Federal Government Contracts And Grants For Nonprofits

CNP-RD2 Layout 1 5/20/13 3:22 PM Page 1brIef #0iMAy 2013Government-NonprofitContracting relationshipswww.urban.orgINsIDe thIs IssUe Government funding covers approximatelya third of the nonprofit sector’s revenue. the federal government generally usescontracts and grants to fund nonprofits. Nonprofits need to understand thedifferent purposes, regulations, and risksthat apply to contracts and grants.federal Government Contracts andGrants for NonprofitsSarah L. PettijohnAbout the AuthorCenter on Nonprofits and PhilanthropySarah L. Pettijohn is a researchassociate at the Urban Institute’sCenter on Nonprofits andPhilanthropy and a Ph.D.candidate and adjunct facultymember at American Universityin the Department of PublicAdministration and Policy.www.urban.org/center/cnp/The federal government spent more than 30 percent of its annual budget in fiscal year 2011 on purchasing services and supporting local and state governments, tribal organizations, nonprofit organizations, and for-profit firms through contracts and grants.The nonprofit sector, in turn, relies heavily on government for revenue to perform services and provide goods to clients. As of 2010,nearly one-third of revenue sources for reporting public charities comes from the government through contracts (23.9 percent)or grants (8.3 percent) (Blackwood, Roeger, and Pettijohn 2012). Despite nonprofits’ widespread reliance on all levels of government for financial support, contracts and grants continue to be a mystery for many in the nonprofit sector. This brief provides anoverview of the main funding mechanisms the government uses and highlights the characteristics of contracts and grants thatmake them similar to, but also quite different from, each other in risks, regulations, and redress of grievances.The Center on Nonprofits and Philanthropy conducts and disseminates research on the role andimpact of nonprofit organizations and philanthropy. The Center’s mission is to promote understandingof civil society and improve nonprofit sector performance through rigorous research, clear analysis, andinformed policy. The National Center for Charitable Statistics (NCCS) is a program of the Center.types of federal spendingThe federal government has several mechanisms it can use to provide funds to individuals and organizations to help address publicproblems. USASpending.gov highlights fivemethods the federal government most frequently uses to acquire products and servicesand assist individuals and organizations.1. Direct payments: payments made to individuals through programs such as SocialSecurity or housing choice vouchers.2. Loans/guarantees: funds that requirerepayment such as federal student loans.3. Insurance: payments to individualsuch as veterans through the Departmentof Veterans Affairs life insuranceprograms and displaced homeownersCopyright May 2013The views expressed are those of the authors and do not necessarily reflect those of the UrbanInstitute, its trustees, or its funders. Permission is granted for reproduction of this document,with attribution to the Urban Institute.UrbAN INstItUte2100 M street, NW Washington, DC 20037-1231(202) 833-7200 publicaffairs@urban.org www.urban.org8.through the Department of HomelandSecurity’s Federal EmergencyManagement Agency flood insuranceprogram. Insurance payments can alsobe made to organizations, for example,the Department of Agriculture’s cropinsurance program.4. Contracts: “mutually binding legalrelationship obligating the seller [contractor] to furnish the supplies or services(including construction) and the buyer[federal government] to pay for them.” 15. Grants: “authorized expenditure[s] toa non-federal entity for a defined publicor private purpose in which services arenot rendered to the federal government.”2Governmentcontractsand grantscontinue tobe a mysteryfor many inthe nonprofitsector.

