Background

Prior to the 1960s, nonprofit agencies in the United States were primarily dependent on private revenue from client fees, charitable donations, and endowment income. Some agencies such as child welfare organizations received public subsidies, but these agencies were nonetheless largely reliant on private funds. However, this funding mix changed dramatically in the 1960s with the rise of the federal role in social policy. As part of the War on Poverty, the federal government created a host of new programs and initiatives, including neighborhood health centers, community mental health centers, community action agencies, youth service agencies, and drug and alcohol treatment programs. Most of these new programs were implemented through government contracting with local nonprofit service organizations. Some of these agencies were entirely new; yet many existing agencies such as Catholic Charities and Lutheran Social Services also expanded their service offerings in response to the dramatic increase in federal funding support for social and health services (Smith and Lipsky, 1993).

Many nonprofit agencies were initially reluctant to accept government contracts due to concern that government funding might undermine their mission and autonomy (Kramer, 1982; Smith and Lipsky, 1993). However, most of these agencies eventually accepted government contracts. This shift occurred for several reasons. First, some federal programs were matching programs so a private agency might be able to use a 25 percent private match to obtain a 75 percent matching grant from the federal government. So at least initially, federal revenues essentially allowed the expansion of existing services. Second, some of the early federal grant programs had very loose accountability requirements, so nonprofit agencies could accept the funds without onerous compliance requirements, thus allowing substantial discretion by nonprofits on the management and implementation of their programs. Third, federal grants offered many agencies far more money than they could reasonably expect from private philanthropy and fees. Fourth, and relatedly, federal funding allowed nonprofit agencies to reduce their dependence on private donations and fees, allowing agencies in some cases to increase their services to disadvantaged and very needy clients. And fifth, many federal programs were structured as grants to state and local governments who then contracted with local agencies. Often, state and local government officials already had established relationships with local nonprofits agencies such as Catholic Charities. With the advent of federal funding, state government officials tended to simply continue these relationships and, at least initially, did not change the terms of the existing agreements between the nonprofit agency and government (Smith, 2016).

Federal spending on contracts soared in the 1960s and 1970s, through direct contracts with nonprofits and more indirectly through grants to the states which then contracted with local community organizations (Smith and Lipsky, 1993). Many state agencies relied almost exclusively on nonprofit agencies to provide services, especially new and innovative services such as community residential programs, respite care, and day treatment.

This increased federal role changed dramatically when the Reagan administration reduced federal spending on many community programs provided by nonprofits, and devolved more responsibility for federal grant programs to the states (Smith, 2012). Over time, though, federal spending rebounded, in part through the expansion of existing grant programs or via the enactment of new programs in areas such as child welfare, workforce development, and community residential programs for the homeless and disadvantaged. Through a variety of changes to existing law as well as new program initiatives, funds for social and health services provided by nonprofit agencies rose again in the late 1980s and 1990s.

Contracting with nonprofits grew in the aftermath of the landmark welfare reform legislation of 1996. As part of this legislation, the federal government created new funding for services and gave greater administrative discretion to state and local governments to spend the new money, including much greater flexibility by local administrators to shift money from cash assistance to services. At least initially, many states used the increased administrative discretion to increase contracting with local community agencies to provide various support services to individuals on welfare, including day care, welfare to work, job training, and counseling programs. Other federal programs reliant on contracting with nonprofits also increased in the late 1990s and early 2000s, including programs for at-risk youth, community service, drug and alcohol treatment, prisoner reentry, and home care.

Since the early 2000s, though, non-health spending on social programs has been in a long-term decline, especially after the 2008 recession (Gais, Dadayan, Bae, 2009; Lynch, 2014). Even before the recession, many federal social programs had essentially been either level-funded or incrementally reduced each year; for grant programs such as the Social Service Block Grant (SSBG) these resulted in a sharp drop in value over time in inflation-adjusted terms (Lynch, 2014). Federal funding for child welfare services has also declined (DeVooght, Fletcher, and Cooper, 2014, p. 2). Likewise, state government funding of key social programs declined during the 2000s after a period of sharp growth in the mid- to late-1990s (Gais, Dadayan, and Bae, 2009). With the onset of the recession of 2008, many state governments dramatically cut funding for social programs, resulting in often sharp cutbacks in staffing and services by community-based nonprofit agencies (Harrison, Eleveld, and Ahern, 2011; National Council of Nonprofits, 2010; Pettijohn and Boris, 2013). As the economy has recovered, states have been able to replace some of the lost funding; nonetheless, the recovery has been very uneven, with many states still struggling to fund their social and health programs (see, for example, Palmer and Robertson, 2016).

