What is the Campaign for 20%?
Currently, most government intentionally contracts cover less than 80% of the cost of delivering the services required under the terms of the contract. The goal of the Campaign for 20% is to change the contracting approach so that human service organizations are paid for all of the services they are performing.
We are asking the contracting with human service agencies be conducted in the same way it is for most other vendors: on a performance-based, lowest responsible bidder basis.
Why is this needed?
Government agencies rely on nonprofit organizations to deliver basic services promised to constituents on their behalf. However, current contracts impose artificial constraints on certain expenses, including wages, benefits, operating expenses, and other critical needs. Because of these constraints, current funding covers about 70% of direct expenses and between 33% and 44% of indirect expenses for government contracts. Human service agencies are required to subsidize these contract with funding from other sources, typically donors. At this point, human services are unable to make up the difference from other resources, as the pace of growth in demand from the government has outstripped the nonprofit sector’s ability to fundraise.
As a result, nearly 1 in 8 human service organizations in our State are technically insolvent. Between 8% and 25% are expected to fail at a time of increasing demand for services. If the sector fails, the government will no longer be able to deliver on its promise to taxpayers. Rebuilding the sector will be extremely expensive and time-consuming to accomplish.
What is a human service organization?
Human service organizations provide critical services to residents in our community, like children, youth, families, seniors, people with disabilities, people experiencing homelessness, job training, meals programs, early childhood education, and more.
Why aren’t human service organizations paid for the cost of services delivered?
Human service organizations originally relied primarily on donors to complete their charitable activities. This happened before government bodies started sub-contracting work to nonprofits. As governments increasingly hired nonprofit organizations to deliver services, the nonprofit human services sector adapted and grew to meet the needs. However, basic human needs and populations facing hardship have grown to unprecedented levels. During economic downturns, the need increased while funding decreased, and government contract managers asked nonprofits to make up the difference through fundraising. As the needs and the sector have grown, this historic reliance on donor funding to subsidize government contracts has resulted in a sector that is financially unstable and unable to sufficiently fundraise from the public to keep up with government demand for services.
Are you asking for larger contracts, costing more money?
No. We are asking for accurately structured contracts, costing the same amount of money, but removing artificial rules based on outdated assumptions about management accounting and right-sizing the required outcomes. Government entities should structure contracts to pay the true cost of the services they expect nonprofits to deliver.
Governments rely on nonprofit human service organizations to deliver vital services in our community. If more nonprofits and human service organizations close, it will be extremely expensive to recreate the structure required to meet those needs.
Does “right-sizing” mean the contracts will fund and serve fewer individuals?
Yes and no. Right-sizing contracts means that a government contract should fully cover the costs of the services they are asking us to deliver. There are two ways a contracting entity could handle this. They could reduce the number of people human service agencies or expected to serve and reduce artificial restrictions on the way the funds would be spent. If this happens, government contracts will fund services for fewer individuals. However, human service entities will be able to redirect the donor and other funds they currently use to subsidize government contracts toward new, innovative services. This may allow those human service organizations to serve more people.
The other option that a contracting entity has is to increase ask organizations to serve the same number of people while increasing funding and reducing the artificial restrictions on the way the funds are spent. If this approach is taken, human service entities will be able to serve more individuals than they currently serve because they will be able to redirect donor and other revenue toward expanded services.
Obviously, the latter approach is preferred by human service agencies! However, we recognize the constraints on government budgets and the difficult decisions legislators must make about the relative importance of serving vulnerable residents in our communities. At this point, we are simply asking for the first solution, even though it means government contracts will serve fewer residents.
How much of the total cost of services are human service organizations paid?
According to the National Imperative Survey conducted in 2018, both government agencies and human service organizations estimate that government funding covers about 70 cents on the dollar for direct program expenses, and between 30 and 44 cents on the dollar for indirect expenses associated with government contracts.
How do human service agencies make up the difference?
Human service agencies make up the difference by reducing compensation and benefits for employees, and critical infrastructure for delivering services. In many cases, they must incur debt, using dollars secured through fundraising to subside government contracts. As a result, nearly 1 in 8 human service organizations are technically insolvent, 40% lack liquidity to meet short-term obligations, and dollars from donors who believe their contributions are being used for innovation and expansion are being used to subsidize government services – a “twice taxed” dilemma. (For more information, see the National Imperative Survey results from 2018.)
What is the “twice taxed” dilemma?
Elected officials promise taxpayers to provide services to residents. However, they require that the organization subsidize the contract with funds from other sources, who are generally donors, in order to deliver the services. This means that these taxpayers are essentially paying for the service through their tax dollars, and then paying again through a charitable contribution.
What kinds of restrictions are imposed, and how do they impact organizations?
Proposal templates and contracts impose limits on compensation and benefits paid to employees, the amount of money and types of expenses that can be used to deliver the services, and the cost of overhead, among other restrictions.
Each of these restrictions has significant negative impacts on the contracting organization. For example, wage limits artificially depress the market for human service professionals, making it difficult to pay market wages to a group of professionals who are predominantly women and people of color. Overhead is often capped at 10% or less. Studies show that most organizations’ actual overhead rate is or should be about 25%. Overhead includes functions that are critical to financially-sound operations, including internal control processes, performance tracking, finance and accounting staff, human resource staff, audit fees, legal fees, insurance, facilities costs, and utilities. Limiting overhead forces nonprofits to cut corners in risky ways that can destabilize or place the organization in significant danger of a catastrophic failure.