CNP-RD2 Layout 1 5/20/13 3:22 PM Page 3federal Government Contracts and Grants for Nonprofitsfigure 1. federal Government spending, fiscal year nsurance:38.8%Source: “Prime Award Spending Data: FY 2011,” Office of Management and Budget, 2011, http://www.USAspending.gov.Notes: Spending on loans was negative for fiscal year 2011. “Other” includes all other reimbursable, contingent, intangible,and indirect financial assistance.Contracts and GrantsFederal contracts and grants share certain characteristics; they must be authorized by law andare subject to available appropriations, andthey are awarded based on solicitation requestsand a response from the interested party. Yet,even with these similarities, contracts andgrants also have substantial differences—theyare governed by different regulations, terms,and conditions.contractors to control costs and completethe project effectively and efficiently.Additionally, fixed-price contracts tend torequire minimal administrative responsibility. The government may opt to use afixed-price contract with certain typesof adjustments and incentives such as aneconomic price adjustment, prospectiveor retroactive price redetermination adjustments, level of effort required, award-feeincentive, or incentives based on performance or delivery (48 C.F.R. subpart 16.2).ContractsGrant:17.3%Figure 1 shows how the federal governmentexpended nearly 3.3 trillion in fiscal year (FY)2011. This brief focuses on the one-third thatencompasses contracts and grants, the twofunding tools the federal government generally uses to fund nonprofit organizations andfor-profit business firms.questions the government asks to determinewhich funding mechanism to use.While the government uses the same testto determine whether a contract or grant isthe appropriate tool to disseminate funds, significant differences between the two emergewhen administering contracts and grants. Thenext section outlines the different regulationsused to manage contracts and grants andhighlights the types of contracts and grantsthe government uses.The first step in the process requires thegovernment to decide whether a contract or agrant is the appropriate vehicle to deliverfunds to a third party. Concerned with perceived mishandling of federal spending,Congress authorized the Federal Grant andCooperative Act of 1977, which providesstandardized tests to determine whether toaward a contract or a grant. The governmentmust determine the principal purpose of theactivity. If it is to provide goods or servicesthe federal government will use to carry outits public mission, then the award will be acontract. However, if the principal purpose isto meet the needs of a third party carrying outan activity Congress has decided to support asa matter of public policy by statute, then theaward will be a grant. Table 1 outlines theFederal contracts are governed by the FederalAcquisition Regulation (FAR), which is codified in Title 48 of the U.S. Code of FederalRegulations (C.F.R.). To establish consistentpolicies and procedures for acquisition, theOffice of Management and Budget (OMB)issued FAR in 1984 and reissued it in 2005.The goal of the Federal Acquisition System isto deliver the best product or service to thosein need of goods or services while having theflexibility to adjust to contractor or granteesneeds, concerns, and feedback (48 C.F.R.,1.101–1.102).Types of contracts. Federal contracts havetwo general groupings: fixed price and costreimbursement. Within these two groups, FARoutlines seven specific types of contracts thegovernment uses based on the liability placedon the contractor as well as the type of profitincentive offered to the contractor. Below is abrief summary of each type of contract:1. Firm-fixed-price. The contract price is fixedor, when appropriate, provides anadjustable price that can include a ceilingprice, target price, or both. Firm fixed-pricecontracts maximize the financial risk to thecontractor because the contractor must takefull responsibility for all costs, which canresult in a loss or profit. Thus, these typesof contracts offer the greatest incentive for2.2. Cost-reimbursement. These contractsbegin with an estimated cost reimbursement that contractors receive for allowablecosts incurred while executing the contract. Cost-reimbursement contracts typically have a ceiling price that contractorscannot exceed unless the governmentcontract officer approves the additionalcosts. These contracts minimize risk to thecontractor because the contractor does notbear the full responsibility for all costs.However, there are greater administrativeoversight and burdens for the governmentcontract officer. The government usescost-reimbursement contracts whenspecifications for a project contain a gooddeal of uncertainty. Cost-reimbursementcontracts can be used to simply fundthe cost of providing a service (no fee)or reimburse with an incentive or award(48 C.F.R. subpart 16.3).3. Incentive. The government uses incentivecontracts, also known as performancecontracts, to tie the contractor’s paymentto its performance based on targetsdefined at the start of the contract period.The government uses incentive contractsto motivate activities of the contractorthat are hard to define and specify as wellas to discourage inefficiency and waste (48C.F.R. subpart 16.4).4. Indefinite-delivery. The government usesan indefinite-delivery contract, alsoknown as a delivery-order or task-ordercontract, when the exact times and/orexact quantities are not known at the timethe contract is awarded. This provides thegovernment with flexibility in what it ultimately orders from the contractor as wellas flexibility in scheduling delivery. Whileindefinite-delivery contracts specify a minimum and maximum amount of a goodsor services to be purchased, organizationsneed to be careful because they mustsecure and are liable for resources to provide the maximum good or service, andthe government may only order the minimum. The government can only enterinto this type of contract with preselectedcompanies (48 C.F.R. subpart 16.5).5. Time and materials. A hybrid of fixedprice and cost-reimbursement contracts,time and materials contracts are whatthe government uses only when no othertype of contract is suitable because thesecontracts present the greatest risk tothe government and the least risk to thecontractor. The government pays thecontractor based on an hourly rate, whichincludes wages, overhead, general/administrative costs, and profits, as well as actualcosts for materials. This type of contracttable 1. tests for selecting the funding MechanismCoNtrACt: beNefIt or Use testGrANt: sUPPort or stIMUlAtIoN testIs the government agency the direct beneficiary oruser of the activity?Is the applicant performing the projectfor its own purpose?Is the agency providing the specificationsfor the project?Is the government agency merely supporting the projectwith financial or other assistance?Is the agency undertaking the project based on itsown identified needs?Is the benefit to the agency incidental(i.e., do funded activities complement the agency’s mission)Source: Federal Grant and Cooperative Act of 1977.3.