The Latest Lowdown on Government Money

Does your organization receive government funding? Or are you at least considering it? The federal government is increasingly stepping away from providing human services like elder care, and instead it is calling for nonprofits to take up the services slack. Some nonprofits see government contracting as the holy grail of funding: "Real money for our programs, and it comes every year!"

But what's the downside of government contracting?

Recently I chatted with Beth Bowsky, a policy specialist in the Government-Nonprofit Contracting section of the National Council of Nonprofits, and asked her a few questions about the new surveys and reports that the Urban Institute and the National Council of Nonprofits are working on. Here are some issues you need to consider:

1. Governments are often really bad about paying on time. According to a Dec. 5, 2013, survey from the Urban Institute, nonprofits say that reporting and the complex application process are the two most difficult things about government contracting. But this isn't the only way that government contracts can be difficult for nonprofits. Seventy percent of respondents stated that the government contract often does not cover the full cost of services.

2. Governments often won't pay for the entire cost of providing the service. You might tell a government entity, "Look, we want to serve seniors in our facility. It costs $110 a day to serve a senior with the various nursing and support staff, as well as medicines, food and more." And the government says, "OK, we'll pay you $90 per day."

Nonprofits feel like they can't argue with this because they know that the government will give the contract to someone else if they do. They think, "Well, we'll find the rest of the money somewhere."

But when the nonprofit has to compromise this way, the quality of the service goes down.

The state government is refusing to pay for the true cost of providing services. Most nonprofit executive directors are tremendously afraid to speak up about this. They're afraid that if you speak up and say there's a problem, it will mean you won't get the contract again. And very often they are right.

So what's the good news?
Many nonprofits that get into government contracting do not know how it works. They get the runaround and don't think that they can speak up. But in 22 U.S. states, nonprofit associations are putting government contracting reform on their agendas. They want to act as a buffer between the nonprofits and the states they contract with, so the nonprofits are shielded from the wrath of these government entities and not forced to lose their contracts.

Recently a new Federal Office of Management and Budget (OMB) Guidance — Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards — was passed at the federal level. Bottom line? It states that local government, including towns, counties and states, have to pay indirect costs of providing services when nonprofits contract or get grants with them. The default is 10 percent of the indirect costs if you don't negotiate.

But think higher! Do you know what it really costs to provide services? Negotiate that. This means instead of the nonprofit saying it will cost $110 per day to take care of a person and the government agreeing to pay $90 of that $110, the government will have to pay at least a 10 percent overhead cost.

Unfortunately this does not mean that more money is allocated for nonprofit contracts. So if a government contract was paying for 100 beds to shelter the homeless, if it is forced to add a 10 percent overhead cost onto the contract, it may just say, "Well, we'll pay for 90 beds instead."

If your contract negotiations come down to this, it would mean that your nonprofit will serve fewer people, but perhaps you can provide better services to the people you DO serve.

Direct vs. indirect costs
OMB has provided a bit of flexibility for determining whether a cost is direct or indirect. For example, traditionally, a receptionist would almost automatically be considered indirect. However, now, if that person does things that directly relate to the program, an appropriate portion of costs can be considered direct.

So, if the receptionist spends 10 percent of his or her time signing people up for the program when they call the organization, then 10 percent of that person's costs can be considered direct.

Or, usually the costs for utilities is indirect, but if you can clearly identify higher costs due to a program, that increased amount can be considered direct. Say you start using a pool for some sort of therapy or recreation and as a result there is an increase in your water costs as well as electric bill to heat the pool — these increases can be charged as direct costs. This one is a bit tricky because the organization will have to be able to prove that it is in fact the program that caused the increase.

Latest news

As of this writing in October, OMB recently had issued its second set of FAQs. It stated that it is the state pass-through's choice whether or not it is willing to negotiate a rate higher than 10 percent for nonprofits that have never had an indirect cost rate. Essentially, this means there will be little if any negotiations. (Why would a state voluntarily pay a higher amount?) The National Council of Nonprofits is challenging this with OMB, as that is not what the Uniform Guidance indicates.

At first, we thought that the OMB Guidance would allow nonprofits to negotiate indirect costs. This was the cause of much rejoicing. We could get overhead covered! And it all would work out!

Now we are seeing that the Guidance will be toothless in terms of requiring states to pay for overhead, unless the OMB acts fast to modify it. We want states to be required to pay for more indirect costs for the services that nonprofits provide.

To take action on this issue, ask the National Council of Nonprofits what you can do to help. Perhaps there are petition letters you can write to the OMB. Or perhaps this issue is already being advocated in your state by your state association. The National Council of Nonprofits can help you find out who is working on this.

Mazarine Treyz is a fundraising speaker and the author of wildwomanfundraising.com, as well as author of “The Wild Woman’s Guide to Fundraising,” “The Wild Woman’s Guide to Social Media” and “Get the Job! Your Fundraising Career Empowerment Guide.” Reach her at info@wildwomanfundraising.com or on Twitter at @wildwomanfund