Two policy fields are the exception to this overall trend of cutbacks and slow recovery, albeit unevenly. First, Medicaid has emerged as a central funder for community-based, nonprofit social service programs—a trend that dates to the 1980s. But the cutbacks in federal and state funding programs like SSBG has accelerated this shift, particularly for services for the mentally ill, developmentally disabled, and at-risk youth. For instance, in 1980, most public funding for services for the developmentally disabled came from state dollars, but because of Medicaid's Home and Community Based Services waiver program, federal dollars (and the state match) through Medicaid are currently the primary funder for these services (Andrews, Grogan, Brennan, and Pollack, 2015; Braddock, Hemp, Rizzolo, Tanis, Haffer, and Wu, 2015; Ng, Harrington, Musumeci, and Reaves, 2015).

Medicaid funding for community nonprofit health agencies has also increased sharply in the last few years because of the implementation of the Affordable Care Act (ACA). The high-profile legislation offers significant federal subsidies to states that decide to expand eligibility for Medicaid. As of 2015, over half of the states have taken advantage of these subsidies and increased eligibility and services for low-income and disabled individuals (Snyder and Rudowitz, 2015). This effort has, in turn, led to sharp rises in federal funding of community health centers and other related community health programs such as substance abuse clinics.

The second policy field with growth in government funding of nonprofit organizations is early childhood and kindergarten through grade twelve (K–12) education. As states have changed their laws in recent years, the number of charter schools—largely financed by government—has risen from 1,542 in 1999–2000 to 6,440 in 2013–2014 (Public Agenda, 2014). Many of these charter schools are independent nonprofit schools, while over 30 percent of the total number of charter schools are overseen by management companies, including large nonprofit management entities like the Knowledge Is Power Program (KIPP) (Miron and Gulosino, 2013). Importantly, the growth in nonprofit charters has occurred in the context of falling overall funding for K–12 education in many states (Leachman, Albares, Masterson, and Wallace, 2016). The result for local nonprofits, including charter schools, is often underfunding and intense competition for contracts and resources.

In sum, the funding environment for nonprofits with government contracts has been very turbulent: cutbacks have often occurred with relatively little notice; state and local governments continue to face fiscal scarcity, despite the recovery of the economy; and alternative sources of revenue for nonprofits such as private philanthropy and earned income are difficult for many nonprofits to raise. Moreover, significant changes have been under way in the form government funding takes via diversification of the tools of government funding, with profound effects on the management of nonprofit organizations and their relationship to government and their communities.

Ironically though, this competitive and austere funding climate is likely to encourage continued reliance on government funding for nonprofits through contracts and other funding tools. State and local governments, eager to save money, often view contracting as a less costly way of providing needed public services. The widespread interest in social innovation and social entrepreneurship is also fueling government support through contracts with nonprofits with novel but proven program models.

A Restructured Contracting Relationship

Even before the economic crisis, nonprofit agencies receiving government contracts were facing important shifts in their funding and their relationship with other government, nonprofit and for-profit organizations as well as their host communities. These developments have profoundly affected the contracting relationship, as well as the staffs and clients of nonprofit agencies. Significantly, even though it had increased such funding until 2008, government had moved away from the traditional contracts that were the hallmark of the initial period of widespread government contracting in the 1960s and 1970s. In this earlier period, most nonprofit agencies did not really compete with other agencies for contracts. Most contracts were cost-reimbursement contracts that paid agencies for their costs based on the contract terms and budget. Reimbursement was not linked to outcomes, and most agencies recovered their costs (at least as specified in the contract). Little incentive existed for agencies to compete with other agencies since contracts were unlikely to be moved from one agency to another unless egregious problems existed.

