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From grants to contracts: opportunities and risks
The funding landscape for INGOs is changing. What’s certain is that contracts (as opposed to accountable grants) are well and truly here, as are payments by results (PBR). The Overseas Special Interest Group (OSSIG) meeting on 16 July focused on the growth of contracting in the funding landscape for INGOs.
We heard from International Rescue Committee UK on how they are adapting their processes and resourcing to handle the programme, legal, financial and governance considerations arising from contracting. Mango’s director, Tim Boyes-Watson, covered PBR models, risks and opportunities – which was especially relevant given DFID’s recent strategy making PBR its “business as usual” approach in contracts. Lastly, Crowe Clark Whitehill (CCW) covered the VAT and accounting implications of contracts and grants.
NGOs will need to adapt in several ways if they are to benefit from this shift. For me, the key take-home messages were:
- Adapt processes and systems: more and more of what INGOs do is likely to be funded by contracts in future, or through contract-type mechanisms for risk sharing and payments. INGOs must adapt their grant management processes and systems to deal with the different and additional risks they will face as a result (and support partners to do so too, where relevant).
- Focus on price as well as cost: INGOs are used to calculating the direct costs of their work in grant bids. Contracts must be priced – which requires different cost analysis, market information and mindset. INGOs will need to understand the competition rules, while pricing services in sectors for which there is little market information available. The full cost of delivery (including pre-bidding costs and the costs of failed bids) must be quantified in order to determine a price sensibly. Where partners are involved, fair pricing of their work is critical too.
- Negotiate hard: it’s important not to accept unacceptable terms and to negotiate hard, for example, to limit the PBR payment element to 5-20% of contract value. INGOs will have to learn fast and adapt quickly to ensure that PBR is used constructively.
- Learn from others: contracting and PBR may be relatively new to INGOs but it’s been used in the UK voluntary sector and amongst private sector providers for many years. It’s important to make a concerted effort as a sector to learn quickly from others.
- Manage your risks: contracting and contracting-type risks need to be managed at portfolio or organisational level. Some INGOs devolve decision-making in respect of individual programme funding – but consideration of cumulative risk and liability will be critical to decision-making about funding in the future. Whether working with partners, in consortia or with lead/sub arrangements, it’s also important to work out how to share risk and liabilities fairly amongst the various parties.
- Draw your red lines: based on your risk appetite, it’s important to work out the types of contracting opportunities your INGO should pursue – and the types which you will not. Funding with contract mechanisms brings a range of potential liabilities for which there is no recourse, including pre-financing, indemnities, and liability to damages – all of which will need to be under-written from reserves. It’s also expensive to bid – so you need to work out how likely you are to win before you invest in bidding.
- Understand the effects on your INGO’s identity and culture: contracting may very well change your INGO’s sense of identity, purpose and organisational culture, for example perceiving itself as delivering services rather effecting social change. It’ll also change the nature of your INGO’s relationships with partners and other NGOs, making them more contractual in nature – and less partnership-based.
And finally... future growth through these types of funding sources will inevitably have an impact on what INGOs do and how they do it. In light of these changes, it’s important to build a good understanding and consensus about what your INGO wants to be and do, and how the aims and values that matter the most to it can be safeguarded whilst responding to this changing environment.
Organiser of the OSSIG meetings, and Mango associate consultant