The Real Costs of Managing Contracts: What Every Organization Should Know

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August 02, 2016

The Real Costs of Managing Contracts: What Every Organization Should Know

By Alison Brady

Associate Director, Programs Humentum

There are many myths that circulate in our industry. One of the first ones I encountered was the belief that, among organizations that receive USAID funding, for-profit organizations exclusively pursue contracts and non-profit organizations exclusively pursue grants and cooperative agreements. This wasn’t true at that time, because there have always been for-profits that implement grants and cooperative agreements, just as there have always been non-profits that implement contracts.

However, there was some basis for the myth. When I started my career 15 years ago, it was rare for non-profits to pursue contracts. At that time, I worked at a for-profit and I remember how surprised I was whenever there was a non-profit that was bidding against us for a contract. But that’s changed. One of the most interesting trends I’ve watched over the last decade and a half has been the increase in the number of non-profits who bid on USAID contracts. The explanations for this trend are varied, and include expanding programmatic impact, aspiring to branch into new technical areas, and desiring to increase revenue.

Whatever the reason, non-profits who make that decision enter a new world with a painfully steep learning curve. I experienced this first-hand when I worked in the Grants and Contracts departments of two non-profit organizations who were in the early stages of implementing their first USAID contracts. In my current role as a trainer for InsideNGO, I continue to encounter organizations that struggle with the transition to managing contracts.

Here are a few key things that organizations taking on contracts need to understand.

Mentality shift

Working under cooperative agreements means that you have a degree of control over both the programmatic and operational aspects of implementation. USAID’s oversight is limited to substantial involvement, defined prior approval requirements, and audits as required. It’s easy to understand why organizations view projects implemented under cooperative agreements as being their projects. There is a mentality shift that is needed to implement under contracts. Put simply, it’s not your project. It is work for hire that you are doing for USAID. While there are some day-to-day decisions that you make about implementation, USAID exercises considerable oversight across all aspects of the contract. There are more approval requirements, more frequent reporting and more administrative requirements. As an example, prior approval for international travel, which is no longer required under cooperative agreements, is still required under contracts.

Managing risk

There is always risk in accepting US government funding. But there is more risk under contracts than under cooperative agreements because of the numerous compliance requirements, the more stringent penalties, and the overall challenge of doing exactly what USAID wants you to do. Organizations with a low risk tolerance need to carefully consider if they can accept these risks before taking on contracts. Even organizations with a high risk tolerance must still consider how they will manage and mitigate these risks.

The temptation of fee

Contracts allow organizations to charge a fee that is separate from direct and indirect costs. Some organizations are tempted to take on contracts because they view the fee as a source of unrestricted funds. Resist this temptation! Fees under contracts are meant to cover a variety of costs, including costs that are not reimbursable, the cost of forward financing if USAID does not provide advance payments and, more generally, the cost of managing risk. For example, I worked on a contract where USAID approved a consultant and the consultant’s scope of work to conduct a study and write a report. USAID rejected the report. Even though USAID had approved the consultant and the scope of work, it was my organization’s responsibility to ensure that USAID was satisfied with the final product, so we hired another consultant to re-write the report. The second consultant was paid out of our fee because USAID would not pay for it directly. Although this is an extreme example of performance risk under contracts, it highlights how the fee is sometimes needed to pay for implementation costs so that you can keep USAID happy.

The real costs of successfully managing a contract

One common lesson learned among organizations that take on contracts is that it takes more time and energy for individual staff and the entire organization to manage a contract than a cooperative agreement. On the organizational level, policies, procedures, and systems need to be updated to ensure compliance with contract requirements. On the individual level, staff time is needed to write monthly reports, to attend frequent meetings with USAID, and to provide the close oversight of project activities that is essential to successful implementation. This is not an area where corners should be cut. Organizations must decide how they will dedicate the needed resources, such as hiring new staff, and how they will justify these costs to USAID during contract negotiations. This is worth the effort because it helps to ensure that necessary costs are paid by USAID rather than taken out of the fee, but it requires that the organization first understand what it really costs to manage a contract.

One of the reasons I enjoy teaching InsideNGO’s USAID Contract Management for NGOs workshop is because we explore these and other topics in-depth. Not only do we teach you the contract regulations, but we also give you a forum to talk frankly with your peers about the risks and rewards of taking on contracts. Whether you are new to contracts or need a refresher, I hope that you will join us at an upcoming workshop to be part of that conversation.

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