The current contracting environment is much more competitive, with higher levels of expectation based on performance. Many government contracts with nonprofits are performance-based, with government specifying the program targets that nonprofits are required to meet in order to receive reimbursement for their services (Desai, Garabedian, and Snyder, 2012; Fraser and Whitehill, 2014; Smith, 2016; Smith and Grinker, 2004). These performance-based contracts are now widely used in many different service fields, including child welfare, mental health, workforce development, and low-income housing.

These performance-based contracts are part of a broader movement affecting public and nonprofit management called “pay-for-success” (PFS) (Corporation for National and Community Service, 2015; In the Public Interest, 2015; Roman, Walsh, Bieler, and Taxy, 2014). A relatively recent innovation in performance-based contracting is the development of “social impact bonds” (SIBs) that depend on private investors loaning money to a third-party intermediary, which then subcontracts with a local nonprofit service agency on a performance contracting basis. The project is evaluated by independent researchers and government repays the loan to investors if the performance targets are met. Despite widespread publicity to SIBS, they remain quite limited in terms of their impact on services, in part because of their complexity and high transaction costs.

Performance contracts and “pay for success” models are especially consequential because they increase organizational and revenue uncertainty and because these contracts offer at least the threat of contract termination for poor performance (although, in practice, losing contracts remains infrequent). Nonprofit service agencies also have an incentive to compete with their fellow agencies since they could potentially grow through additional contracts. Also, performance contracts are usually structured so that agencies receive graduated payments as they hit their performance targets; thus, agencies may receive less revenue than planned, reducing their available cash flow.

Increased competition for funding is also a direct and indirect effect of the restructuring of government support itself. In the big build-up of government contracting with nonprofits, government funding primarily flowed to nonprofits through block contracts for a certain levels of service. However, many current forms of government support are tied to the client rather than the agency. The most vivid example is Medicaid, which functions like a “quasi-voucher” since eligibility is tied directly to the client (Steuerle, 2000). Agencies are reimbursed for providing qualifying services to eligible clients; their reimbursement rate is a vendor rate, whereby government will pay a certain amount for a specific service regardless of the actual costs incurred by the agency. In general, Medicaid vendor rates encourage competition for clients, since it may only be possible to generate surpluses at high levels of service volume (because each new Medicaid-eligible client is more revenue for the agency at only marginally more cost). This financing arrangement is dramatically different from the traditional cost-reimbursement contract. Under the latter, agencies actually faced disincentives for service expansion because additional services added to an agency's cost without any certainty that these costs would be reimbursed.

The diversification of government support—or policy tools (Salamon, 2002; Smith, 2016)—is also evident in the growing use of vouchers for child care and housing and tax-exempt bond money to support the capital needs of nonprofit agencies. Access to bond funding can be very competitive and subject to the state budget cycle; nonetheless it has become an important source of capital financing for many nonprofit agencies providing community-based services (Calabrese and Ely, 2015).

The scarcity of contract funding, the emphasis on performance, and the growth in the number of nonprofit agencies (McKeever, 2015) fueled growing competition from for-profit social and health services firms, especially in community-based services like home care, child care, early childhood education, and mental health. Many for-profits possess some notable advantages vis-à-vis nonprofits in competition for government contracts (and private fees). For example, for-profit chains have access to capital and operate at a sufficient size to enable substantial economies of scale, allowing them to operate at least some programs more efficiently. Further, since nonprofits are mission-based and many are small and unwilling to serve certain types of clients or certain regions, the opportunities for them to cross-subsidize their operations through growth or a diversified client mix are reduced. Many community-based nonprofits may also be very ambivalent about expansion (or even lack the capacity for expansion). For-profits typically do not have these types of mission constraints and are thus more willing or able to serve a more diverse mix of clients. Finally, larger for-profits may be able to use their size and bargaining power to obtain higher rates than the small community-based nonprofits. As a result of these factors, the percentage share of the market among for-profits has been rising for the last twenty years in these community services such as home care and child care (U.S. Census Bureau, 2015).

