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Show Me the Money: The Uneasy Financial Relationship between Government and Nonprofit Organizations

A note for our readers: the views reflected by the authors do not reflect the views of ASPA.

By Alicia Schatteman

Schatteman mayThe sector lines are blurring. Nonprofits provide goods and services only previously delivered by the public sector, especially in the area of human service. Today, human services are more likely to be provided via contracts with nonprofit organizations than by public employees. In fact, nonprofit organizations provide over half of all government-funded social services. The Urban Institute has done extensive research in this area and their reports are all available online.

Benefits to Nonprofit-Government Collaboration

There are several reasons why nonprofits may choose to collaborate with government and vice versa. Contracting with nonprofit organizations may be easier than working with private business because they share a public service mission orientation. Government and nonprofits also share a similar ethical climate. Common traits include a shared sense of caring, fostering of friendship and concern for the individual. Both types of organizations believe that the other is not acting in their own self-interest.

Collaboration also helps to cultivate trust and create a more interdependence in a community. Interdependence fosters deliberation and builds trust. Collaboration can take many forms and contracting is a common type of collaboration. However, collaboration can also bring challenges.

Challenges to Nonprofit-Government Collaboration


There is an interesting dilemma when contracting occurs however, the extent to which citizens understands who is actually providing public goods and services. Do citizens need to know when they are using a nonprofit good or service and when it is government provided? In fact, when citizens have a positive satisfaction rating, they are more likely to identify the organization as a nonprofit. When they have a negative satisfaction rating, they are more likely to identify a government organization as providing that good or service. Perception reigns supreme. Contracting makes it difficult for citizens to know who is actually providing public services but maybe it doesn’t matter in the end if citizens are satisfied with the services.

However, in order to be accountable for spending public dollars by giving it to a nonprofit organization under a contract agreement, there are some accountability issues. Nonprofit organizations have very different accountability requirements. Lester Salamon, with The Aspen Institute, recounts the challenges nonprofits face in accepting government funds in The Resilient Sector: The State of Nonprofit America. The Vermont legislature recently passed the Results-Based Accountability (RBA) Bill 293, which now goes to the Governor for signature. RBA will be a tool for policy makers, nonprofit organizations, state agencies and organizations looking to improve performance results. The model is based on the book by Mark Friedman author of Trying Hard is Not Good Enough and taught at Marlboro College. RBA focuses on results and, if signed into law, is meant to hold nonprofit organizations to a higher standard of accountability. This law could influence other states to pass similar laws.

Performance Contracts:

One significant change to nonprofit contracts is the introduction of performance measures, now termed performance-based contracting. Local governments, in particular, are using more of these performance contracts for human and non-human services. A performance-based contract includes outputs, quality and performance outcomes and payment of the contract is tied to those performance objectives. Authors Lisa Dicke and Steven Ott argue in their book, The Nature of the Nonprofit Sector, that there are challenges on both sides with this level of collaboration. Some researchers have shown that nonprofits benefit from the government revenue but the contract does not provide for the whole cost of administering a particular program and therefore government funds are leveraged by using volunteers and private philanthropy. Typically, the government grants may not cover any administrative costs or overhead, which is problematic because without overhead there are no programs to administer.

If a complicated performance contract is in place, you need contract management specialists in government and the nonprofit organization to properly manage and fulfill those contracts. This may mean costly program evaluations, reporting and data collection for nonprofits. For governments, they have to understand the human resource and technological capacity of nonprofit organizations in terms of data collection, complicated reporting and data analysis.

Again, the lines are blurred between what is public and what is not. If government wishes to continue down the path of contracting out, then professional public and nonprofit managers are needed to effectively manage and oversee the contracts and uphold public accountability. The relationship between government and nonprofits is an uneasy one but growing closer every day. Some collaborations, like contracting, go very well and others fail. What can governments and nonprofits do to make this collaboration successful for both?

Recipe for a Successful Collaboration

  • Understand each other’s organization culture; the organizational chart as well as the organization’s commitment to transparency and innovation.
  • Have staff in place in both organizations that understand the collaborative relationship, who clearly understand any written contracts.
  • Realize that there will be bumps in the road as you go and build in some flexibility to adapt plans or action steps as needed.
  • Understand the capacity of each organization in terms of financial resources but also human resources and how this will affect the collaboration.
  • Governments can offer assistance to nonprofit organizations if their capacity is lacking in certain areas and resources can be shared across organizations such as tech support, legal advice, or infrastructure needs like additional space or insurance requirements.


Author: Alicia Schatteman is assistant professor in the School of Public and Global Affairs, Department of Public Administration and the Center for NGO Leadership and Development at Northern Illinois University. She received her Ph.D. from the School of Public Affairs and Administration at Rutgers University, Newark. The author can be reached at www.nonprofitscholar.

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