What is the Campaign for 20% asking for?
We are asking governmental agencies and other funders to commit to funding the full cost of delivering services. We recommend using a performance-based, lowest responsible bidder approach that is similar to what is used for other contracts.
What is a performance-based, lowest responsible bidder approach?
Human service agencies should be able to propose on services in the same way any other vendor to a governmental agency does: using a performance-based, lowest responsible bidder approach. The governmental entity identifies the needs, and the service provider quotes a price that fully covers their costs, outlines their qualifications for delivering on that outcome, and provides references and evidence of past performance. Vendor selection will be made based on those criteria.
How does that differ from what happens now?
Currently, human service agencies must provide detailed budgets, comply with wage and benefit caps on employees, and operate within artificial budget constraints on how funds can be spent. In addition, they are often asked to provide “matching” or “braided” funding from other sources to gain access to funding.
To use another type of vendor as an example, this would be like the Washington State Department of Transportation asking for a bid on a new bridge, and then telling the contractor how much they could pay for their employees’ wages and benefits, that they could only spend 10% of the funds on concrete, and 5% on wood screws (even if these are not necessary for construction), and that they would need to find another client who was willing to subsidize 30% of the cost of the bridge without claiming credit or ownership.
For an entertaining – and accurate – video that illustrates the issue nonprofit human service organizations face, check out Everyone Deserves a Fair Slice.
So, human service organizations are already in a competitive bidding process for the work?
Yes. However, the bids must be broken down on a line item level, with artificial caps on what can be bid for each part of the contract. For example, wages might be capped a certain pay rate per hour that is below market rates.
If governments lift the constraints, won’t nonprofits bid lower and lower until they all go out of business?
If governments lift the constraints, won’t nonprofits bid lower and lower until they all go out of business?
There is always the risk that someone will “low ball” the price. That already happens. After all, government contracts constrain the ceiling on prices, not the floor. However, the lowest responsible bidder approach allows a government to pass over a low bid that they feel is irresponsible in favor of a higher bid that is better able to meet the requirements.
Regardless, this approach will leave pricing to the human service organization, rather than having the government agencies who contract for services dictate what they will pay.
Why don’t human service agencies refuse these contracts?
As nonprofit, mission-driven organizations, we have felt compelled to accept sub-optimal contracts to continue delivering vital services in our community. However, nowadays human service agencies are beginning to refuse contracts. In fact, some contracts have had terms so onerous that no human service agencies have even bid on the work. However, since government contracts provide the majority of our funding, if we suddenly walk away from all contracts, we would need to close our doors.
What is Brave Commitments?
Brave Commitments is a committee of CEOs and Executive Directors serving child, youth, and family-services agencies who are concerned about the health of the sector. Research conducted in 2018 identified a number of critical issues, including a crisis in the financial health of member organizations. After several years of deliberation and analysis, the group formed Campaign for 20 as the first initiative to address this issue across all human service organizations. More information about Brave Commitments and the other issues identified by the organization can be found at www.bravecommitments.org.
How can I support the Campaign for 20%?
If you are a government agency, please pledge to fully cover the cost of delivering services or, at a minimum, increase the indirect cost rate to a minimum of 20% on all contracts. If there are barriers to making this happen, please help us understand what they are and work with us to address them. You can email our campaign at campaignfor20@bravecommitments.org.
If you are a human service agency or coalition of nonprofits, a member of the board of directors for a human service agency, or a concerned member of our community, please sign our letter of support.
Until this issue is resolved, please provide financial support to nonprofit human service agencies through unrestricted donations that allow us to continue serving critical needs in our community.
Where can I find more information?
There are several studies that have been conducted locally and nationally highlighting the financial crisis in the sector, including:
Call to Action: Reimagining How Nonprofits will Meet our Mission for the Children & Youth of our Community (King County specific)
2022 Nonprofit Association of Washington Government Contracting Report (Washington State specific)
Funders for Real Cost, Real Change: Indirect Cost Rate Guide 2022 (published by the accounting firm BDO)
Ending the Nonprofit Starvation Cycle (Published by Bridgespan, 2019)
The NonProfit Times: 80% of Nonprofits’ Revenue is from Government, Fee for Service (2019)
A National Imperative: Joining Forces to Strengthen Human Services in America – 2018 (Published by Marsh & McLennan Companies)
Strengthening Human Services With and Without Government, John Locke Foundation, 2018
The Financial Health of the United States Nonprofit Sector: Facts and Observations (Published by Marsh & McLennan Companies, 2018)
Costs, Complexification, and Crisis: Government’s Human Services Contracting “System” Hurts Everyone (Published by the National Council of Nonprofits, 2010)
United States Government Accountability Office (GAO) report: Nonprofit Sector: Treatment and Reimbursement of Indirect Costs Vary among Grants, and Depend Significantly on Federal, State, and Local Government Practices (2010)
Human Service Nonprofits and Government Collaboration: Findings from the 2010 National Survey of Nonprofit Government Contracting and Grants (published by the Urban Institute)
The Nonprofit Starvation Cycle (Published by Stanford Social Innovation Review, 2009)
The Bridgespan Group: Nonprofit Overhead Costs: Breaking the Vicious Cycle of Misleading Reporting, Unrealistic Expectations, and Pressure to Conform (2008)
Campaign for 20% 