Contracting as a Regime

This turbulent and more competitive environment for contracting is disrupting (and has the potential to further disrupt) many longstanding relationships between government and nonprofit agencies. During the development of extensive contracting in the 1960s and 1970s, contracting tended to evolve through patterned relationships and expectations between government and nonprofit agencies that could be characterized as a “contracting regime” (that is, “a set of stable relationships that transcend simple common practice and reveal assumptions about the way the world works” [Smith and Lipsky, 1993, p. 43]). The historic nonprofit-government contracting relationship could be characterized as a “regime” for the following reasons. First, regimes tend to have accepted means of resolving disputes and addressing particular problems. This is evident in the tendency to rely upon nonprofit organizations funded by government to address current social problems, and in the existence of accepted norms governing the interaction between nonprofit organizations and government. Second, the regime concept is helpful in illuminating the regularized patterns of interaction between government and nonprofit agencies, even when these nonprofit organizations are opposed or resistant to particular government regulations and mandates. Third, regimes are marked by continuity, and participants in regimes are mutually dependent. If participants depart from the regime norms, they are penalized, either by the dominant party or by third parties. Fourth, regimes are usually sustained and dominated by a powerful party. For example, in international relations, this role is performed by a country whose policies and norms are accepted by other countries in the regime (Krasner, 1982). The government-nonprofit relationship is similar; despite the mutual dependency of government and nonprofit organizations, government tends to be the more powerful in the relationship. Thus, nonprofit organizations are often in the position of being forced to accept or follow the norms and policies of government (Considine, 2000; Smith and Lipsky, 1993).

The implications of the contracting regime for nonprofit management are profound. Managers of nonprofit agencies receiving government contracts are not free agents but are linked in an ongoing relationship with government, which at once constrains their behavior as well as provides certain incentives for organizational strategy, including a susceptibility to government influence. The vulnerability of nonprofit agencies receiving government contracts reflects the important characteristics of nonprofit finance, especially in the fields of social and health services. Nonprofit agencies, especially grassroots community organizations such as battered women's shelters, poverty agencies, and youth organizations, emerge through the collective efforts of like-minded individuals interested in addressing a particular social problem. Typically, these organizations are dependent on a mix of small cash and in-kind donations. As a result, they tend to be significantly undercapitalized. Overcoming the capitalization dilemma is hampered by the preference of private donors for specific programs and projects. This undercapitalization can be exacerbated by many banks' reluctance to lend money to nonprofits, especially smaller agencies. Such constraints on building an adequate capital base make it difficult to weather disruptions in cash flow. When nonprofit organizations are young, mostly volunteer, and small, a cash flow interruption may represent a minor problem. But when a nonprofit becomes involved in a contractual arrangement with government, the implications of cash flow disruptions often are more serious. Contracting typically requires more resources, such as more paid staff with higher salaries and greater levels of professionalization (Hwang and Powell, 2009), hence much higher cash flow demands. Thus, shortfalls in client censuses, management miscues, payment delays, or unexpected expenses are much more disruptive and problematic. For some agencies, cash flow problems in the current competitive contract environment can encourage mergers—or even the outright closure of some agencies.

Importantly, the uncertainty of contract revenue has been exacerbated by changes in the structure of the government-nonprofit contracting relationship. In the early years of widespread contracting, most contracts entailed a direct relationship between government and the nonprofit agency, such as a direct contract between state or federal government and a local nonprofit social service agency. But this relationship has evolved significantly through the involvement of a wide variety of intermediary organizations. Managed care organizations are one prominent example in health and social services, including child welfare and mental health (Courtney, 2000; McBeath and Meezan, 2010). In particular, many states contract with managed care organizations (MCOs) for their Medicaid spending; these MCOs then contract with local nonprofit and for-profit service providers. This increase in intermediary relationships is evident in various public-private partnerships that have become more common in the last twenty-five years. For example, a nationwide initiative called Funders Together to End Homelessness strives to bring together the resources and expertise of multiple funders in order to develop a more coordinated and effective strategy to end homelessness (Wertheimer, 2011). Many other similar public-private partnerships exist around the country in services such as early childhood education and workforce development.

