Performance-Based Contracting for Nonprofits

Social Solutions Blog

Performance-Based Contracting for Nonprofits

Government funding is one of the main sources of revenue and support for nonprofits. The Urban Institute estimates that “Government funding covers approximately one-third of the nonprofit sector’s revenue.” For some, government contracts are a mystical golden goose that will solve all of their organization’s funding needs. However, the acceptance of government funding brings with it certain expectations – especially in the case of performance-based contracts.

What Is Performance-Based Contracting?

By now, you’ve probably learned about the movement towards performance-based management for nonprofits, driven by both private grantmakers and government agencies, to encourage nonprofits to improve their services in measurable ways. However, in performance-based contracts, funding awards and penalties are directly related to the awardees ability to show the grantor that they are meeting the expected outcomes.

It should be noted that there are many different kinds of government funding, all of which to some extent rely on measured outcomes in order to hold nonprofit grantees accountable. The Urban Institute describes many of them in their discussion on government funding for nonprofits.

Government Contracts vs. Government Grants

What makes performance-based contracting a unique form of government funding for nonprofits is that it is a top down approach where the government grantor has identified an unmet need and requires an outside contractor to fulfill it. This is distinguished from a government grant, which nonprofits may be more familiar with, in which the grantee proposes a solution to a need that fits within the scope of the grant. But wait a second – doesn’t the nonprofit who deals with the service provision day in and day out know more about the needs of the community than a government bureaucracy?

Not necessarily. The World Health Organization describes one perspective on grants vs. performance-based contracts:

Grants can be very useful and have worked well in many situations. They are particularly helpful in beginning new types of services or providing an opportunity for creative innovations… The downside to grants is that they can lead to an irrational distribution of services with gaps in some areas and duplication in others.

Having a funding organization at the top making decisions about what kinds of jobs need to be done can help to organize the almost endless number of nonprofits who are fulfilling discreet services and streamline service delivery.

Complying With Performance-Based Contracting

Know What You Are Being Evaluated On

It is likely that you will be weighed and measured based on a few critical metrics rather than a horde of comprehensive data points. According to the General Services Administration (GSA), the government is encouraged to evaluate performance based on industry best practices or “commercial quality standards,” but often times the grantee will be allowed to propose what they should be evaluated on. In either case, it is imperative that you and your staff know what the critical metrics are and how you are going to collect them.

Make Sure You Have the Means to Collect, Analyze, and Report on those Metrics

Database software is a must have for the collection, analysis, and reporting of your key metrics. Some government grants specify specific attributes that your database must comply with (such as HMIS), but you should have a solution that fits your needs and fits your organization. Social Solutions’ ETO software has proven itself to be a robust solution for organizations of many sizes that are complying with government reporting guidelines.

Make Sure that You Know Whether You Can Renegotiate the Terms of Your Evaluation

There may or may not be a clause in your contract that allows you to renegotiate the terms of the evaluation or which metrics your programs are being evaluated on. Often times reporting to private supporters or even private grantmakers can be fluid and conversational, but government contracts are often more rigid. If the clause does exist, make sure you maintain open lines of communication with the grantmaking agency so that they understand why you believe a different evaluation process would be necessary.

Are Performance-Based Contracts Right for Your Organization?

Although they are an enormous source of funding, performance-based contracts may not be right for all organizations. There is a lot of paperwork and administration involved in securing, reporting to, and complying with government funding opportunities. If your organization is just starting out, or doesn’t already have a strong philosophy of evidence-based practice or performance management, you may not have the infrastructure ready to support the rigors of performance-based reporting compliance.

However, if you’d like to take your organization to the next level, consider speaking with our solutions specialists and see how you can move towards evidence-based best practices that will allow you to pursue more public and private funding, including government grants.

If you think your organization is ready to dive in, you can browse the available Government contracts (more than 25,600 of them) at

The Takeaway

Whether you are a fledgling nonprofit, or a seasoned agency partner, knowing the ins and outs of performance-based contracts, and positioning your organization to be a good awardee, can help you towards becoming truly evidence-based. Whether you win government contracts or not, becoming evidence-based will help you secure private and public funding, streamline your operations, eliminate waste and improve the lives of those that you serve.

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