Monday, August 24, 2009

From Blue Avocado - Five Ways to Let Government Money Run You Over

A major problem I see with small nonprofits I work with is an over reliance on government funding and a lack of understanding that million dollar contracts can cost $1.5 million or that you can’t collect $1 million even if you spent it because you have not served the exact number of people required, or they didn’t all complete the program and get placed, or all the paperwork to ensure they were eligible wasn’t completed, etc., etc., etc. I’m sure these scenarios sound familiar to many of you. You are not alone. Don’t beat yourself up over it, examine the lessons learned and do some research on how to best manage government grants and do it right the next time.

The best article I have ever seen written on this subject is by Jeanne Bell, CEO of CompassPoint Nonprofit Services. Jeanne frequently writes about financial and management issues for Blue Avocado. Blue Avocado is the successor to Board Café and one of the best eNewsletters for nonprofits there is. I highly recommend that you sign up for a free subscription. I am delighted to have permission to reprint this article in full here on my blog.

This article is reprinted with permission from Blue Avocado, a practical, provocative and fun magazine for nonprofits. Subscribe free by sending an email to or at
Blue Avocado

Five Ways to Let Government Money Run You Over
Is government funding a way to expand what you do for important constituencies, whether they are families living with autism, low income people seeking legal help, or people attending your dance performances? Or is government funding a trap that will mire you in reporting nightmares, take you away from your values, and turn you into a heartless bureaucracy?

Let's start with a reality: local, state, and federal government agencies are major buyers of social services, education, health, and arts in the United States. In fact, government funding made up 52% of total income for social service nonprofits in 1997 (Lester Salamon in The Resilient Sector). For many organizations, the question is not whether to take government funding, but how to get more of it. Whether you are thinking about your first RFP (Request for Proposals) or are already knee-deep in existing grants and contracts, here are five ways to do it WRONG.

1. Don't assign anyone to oversee contracts management. Successful completion of a government contract requires not just doing the work well, but customized reporting of activities and finances. If no one is explicitly responsible for contracts management, some program directors may under-bid on costs, and you'll end up losing money on the contract. In other cases you may not pay attention to ensuring that the full amount of allowable costs is charged to the contract. Someone needs to make sure that budgets are appropriate prior to submission, that financial and programmatic performance is monitored, and that reports are done promptly and completely--these are not entry-level responsibilities!

2. Stay out of politics. Political engagement is an essential responsibility of government-funded organizations. It's not enough to help social service clients deal with the aftermath of our systems' inadequacies. Nonprofits need to take a seat at the budgeting and policy tables to inform policy direction and protect vital services. This might mean joining a local association of nonprofit contractors, or making sure that your board and staff leaders have the savvy to engage with government agencies and officials. Remember: endorsing a candidate for office isn't legal for nonprofits, but keeping officials informed is.

3. Blind yourself to the difference between what they're paying and what it's costing. A $1 million contract is a disaster if it ends up costing you $1.5 million to meet the deliverables. Because nonprofits have to track expenses to show they are in compliance with an approved contract budget, it's easy to post expenses only if they are at the level in the approved contract budget. In many cases, real costs that were not approved in the contract budget often get pushed somewhere else--to some nebulous "administrative" dumping zone--and the full cost of the program is lost forever. As a result, when it comes time to negotiate a renewal, the cost picture is inaccurate, and the nonprofit happily signs onto another money-losing year.

4. Let your organizational culture evolve organically. Because government funding often is a majority or even 90% of a nonprofit's budget, an implicit culture can grow that narrowly focuses on contract compliance and regards the government as the client (after all, the government is the client from a contract perspective). Culture means more than dress code or communication styles: it means a sense of nonprofit commitment to mission and to mission-identified constituencies (rather than contract-identified targets). Rather than let culture evolve on its own, devote attention keeping a nonprofit culture and a constituent-oriented outlook. Encourage cross-contract work groups and discussions. Demonstrate the same care with individual donors as you do with institutional donors. Engage your community in needs assessment, feedback, and be open to criticism and suggestions about your programs.

5. Now that you've got big money, don't sweat the little money. In CompassPoint's consulting practice, we often work with nonprofits--often those based in communities of color--whose early funding came from government agencies. Unlike nonprofits that established with large donations from their founding volunteers and board members, these groups often get started later on their individual, foundation, and corporate contacts. The result is too many 10-year-old organizations with $1 million programs but with fewer than 50 donors (who are listed in an outdated FileMaker database that nobody knows how to use!). Start to build the capacity for other kinds of funding, and set realistic goals for doing so. With even 10% of your budget coming from non-government sources, you'll enjoy the freedom to experiment, make a few mistakes, and do important work that would never be government-funded.

This article is adapted from "Government Funding: Use It Well," by Jeanne Bell, in Nonprofit Quarterly.

Thanks again to Jeanne Bell and Blue Avocado for allowing me to share this article with you. I hope you will share your experiences - both lessons learned and tips for success in the comments.

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