Overall, the growth of these intermediary associations has created greater turbulence and less predictability in the contracting relationship from the perspective of the nonprofit agency, thus contributing to financial challenges and uncertainty. The cash flow problem, as well as the more general challenge of generating adequate revenue, is exacerbated by a common characteristic of the contracting regime: the inability to secure contracts that fully fund the agency's costs. Given the continuing budgetary volatility faced by many state governments, government officials across the country routinely set rates for nonprofit providers at levels insufficient to cover their costs. Multiple factors account for this shortfall: a contract may have declined in inflation-adjusted terms due to government budget cuts and austerity; a nonprofit manager may have underestimated the contract implementation costs; or government may saddle the agency with unexpected expenses or fail to provide the expected revenue. In this performance-based contracting environment, the latter is a much greater possibility than in the past. Also, agency expenses may rise unexpectedly and exceed contract revenues.

Underfunded contracts put nonprofit managers in a delicate position: relinquish the contract, with its implications for staff layoffs and shrinkage of the agency, or continue with the contract, albeit at an underfunded level. Since nonprofit executives are rarely rewarded for staff layoffs and the accompanying organizational turmoil, most nonprofit executives elect to keep the contract. To compensate for revenue shortfalls from contracts, nonprofit managers often try one or more of several strategies: (1) diversify their government contracts so they can obtain greater economies of scale and mitigate their risk from any one particular contract; (2) seek private donations from individuals or corporations;( 3) obtain foundation grants; (4) increase earned income such as rental or technical assistance income; and (5) attempt to directly or indirectly tap fee income from government sources, including Medicaid, vouchers, or tax credits such as the Low Income Housing Tax Credit (LIHTC).

Obtaining additional revenue in the current economic climate is especially challenging though. Intense competition exists for private donations and government contracts, and many agencies lack the infrastructure and capacity to effectively compete for government contracts, raise private donations, or generate earned income. Consequently, large nonprofit agencies and for-profit firms have a decided competitive advantage, since they are more likely to have access to adequate credit lines or bank loans and possess the professional staff to raise private donations and launch commercial ventures.

Strategic Management in an Era of Impact, Competition, and Accountability

Despite the increasingly uncertain and competitive environment for nonprofits contracting with government, many nonprofit executives are nonetheless able to develop sustainable, effective business models for their organizations. This strategic success requires sustained attention to agency governance, effective leadership, the development of broad and sustained community support, and ongoing advocacy on behalf of the agency and its clients.

Innovation and Reform in Contracting

The sharp expansion of contracting with nonprofits in the United States and beyond has been accompanied by persistent nonprofit complaints about the contracting process itself, including lack of transparency, overly burdensome regulations and reporting requirements, inappropriate performance targets, and underinvestment in infrastructure. In response, government and nonprofits have tried different types of reforms and innovations.

First, many performance-based contracts represent the imposition of specific outcome targets on nonprofit organizations with little input from these agencies. However, many performance-based contract negotiations begin with a decided lack of adequate information on the appropriate outcomes; thus, the construction of the contract can be a process of mutual discovery and problem solving. This point is another reason why nonprofits need to invest in their own capacity to manage and implement contracts; government officials may be looking to them for input. Second, a persistent lament among nonprofits is excessive regulation of nonprofit contract agency budgets, greatly limiting spending flexibility (Pettijohn and Boris, 2013). Further, the spread of performance-based contracts and “pay-for-success models” has often meant much greater attention to outcomes without a corresponding reduction in paperwork on accounting for specific line-item expenditures. Consequently, initiatives for innovation and reform in contracting have increasingly focused on identifying ways in which government can hold nonprofits accountable for expenditure of government funds while not imposing unnecessary restrictions. In many jurisdictions, officials and nonprofit agencies have been attempting to reduce regulatory burdens and at the same time achieve positive outcomes. For example, New York City has established the Health and Human Services Accelerator, which seeks to streamline the procurement process with local nonprofit (and for-profit) service providers. Many other jurisdictions have been exploring or implementing similar policies to reduce the regulatory burden of contracting (National Council of Nonprofits, 2014).

