November, 2011Have you ever tried to piece together eleven government contracts for overlapping programs, trying to make them fit together to fund all the costs? Or have you had six foundation grants, all for the same program area, but each requiring different line items and paying for separate, narrowly defined expenses? If so, you are either a Contract Wizard or you need to know one:
The term "contract wizardry" caught our eye in a recent article from the Bridgespan Group: "Clients at the Center: Realizing the Potential of Multi-Service Organizations," by Bob Searle, Alex Neuhoff, and Andrew Belton. To learn more, we spoke with Bob and interviewed two real-life contract wizards -- one at a $700,000 nonprofit and one at a $65 million nonprofit.
Most funders -- whether government or foundations -- fund specific programs rather than provide core support to nonprofits. For example, a government contract with the local health department may fund case worker services to people with alcohol and drug abuse problems. Another government contract -- this time with the state and on a different fiscal calendar -- may fund services to people with disabilities, including alcoholism. And a foundation grant -- again on a different timeline -- may fund a research project that includes some family-based services for people in a specific neighborhood.
The challenge for nonprofit finance managers is not any simpler than turning a human into a hedgehog, and requires nearly the same level of wizardry. The goals of such wizardry:
Plus as contract wizard Sister Paulette LoMonaco, executive director of Good Shepherd Services, a $68 million organization in New York City, puts it: "And you have to stay out of jail. . .you must be able to legitimately substantiate all the money you have spent."
In the Bridgespan article, the authors need a 73-word sentence to describe it: "One strategy some MSOs use to get around these funding silos is what leaders we’ve spoken with often call 'contract wizardry' -- meaning the ability to figure out exactly what is allowable through each funding stream and then pressing against those limits, taking pieces of funding from various streams to develop services or initiatives that are effectively integrated at the client level, even if the results are still reported to funders silo by silo."
Government grants don't cover costs
"Government will never give you sufficient indirect costs," says Sister Paulette. "We have 0% indirect in some programs. The highest reimbursement we receive is 10%. Our actual rate is usually between 12% and 14%." On a $68 million budget, the difference that must be made up privately is quite significant.
Managers faced with similar problems typically begin by trying to characterize as many "administrative" positions as possible as program positions. An "administrative assistant" who works in a program is probably better titled "program associate," a position more likely to be justifiable in a given grant or contract.
And because so many grants and contracts pay for only part of a program, each is typically paying for a small percent of a salary. Contract wizard Richard Mostranski, CFO of Humboldt Domestic Violence Services, says that of its 16 staff, "in any given month someone will be billed to eight or nine separate grants." He continues, "And we have one contract that pays for 5.27 FTE, but we have nine people billing to that grant in chunks . . . that's wizardry!"
Steve Zimmerman, CPA, a finance consultant and Blue Avocado contributor, says that on his last job as a CFO he was able to move overhead among programs. "For example, let's say I had $100,000 per month in overhead to split between six funders. In January and February I might charge it all to Funder A because its grant expires in March. Then I'd charge all the overhead to Funders B and C because their grants expire in June. And so on." But he notes that many funders now require the same amount in overhead to be charged every month. "Which makes it ten times harder."
Gaps and retroactive cuts
"The state [of California] is supposed to pass a budget before July 1, the start of the fiscal year," says Richard, who worked for the county before joining Humboldt Domestic Violence Services. "But then they don't pass the budget on time and we have to use our reserve funds to pay employee salaries and operational cost until the budget is passed, which typically is in late September. We also do not know what level of funding we will receive which really puts a strain on our strategic planning for the year, i.e., do we lay off employees, hire more employees, cut operational costs, cut services? Domestic violence is 24/7 . . . so we can't close the shelter or the hotline while we wait to hear whether we're going to get funding or what level of funding."
And Steve notes that some nonprofits are now using 100% of their United Way funding to fill in the gaps between government contract renewals.
Adding programs adds impact but also complications
Sister Paulette's very abridged story at Good Shepherd Services is telling. Like many community-based service organizations, the organization has added programs over time that expand its ability to serve the low-income families in its neighborhoods. It has also developed the ability to -- using Bob Searle's words -- "position contracts so that, within certain parameters, you can fund overhead and other things." Good Shepherd excels at mixing and matching funding to piece together the support for its programs and client services.
"There was no one stable funding stream that could respond to at-risk needs of families in underserved communities," says Sister Paulette, "so we had to learn how to blend money.
"We segment out pieces of programs that are marketable, and try to get them funded by other private sources. So for example our afterschool programs in the public schools have had horrendous cuts. Last year the foster care reimbursement rates were dropped dramatically."
As a result Good Shepherd Services approached a corporation that might be interested in funding afterschool programs for a certain grade. If it gets the funds, its staff wizards can take the funding that was being used for that grade and move it into other grades to make up for the government reductions. Then multiply this issue by the multiple sites and programs of this $68 million organization . . .and contracting magic!
Most nonprofits strive to pay consistently across programs so that, for instance, the cook in the senior nutrition program makes the same as the cook in the homeless shelter. But what if one government agency is willing to pay more for cooks than the other? Or what if you want to give benefits to all staff, but only some of your contracts and grants allow for benefits?
"Most of our government contracts allow us to pay a Crisis Advocate $11.03 per hour and no benefits," say Richard. "So, many of our Crisis Advocates have to be kept at or below 29 hrs per week--because benefits would be required at 30 hours. It is not good for the Crisis Advocates and it is not good for the Agency in employee retention and longevity," he notes.
Sister Paulette comments: "We try to create lines of funding for every position in a program. A position might not be funded initially at 100%. But if you have accruals over the life of the contract, and the individual is working 100% in the program, later on you can sometimes back-fill the costs, although rarely are you able to fund 100% of the cost of the cost of the position." And although the organization charges a standard percentage of salary expense for benefits across all its programs, "sometimes you have a poorly funded program that has a lot of employees who use family coverage, so you have to raise additional private money to put into that program to pay for the benefits."
Where's the Hogwarts School for Contract Wizards?
How does an organization learn contract wizardry? "I don't know," said Bob Searle. "But I know when it's there." He suggests asking nearby wizards -- AKA nonprofit CFOs and executive directors -- for help.
What all our interviewees said is that contract wizardry requires:
"It's really crucial to have staff at the top stay for a long time," emphasizes Richard. "It takes years to understand how all the pieces fit together and how you can add a new piece here and a new piece there." Sister Paulette has been at her job for 31 years, and other organizations identified as being contract wizards all had long-tenured leadership.
And the reason for contract wizardry?
"When you start with the needs of the community, and you're opening to listening, you realize that doing one or two things isn't enough. But no single government source will fund it all. So once your mission is clarified, you look at how you can make your goals fit into various RFPs and private support," says Sister Paulette.
"I'm not the type who goes out and waves a domestic violence flag," says Richard. "But I believe in it. And you have to be a wizard or your agency can't do the work."
Our thanks again to Sister Paulette of Good Shepherd Services, Richard Mostranski of Humboldt Domestic Violence Services, Bob Searle of the Bridgespan Group, and Steve Zimmerman of Spectrum Nonprofit Services.
Thanks to Jan Masaoka, and her publication: Blue Avocado. find them at http://blueavocado.org.