News and analysis
May 15, 2014

Nonprofits Cite Headaches in Government Contract Work

For nearly all of Maryland’s nonprofits that receive government support, the process is too complex and takes up too much time. Most Rhode Island charities complain that the government changes the rules midway through a contract and often pays late. And a large portion of Mississippi nonprofits that rely on government support have frozen or cut their employees’ pay.

Those were some of the findings from a pair of studies released Thursday that depicted nonprofits’ frustrations in working with the government.

The studies, released by the Urban Institute and the National Council of Nonprofits, followed a survey released by the two groups in December that found 56,000 nonprofits had 350,000 federal, state, and local government contracts totaling more than $137-billion in 2012.

In the current report, supported by the Bill & Melinda Gates Foundation, the Urban Institute reported state-level data on 2,764 nonprofits that had more than $100,000 in annual expenditures, received government funding, and represented causes including the arts, education, environment, human services, international relief, and religious organizations. Hospitals, colleges, and universities were not included in the survey.

The National Council of Nonprofits contributed anecdotes from groups across the country and offered policy proposals aimed at streamlining the contracting process.

Timing Is Off

A big problem for nonprofits, the two groups concluded, is that government officials often sign payment contracts months after a grant has been greenlighted. And after the paperwork is complete, agencies are often slow to send payments

State governments owed each nonprofit about $200,000 on average, the federal government owed $109,000, and local governments $85,000, the survey found.

The late payments have required groups to tap lines of credit and seek bridge funding from private donors and foundations, says Tim Delaney, president of the National Council of Nonprofits. Those donors, he says, should be outraged.

“They should be upset they are subsidizing government operations.”

The clunky process shouldn’t be blamed on any “sinister motives” of government officials, who are often just as frustrated as nonprofits with multi-layered application and audit rules that vary from state to state and among federal agencies and can often prolong the wait time for checks to be paid, says Elizabeth Boris, director of the Urban Institute’s Center on Nonprofits and Philanthropy.

She says nonprofit and government leaders should work together to see the “bigger picture” and streamline paperwork. She’s in the process of conducting interviews of government contracting officials to get their perspective, and she plans to complete a report on her findings as early as December.

If nonprofits and governments “aligned” the number and timing of grant and contract requirements, “it would save money on the government side and on the nonprofit side,” she says. 

 Among the survey’s findings:

• 72 percent of nonprofits said the government-reporting process was time-consuming and complex. Maryland groups were particularly frustrated (88 percent).

• 44 percent reported a change to a grant or contract midstream, especially Rhode Island groups (67 percent).

• 45 percent noted problems with late payments. Rhode Island groups led the pack (81 percent).

How Charities Cope

Those difficulties added to the already barren fundraising environment nonprofits were facing as the economy struggled to rebound after the recession. States grappled with the challenges differently, the report found. For instance:

• 14 percent reduced the number of people they served. Nonprofits in Mississippi (34 percent) were more inclined to do so than those in Arizona (4 percent).

• 42 percent drew on their reserves, with nonprofits in Hawaii (66 percent) more likely to do so than those in Virginia (26 percent).

• Just more than half of surveyed nonprofits froze or reduced employee salaries; Nonprofits in Mississippi (80 percent) did so more than those in North Dakota (26 percent).

Mr. Delaney says that in some instances, changes in policy can help minimize aggravation. For instance, he points to a federal Office of Management and Budget regulation that allows nonprofits to carve out at least 10 percent of government grants for overhead, such as rent and utilities. The change, which will begin in December, could lower the number of nonprofits (currently 75 percent) that say government payments don’t cover the full cost of contracted services, he says.

Long delays in payments were another issue nonprofits frequently cited. Even nonprofits in states with stringent “prompt pay” laws experienced long waits, he says, citing the 62 percent of organizations in New York that reported problems with late payments.

“Nonprofits are over a barrel,” he says, “because they recognize the services need to be delivered, but they can’t get paid.”

Send an e-mail to Alex Daniels.