In addition, a wide variety of efforts are being devoted to more self-regulation by nonprofit service providers as a strategy to raise service standards while reducing the need for intensive government regulation. One example involves new initiatives in the area of accreditation, which typically specify a minimum standard of service that is detailed by the accrediting body. For example, nonprofit organizations in Herefordshire in the United Kingdom created their own accreditation system, which is administered by a third-party organization; government agrees to only contract with accredited agencies (Smith and Smyth, 2010). Other examples include the Commission on the Accreditation of Rehabilitation Facilities (CARF) and the Joint Commission (which accredits health care organizations). Increasingly, governments are looking to these accrediting bodies to certify minimum standards of quality in services provided by nonprofit (and sometimes for-profit) service providers in social and health care.

Also, growing interest exists in the United States and abroad in developing quality frameworks specifically tailored for nonprofit organizations. Thus, Maryland Nonprofits (2016) developed its Standards for Excellence program, which details ethical and quality guidelines for the governance and management of nonprofits. Similarly, the Charities Review Council (2014) in Minnesota has created a set of “Accountability Standards” and the Minnesota Council of Nonprofits (2014) has issued the “Principles and Practices for Nonprofit Excellence.” Relatedly, efforts are under way to strengthen the self-regulation of fundraising by nonprofits (see NCVO, 2015a, 2015b).

Further, recognition is growing among policymakers and nonprofit leaders that investment in nonprofit capacity also is essential for the delivery of sustainable and quality programs (Gregory, A. G., 2009). Indeed, since so many nonprofit organizations are now “agents” of government, one could argue that government has an obligation to support training and education and, more generally, capacity building among nonprofit agencies providing public services. Government can provide funding to associations, coalitions, and other intermediary organizations such as Maryland Nonprofits to provide technical assistance to nonprofits. Government officials can also provide direct help to nonprofits through information sessions and direct capacity building assistance to nonprofits, and they can indirectly assist nonprofits by their willingness to work collaboratively with nonprofit organizations and their representative associations on issues of mutual concern (such as rates and regulations) (National Council of Nonprofits, 2014; NCVO, 2015b; Pettijohn and Boris, 2013). Of course, a sustained collaborative effort requires an ongoing commitment of resources by government.

In support of improved nonprofit capacity, government can structure contracts to include support for reasonable administrative costs. This is especially important given the constant challenge faced by nonprofits to find sufficient funds to support their administrative infrastructure. Underfunded infrastructure is a common problem, since many government and private funders focus on program-related funding. Lacking sufficient funds to pay for an adequate administrative structure, agencies are at a disadvantage when they seek to raise private funds and compete for public grants and contracts. Insufficient infrastructure also contributes to program instability, especially among smaller community-based organizations. More generally, state and local governments can strive to more fully fund contracts to reflect reasonable costs of nonprofits (National Council of Nonprofits, 2014; NCVO, 2015b). Importantly, the U.S. Office of Management and Budget in 2014 adopted a rule requiring that U.S. federal agencies pay for legitimate administrative expenses in addition to direct program expenditures (National Council of Nonprofits, 2016).

Government can also play an important role in directly and indirectly helping nonprofit contract agencies with their capital costs. Before the financial crisis hit in 2008, many states and localities expanded nonprofit contract agencies' access to tax-exempt bonds to help them with their capital needs, such as the purchase and renovation of their facilities and new equipment (Calabrese and Ely, 2015; Human Services Council, 2015; Smith, forthcoming). To the extent that nonprofits can improve their capital position, they will be in a better position to manage their cash flow effectively and be able to develop productive relationships with government contract officials.

Government administrators, especially at the state and local level, can also help improve governance and performance among nonprofit organizations through their support of appropriate mergers and collaborations. As discussed earlier, many nonprofits are small and struggle with capacity and funding issues, creating problems with board and executive leadership. Mergers of some of these organizations could be quite helpful in resolving some of these governance problems. Nonetheless, nonprofits are often resistant to mergers, so support from government (and private funders) is often essential if mergers are actually to occur.

