Five Worst Government Contracting Abuses

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For decades governments have been turning to nonprofits to deliver government services, but increasingly governments fail to pay to nonprofit organizations the full cost of providing those services to individuals.  Nonprofits have struggled for years to maintain quality services despite inadequate reimbursements, and now government reports and records are openly confirming the fact that government contracts frequently shortchange nonprofits. The Congressional Research Service recently warned that “governments, particularly state governments, may be contributing to the financial difficulties of nonprofit organizations, even to the point of not paying for contracted services.” 1

The National Council of Nonprofits is conducting wide-reaching research into the many ways state governments are making it difficult for nonprofits to deliver high-quality services in local communities. We have identified the following practices as among the worst abuses discovered – so far:

  1. Late Payments, Forced Loans
    Governments failing to make contract payments, even when the nonprofit had fully performed, sometimes withholding payments for more than a year, thus effectively forcing nonprofits to bankroll government operations. 2
  2. Profiting from Nonprofits
    Governments taking for their own use a significant percentage of federal grant funding from nonprofits and requiring nonprofits to raise and pay for part of the costs. 3
  3. Using False, Out-of-Date Rates
    Governments using reimbursement rates that haven’t been adjusted for years and don’t come close to covering actual costs. 4
  4. Waive Rights, or Else!
    Governments requiring nonprofits to waive their statutory rights to receive prompt payments – or lose the contracts. 5
  5. Shortchanging Nonprofits
    Governments charging nonprofits a fee for administering contracts and demanding discounts for making contract payments on time. 6

But our research continues. Has your nonprofit experienced something similar, or worse, when it comes to dealing with government agencies? 

To explain to policymakers and the public how these abuses shove huge financial burdens onto the backs of nonprofits, we need to hear your stories and get copies of any government reports documenting these abuses that ultimately hurt Americans in need of help.

Tell us your story. Together, we can devise solutions to end these unfair practices and restore a healthy partnership between governments and the nonprofit sector.  

Read more about Government Contracts & Grants.

1. “An Overview of the Nonprofit Sector,” Congressional Research Service (R40919; November 17, 2009).

2. “Controller Warns Lawmakers, Governor About Impact of a Late Budget,” June 15, 2010, California State Controller John Chiang (“Without a budget by August 1…I will be forced to advance another round of deferrals scheduled for October into September, which will result in a three-month delay of payments to education and other programs.”); “An Open Letter to Illinois Service Providers,” Comptroller’s Quarterly (Editions 32-26), Illinois State Comptroller Daniel Hynes (“Instead of the non-stop cycle of extended payment delays, we need a comprehensive plan that will eliminate the deficit and restore fiscal stability to Illinois for the long term. Most importantly, it is time for our leaders to recognize that the public service community and its hundreds of thousands of employees is not just an essential purveyor of critically needed services to our most at risk population but is a significant element of our state's economy.”); “Not-For-Profits Continue to Suffer As Great Recession Lingers,” March 30, 2010, New York State Comptroller Thomas DiNapoli; Prompt Contracting Annual Report, 2009, New York State Comptroller Thomas DiNapoli (“The adverse effects of late contracting and the associated late payments on the [nonprofit] community and the people they serve are significant.…The cumulative effect is to undermine the stability and financial viability of the entire NFP sector.”).

3. “Treatment and Reimbursement of Indirect Costs Vary among Grants, and Depend Significantly on Federal, State, and Local Government Practices,” May 2010, Government Accountability Office (GAO found “differences in the rates at which state and local governments reimburse nonprofits for indirect costs.” For instance, GAO found in one federal grant program that some states reimbursed their nonprofit contractors for indirect or administrative costs they incurred delivering the services while another state kept those federal funds for itself.)

4. EOHHS Report to Administration and Finance: Recommendations for Reforming the Purchase of Service System, January 2008, Executive Office of Health and Human Services, Commonwealth of Massachusetts (see page 2: “Rates in the POS system are not based on the actual price of the service…. These rates frequently do not cover the full cost of providing services and do not support a fair wage for human service workers.”).

5. Prompt Contracting Annual Report, 2009, New York State Comptroller Thomas DiNapoli (“Table 4 shows that of the 136 waivers of interest submitted to OSC for review, 26 percent were determined to be unwarranted with potential interest due.”).

6. Statewide Contractor Administration Fee, General Compliance Requirements, Executive Office for Administration and Finance, Commonwealth of Massachusetts; Prompt Payment Discounts policy, Office of the Comptroller and Operational Services Division, Commonwealth of Massachusetts.