Industry Insights
Not-for-Profits Challenged by the Rising Cost of Administration

Brian Sackstein, CPA
09.14.2018 | Long Island Business News

Not-for-profit (NFP) organizations today are facing the rising cost of administration which threatens to drown them in a flood of operational costs and/or leave them open to noncompliance violations. The key to succeeding through these demands is to adopt approaches that enable the organization to efficiently and effectively manage administrative requirements.

NFP organizations receive funding from private and public sources. When dealing with public sourcing, organizations typically enter into a “contract” with the federal, state, or local government agency supplying the funding.

There are basically two types:

Fixed Contracts. A government agency contracts with an organization for the principal purpose of providing a specific service, at a fixed rate, for public benefit.

Fee-For-Service Agreement. Organizations enter into an agreement with a government agency for funding, and are reimbursed on a cost per unit service.

These contracts frequently require extensive reporting and a high level of responsibility to the organization, which usually means a substantial amount of oversight and administration cost.

When contracting for services or programs, the amount is determined at the time of contract issuance and based on current market value to perform those services, as well as the present regulatory environment. A percentage of that amount is dedicated toward the administration expenses necessary to support the specified service. This percentage is generally determined during contract negotiations, and differs depending on the program and/or organization. When dealing with multi-year term contracts, increases for general inflation are typically factored in. Often ignored, however, is the evolving number of new regulatory requirements.

New regulations for procurements, employee background checks, and audited financial statement requirements, are examples of recent changes that may impact how organizations operate, and they keep coming. Staying abreast of these changes can be a daunting task and working within this new regulatory environment has caused some significant challenges for organizations. One major issue is the existing contracts that have not accounted for new regulations.

The administrative work required to meet the ever changing requirements and ensure their compliance, is growing at a higher rate than initially calculated when negotiating contracts—surpassing allocated funds and annual renewal percentage increases. The additional work falls back to the organizations to cover. Some are able to hire more administrative staff to fill in the gap, but others don’t have the funds and are forced to do more with less.

Fund raising events are one tactic commonly used to help fill the gap, and support future program funding. Although events are usually successful, they are normally short-term fixes as they often do not raise enough to support growth goals. Moreover, Long Island has seen an influx in charitable fund raising events and many organizations are grappling with decreased attendance.

However, there are other approaches to battle the rising cost of doing business in our current regulatory environment:

Program fund re-allocation. There may be opportunities to move budget numbers around to make better use of existing resources and assist in covering costs. A quarterly budget analysis is a healthy operational habit to adopt. Such a review would include all amounts dedicated for operations, program specific needs and incidentals, and future growth. When re-allocating funds, be sure to remain mindful of contract terms, so no violations occur.

Tap into consultants. Legal and accounting professionals can assist with identifying ways an organization can streamline internal controls, compliance or financial reporting requirements, which can result in minimizing some administrative responsibilities. Additionally, technology consultants can suggest high level reporting and tracking software that can substantially minimize administrative work, although the upfront cost may be difficult for smaller organizations.

Explore innovative ways to raise funds. The more unique the approach, the greater the potential return. Online crowdfunding has proven effective in certain situations, but evolving technology in areas such as targeted marketing campaigns, have proven successful as well when executed properly. Speaking to public relations and marketing firms can uncover opportunities.

Renegotiate contract terms. Many organizations have had success in renegotiating increases for administrative budget provisions on existing contracts with multiple year terms. Even if the current year budget balances, year three may not, so review all existing contracts. Organizations should also ensure that all new contracts include appropriate administration fee increases.

Congressional outreach campaign. There is strength in numbers, and with 20,000+ nonprofit organizations on Long Island, asking local representation to help with existing contract processes that may stifle fee increases mid-term, as well as battle some of the regulation requirements that add undue administrative stress. There is a substantial amount of planning and collaboration required to successfully launch such a campaign, but the results may be worth the effort.

Contract cancellation. Since this would mean the elimination of services for an essential community or welfare program, consideration of this tactic would be a last resort.

The key is to remain proactive in managing the rising cost of administration, so that operational costs and possible noncompliance violations do not overwhelm your organization.

Berdon LLP. New York accountants