Importantly, these steps to enhance performance in nonprofits will be insufficient to improve the overall quality and effectiveness of publicly funded services provided by nonprofit agencies unless government takes steps to invest in its own management team and structure. In the case of contracting with nonprofits, state and local government will most assuredly fail to realize the benefits of contracting if government contract administrators are unable to monitor nonprofit performance or work effectively with nonprofits. Consequently, government agencies need contract managers with skills in negotiation and bargaining, and knowledge of management, finance, budgeting, and the organization of nonprofits. Government managers could thus benefit from executive education and training opportunities focused on contract management, nonprofit management, financial management, program evaluation, and negotiation (National Council of Nonprofits, 2014; Smith and Smyth, 2010).

Government contract managers with these skill sets would also promote more effective relationships with nonprofits, as well as support working groups and more formal arrangements among nonprofits and government, to address important sector policy and management issues. Toward this end, government and nonprofit organizations in the United Kingdom negotiated a formal agreement, called “The Compact,” outlining key principles and practices to guide their interactions at all levels of government (Compact Voice, 2010). The U.K. Compact has generated broad attention among governments and nonprofit organizations throughout the world. Some countries such as Australia have experimented with local level compacts (Casey and Dalton, 2006). Nonetheless, the basic principles of The Compact, such as regular communication and dialogue between government and the nonprofit sector and good standards of practice, can be developed through more informal relationships and partnerships at any level of government.

Nonprofits, for their part, should strive to invest in their administrative and programmatic infrastructure, including new technology and qualified administrative staff (Human Services Council, 2015; Light, 2004). The development of a private donor base can also be essential to building capacity, especially given the competition for scarce public contracts. Fundraising may not produce large benefits for the organization in the short term but, in the long term, may become very important as a way of cross-subsidizing programs inadequately funded by government contracts, and it may help build broader community support.

Conclusion

Government contracting with nonprofit agencies is in the midst of an important transition. The competition for government contracts is increasingly intense, reflecting growth in the number of agencies, coupled with the profound and broad-based interest of government and many private donors in accountability, efficiency, and results. Over time, this emphasis on performance and outcomes will produce more comparative analysis among nonprofit organizations, as well as between nonprofits and for-profits, particularly in service fields (such as home care) where these agencies directly compete. In the process, the monopoly now enjoyed by many nonprofits in their local communities is likely to be eroded or threatened by for-profit agencies or upstart nonprofit agencies. Moreover, larger nonprofit (and for-profit) contract agencies with proven track records and capacity are likely to have an edge in the competition for contracts. Further, government is likely to continue to shift at least some of its contract funding away from traditional contracts and into other, less direct funding vehicles such as vouchers, quasi-vouchers (such as Medicaid), and tax credits, further encouraging a more competitive, entrepreneurial contract culture. Amidst this competitive contracting environment, nonprofits will also need to engage in collaborative initiatives to enhance efficiency and program effectiveness, including the co-location of services; cooperative arrangements on benefits; sharing staff; and formal agreements to merge some services, yet retain separate organizations.

In short, the contracting environment is likely to remain relatively unpredictable and turbulent for the foreseeable future. Thus, nonprofits will need to adapt in ways that support both agency sustainability and program effectiveness. In the process, they will need to balance the imperative to be market-oriented in order to compete effectively for contracts with the imperative to stay true to their social mission and community orientation. Multiple revenue streams will become increasingly important, even for modest-sized agencies, and effective advocacy on behalf of the agency and its local constituencies will be vital for agency sustainability. Ongoing investments in their own capacity will be necessary for agencies, too. Nonetheless, government also needs to recognize its obligation to invest in nonprofit infrastructure and capacity and to support nonprofit contractors with equitable and fair funding. For nonprofit leaders and managers, such investments in agency capacity and good governance, coupled with sustained engagement of local citizens and stakeholders, will enable the sector to realize the promise that nonprofits offer as effective providers of vital public services in a new and dynamic environment.

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