Forthcoming Government Contract Reforms: What you should know

The Problem

Governments and nonprofit organizations partner to provide needed services in communities across the country. Contracts and grants are the mechanisms governments use to fund these partnerships. These grants and contracts can be direct federal grants or indirectly through grants and contracts with state and local governments as well as other pass-through entities for the services they perform under federal awards. However, for nonprofits receiving these contracts and grants, the administrative burden is taking its toll. In a nationwide study published December 5, 2013 by the Urban Institute, there are an estimated 55,702 nonprofits with government contracts totally $137 billion. The study found that governments arbitrarily limit indirect costs for necessary program and organizational expenses. Nationwide, 50 percent of organizations report such limits on program administration or overhead costs, and 53 percent report limits on general administration or overhead costs. The study identifies other issues around government contracting that further exacerbate the problem.

• Requiring organizations to match or share the cost of programs or services
• Limits on type of activities that nonprofits can spend money on
• Complexity of or time required by government reporting processes
• Complexity of or time required by application processes
• Payments not covering the full cost of contracted services
• Government changes to contracts or grants midstream
• Late payments

The Impact to West Virginia Nonprofits

According to the State Rankings in the Urban Institute Study, there are 375 nonprofits in West Virginia with government contracts or grants. Of the 30 or so rankings, West Virginia stands highest in the following:

• 50% of nonprofits reported their government contracts/grants limit program admin or overhead costs. WV – 52% 20 rank
• 26% of nonprofits reported that their government contracts required them to share costs. WV – 27% 19 rank
• 52% of nonprofits reported that their government grants required them to match grant funds 
WV – 60% 12 rank
• 26% of nonprofits with government contracts or grants reduced their number of employees WV – 30% 13 rank
• 6% of nonprofits reduced their number of offices or program sites WV – 10% 8 rank
• 11% of nonprofits with government contracts or grants reduced their number of programs/services WV – 13% 12 rank
• 53% of nonprofits with government contracts or grants froze or reduced employee salaries WV- 55% 24 rank
• 32% of nonprofits with government contract/ grants reported reduced revenue from private fdn’s WV – 34% 20 rank
• 37% of nonprofits with government contracts or grants reported reduced revenue from corporate WV – 48% 5 rank
• 36% nonprofits with government contracts or grants reported reduced revenue from investments WV – 40% 16 rank

Without the ability to recover full costs for program administration, nonprofits are increasingly under pressure to raise additional funds to subsidize governments, and nonprofits without government funding see more competition for scare philanthropic dollars. Reimbursement of indirect costs is vital to the sustainability of nonprofits leading to greater stability.

OMB Final Guidance on Grant Reform

With the help of the Urban Institute Study, government contract reform has been a priority issue in the nonprofit sector for the past several years. After a lot of hard work and the input of many, the OMB released final Guidance on Grant reform on December 26, 2013. 
Their goal from the beginning has been to streamline guidance for federal awards easing administrative burdens, increasing the efficiency and effectiveness of federal awards, while also strengthening the oversight of federal funds to reduce the risks of waste, fraud, and abuse. 
The new reforms make clear that a nonprofit’s indirect costs are legitimate expenses that need to be reimbursed and that nonprofit organizations receive at least partial reimbursement of their indirect costs from states, local governments, and other pass-through entities for services they perform under federal awards. 
The most pertinent changes to nonprofits include:

• Indirect cost reimbursement
• Pass-through entities (most frequently states) will be required to pay nonprofit subrecipients their approved federal indirect cost rate if they have one. Those without an approved federal rate may opt to either negotiate a rate in accordance with federal guidelines or receive a minimum of 10% of its modified total direct costs (MTDC).
• All federal agencies must utilize a nonprofit’s existing approved federally negotiated rate rather than negotiating its own separate rate with the nonprofit.
• Nonprofits with an approved federal rate have the option to extend this rate for up to 4 years on a one-time basis. 
Ø Cost Principles
• It is not possible to create a list of costs that are direct and indirect because many timesit depends on the circumstances. However, modifications and clarifications in categorizing costs as direct, indirect, or allowable have been made.
• Administrative Requirements (announcements, level of risk assessment, OMB approved forms, standards, etc.)
• Audit Requirements
• The threshold for having a single audit (previously referred to as an A-133 audit) is increased from $500,000 to $750,000.

The Next Steps

OMB’s new Guidance provides much-needed clarity and direction, but it does not guarantee increased revenues to cover full costs or, by itself, change long-standing attitudes about nonprofit overhead. To secure the benefits of the new rules, nonprofits and foundations must do much, immediately. For instance, the Guidance says only that, when it becomes effective, federally funded contracts and grants must pay for indirect costs; it does not appropriate additional funds to do that, so nonprofits will need to become more adept at advocacy on appropriation and tax matters. Moreover, governments have incentives to try to avoid compliance. Nonprofits and foundations must be primed to guard against such attempts, whether by actively negotiating fair contract terms or blowing the whistle when the Guidance is being evaded. Federal agencies have up to a year to revise their regulations and train staff to implement the changes. During this time, nonprofits in the field need to learn how to maintain their financial records to properly allocate costs so they can negotiate for the full indirect costs rather than settle for the default rate of 10 percent of MTDC. Nonprofits must also learn to negotiate their own indirect cost rates at the federal as well as state and local levels. In short, immediate action is needed to create capacity for nonprofits to ensure that the recognition gained through the OMB Guidance is turned into the reality of reimbursement.

What the WVNPA Can Do

• Reach out to nonprofits in our state to alert them to how they can obtain indirect cost reimbursements.
• Use as an advocacy tool to engage state and local government in collaborating to create implementation plans.
• Use as an advocacy tool to engage state government in collaborating to address broader contracting issues.
• Provide trainings for nonprofits on
  • Identifying indirect/administrative costs
  • Accurately calculating and reporting indirect costs
  • Developing indirect cost rates
  • 
Negotiating contracts
  • Strengthening internal controls
  • Maintaining appropriate records/formats
  • Establishing required procurement policies and procedures
• Educate and encourage foundations to understand the importance of covering administrative costs.
• Share resources with one another—what trainings are already being provided on administrative/indirect costs? What resources already exist that can be shared?

What Foundations Can Do

• Recognize that like governments, they often do not adequately cover administrative and overhead costs in their grants to nonprofits and therefore limit the effective use of their own dollars.
• Insist that grantees accurately report their real administrative costs so that they can be included in grants.

Data & Resources

• Download this article as a PDF
• West Virginia Urban Institute Data 2014
• National Council of Nonprofits OMB Final Guidance on Grant Reform Release December 26 Updated Aug 1 2014
• National Council of Nonproifts OMB briefing sheet – Jan 10 2014

Take the Survey, Share the Survey

In less than five months, new reforms governing payments to nonprofits for their indirect (overhead) and other costs will go into effect. Read below to learn what the reforms do and why they matter to West Virginia nonprofits.

You can help in the development of tools to turn the promise of the new reforms into reality for your organization and others by completing this short survey from the National Council of Nonprofits and by encouraging your colleagues at other nonprofits to fill it out as well.