When Your Nonprofit Should Consider Turning Down That Contract: A NY CEO Speaks Out

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September 7, 2016, Crain’s New York Business

Traci Donnelly, CEO of The Child Center of NY, has written an opinion piece for Crain’s Business wherein she suggests that government-contracted nonprofits consider turning down any contracts that do not cover full costs.

She rightly observes that such contracts retard innovation and trap organizations in starvation mode, which does no justice to the importance of their work. This results in sometimes very large organizations serving very vulnerable people with little or no cushion for research and development, or for surviving any sort of crisis. NPQ explored this issue in its analysis of the demise of the social service mega-agency FEGS.

Nonprofit social impact organizations with government contracts are not paid for all the costs involved in providing services. These are the organizations doing the work in their communities for the neediest children, the sick and disabled, the mentally challenged, and the poor. Nonprofits must make up the difference by fundraising, another expense. Conversely, for-profit companies are paid for their overhead and can profit from their government contracts.

This system does not provide funds for trying new ideas, for research and technological innovation, or for training and strategic planning. Keeping a cap of 10 percent for overhead expenses does not allow room for change, and the result is that nonprofits are encouraged to do the same things they have been doing, even if a new, untested idea just might advance the mission and improve the lives of individuals.

The Child Center of NY, located in Queens, is not small; it has 110 government contracts for $34 million. Ten percent is a huge amount of existing expenses left uncovered; she cannot even consider innovation that could make a profound impact. This ties the hands of Donnelly and the staff at the organization, which helps children and families at risk. As she writes for Crain’s New York:

When investors put money into a startup company, they write big checks and often expect failures as part of trying something new, in return for potentially big dividends in the end—and there is no expectation that the return on investment will come quickly.

Conversely, nonprofit organizations like ours are expected to demonstrate an impact on age-old social problems within a year. We welcome the challenge and the directive, but, just like investors in a for-profit business, governments need to invest adequately now in order to realize big payoffs—like a productive, emotionally healthy citizenry—in the future.

Ironically, the government does not just underfund overhead in their contracts with nonprofits; they also cause more expenses in filling out their paperwork. For instance, New York State Executive Order #38, requires worksheets and forms to submit in addition to the other contract paperwork, and the time it takes nonprofit staff to fill all these out is not covered by the contract to supply services in the state of New York. When federal, state, and city money mix, as New York, the overhead cap of 10 percent becomes a roadblock to doing the best work.

It should be emphasized as well that it’s not just dollars that are allotted—time is allotted, too. The impact covered by each contract must be accomplished to a measurable goal in one year. Wrap it up in a neat package in 365 days and then supply the final report. Fix the injured kids, feed the hungry, end poverty, assist the families at risk, in no more than 365 days—after all, there’s a contract. No dollars invested in advancing new ideas, and no time to invest in them, either.—Marian Conway

  • Janet Reasoner

    This is true for any contract that a nonprofit might take on. I’ve seen community-based groups get contracts for outreach from other, larger non-governmental organizations and they almost always ended up losing money because of the overhead and actual costs were so much greater than the contract.

  • treadlightly

    When I took my current position I found out that we had a government contract that was costing us about $2,000/month, not figuring in the overhead costs. We’re a small org, so that was a huge deal! Three months before the contract ended I told the staff to let the beneficiaries of the program know that it was going to end so they needed to start planning for it. Everyone ended up addressing their issues in various ways so we did not have to figure out how to help them when it came time for the program to end. #worstgrantever