must be raised. Service providers are struggling to hire and retain qualified staff because they can’t afford to pay a living wage, and COLA rates have failed to keep pace with the sharp increase in housing costs – particularly in California communities. 

“Staff cannot afford to live here.”

In fact, some nonprofits are losing experienced staff to the very government agencies with which they contract because county government can offer higher salaries and/or better benefits, such as pensions. 

“Nonprofit workers shouldn’t have to take a vow of poverty.”

We need greater parity between how nonprofit and for-profit contractors get paid for what is essentially the same work. There should be equivalent administrative rates and reimbursement practices across all sectors.

To understand these discrepancies and negotiate better contracts, nonprofits need data that compares reimbursement rates and reporting requirements across ALL government contractors, including defense and healthcare (both known for some level of markup on standard procurement items).

Streamline compliance, reporting, and invoicing to work better for providers. Nonprofits are already tasked with managing the complexity of dozens of government contracts and relationships at many levels. Specific pain points include:

• Even the smallest grants can have disproportionately long and onerous application processes.
• Reporting systems don’t talk to each another (e.g., homeless services providers assume the burden of reporting across different government and hospital platforms). The result is that it takes longer to provide services, like place a person in a shelter or supportive housing.
• Rather than requiring nonprofits to provide the same services under multiple contracts with different reporting requirements and payment structures/rates, government agencies could manage this complexity by taking on the responsibility of bringing together and blending funds for similar purposes.  
• Focus compliance and reporting on results, not just activities. 

Reimbursement delays wreak havoc on nonprofit budgets by forcing them to front unpaid costs and bridge payment delays. Some nonprofits quite literally pay the price for government payment delays because they have to use lines of credit to keep the doors open despite the fact that interest is an unfunded expense.

Sometimes local government agencies face challenges with delays at the federal or state level, or have inherited complex bureaucratic processes, but it’s important to prevent these issues from falling on the shoulders of nonprofit leaders.

One suggestion is to structure more contracts with advances, so that nonprofits have resources readily available when they’re needed and not months (or years) later. But this only works if those advances come on time, and it still doesn’t solve for contracts that are underfunded to begin with. 

Rather than having to use a line of credit to manage reimbursement delays or working capital to fill in the gap with underfunded contracts, it’s far more beneficial for leaders to use debt in ways that truly support growth, such as acquiring and/or investing in their facilities. For some nonprofits, owning real estate (versus leasing) is one of the few ways they can build their balance sheets and wealth. And with more reserves on hand, leaders can engage in more thoughtful planning about how to deepen and expand their impact.  

However, using debt strategically still requires healthier government contracts and greater predictability for on-time payments because leaders need to be able to make financial projections based on reliable, long-term funding.

Nonprofits bring specialized knowledge and vital experience to addressing some of our nation’s most complex social issues. They are invaluable, and yet they are continually asked to do more with less and deliver results with partially funded contracts and habitually late payments. No private government contractor would accept the terms that are forced on nonprofits. Government pays full cost, and typically in the promised time frame, for private contractors’ office supplies. In doing so, they are supporting those businesses’ ability to prosper. Yet for nonprofit service providers, government often is doing the opposite: by paying too little and too late, they are dangerously damaging the organizations that do some of the most important work in our state, from running health clinics to taking care of our kids after school. It’s time for government – and all funders – to recognize and pay for the value that nonprofits bring to all of us.