Social enterprises, by definition, generate revenue and social value through the sale of a product or service. At the same time, charitable programs providing social value are often funded by government grants.
But what happens when a government agency elects to HIRE the charity to fulfill a service contract? In fact, it may not be easy to see the difference between a government contract and a grant.
What are the benefits of one over another?
In the grant model, a government provides cash to a non-profit or charity and with that money the charity then delivers the necessary service to fill a social need in our society. The charity then has to account for the expenditure of the funds and report to the funder on activities undertaken and the net effect (impact) of those activities.
Funding relationships give all the power to the granting body, which sets the terms and format of the application and budget and sets the parameters about how, what and when deliverables are to be met. Creating a funding application is also time consuming for the hopeful grantee, often requiring letters of community support, sharing of financial statements, providing names of board members, and painstaking hours of wordsmithing to fit all the good, innovative ideas into a predetermined (often online) format.
Once the grant is awarded (often after months of patient waiting) you get the money, up-front. This is good for cash flow. However, then there are typically arduous reporting requirements to document activities, expenditures, variations in budget and requests (read: apologies) for material changes in scope (often learned only once a social service project starts). Fulfilling the reporting requirements cost your business money (in staff time and resources); these costs are rarely covered by the grant. And, if there is an allowance for reporting or administration, the amount is insufficient to pay market costs or wages.
When you apply for funding, you don’t sell your services, you adjust your business idea to meet the needs of the funder. You don’t create demand; you simply meet an existing demand.
The Service Contract
Social enterprises, however, want to generate income from business activities, not grant revenue. By seeking governments as “clients,” they can access different pots of money in the public sector. This is strategically prudent, as governments are reducing available grant programs in so many social service areas, yet they continue procurement activities through competitive bidding in order to provide public services.
When you respond to a request for proposals in a competitive bidding process, such as the federal procurement process at www.buyandsell.gc.ca, you sell your business, and the government buyer determines if you are the right supplier. You sign a contract which states that “if you provide X, you’ll be paid Y.” Admittedly, you don’t necessarily get the payment up front. However, you can negotiate terms that allow for a first payment to be made early, and with a signed government contract in hand, you can access bridge financing at reasonable rates.
As with writing funding proposals, you don’t get paid for your time for this business development, but your government proposal can be branded to your business, and it can frequently take a format that is convenient (even a template) for other sales proposals. Your wordsmithing angst can now be allocated to clarity, accuracy, quality, passion, and not about fitting a response into 750 characters.
If there are problems in the contracting scenario with government, there are arbitration procedures, access to information requests, and public documents that you are eligible to engage at little or no cost. Rather than asking for changes on bended knee (as a grant recipient), contractors frequently negotiate change requests; such requests are almost an expected part of a service agreement.
Best of all, results speak for themselves. Very rarely will a government contract require a “final report” unless the report is an agreed upon deliverable in the contract. If it is in the contract, then the preparation, copying, editing, distribution, of the report are all paid for at market rates.
Ah, and competitive bidding for contracts has the possibility of the dream of all contracts: the standing offer, or the retainer agreement. It is very difficult to get multi-year funding for social enterprises. However, through competitive bidding processes (which actually cost the government a lot of money to administer) multi-year agreements are more common, and standing offers or preferred supplier agreements are possible.
So what is the downside of getting the government as a client? First, if you don’t perform, they may find another supplier. Funding agreements are typically set for a year, but contracts can be broken based upon poor performance. There may also be extra requirements for government service contracts, including proof of liability insurance, documented prior experience including client references, and possible security clearances for staff, to name a few.
Also, if the value of the contract is greater than 50% of your total annual operating budget or if the contract dictates the strategic planning of the charity, the contract may cause concern with your charitable registration, as stipulated in the “related business” clause.
Another possible downside is that if you are competing for a government contract, you’re competing against the marketplace, including for profit companies who may be well capitalized, well connected, and well diversified. And finally, government contracts are typically larger in total value and expected deliverables. Some social enterprises may not have the capacity to scale up to meet the demands of the public sector client, or they may have to form a consortium with another company or another social enterprise to fulfill the contractual terms.
Many charity-based social enterprises may not distinguish between a grant and a contract. After all, both scenarios provide money from the public purse to the charity to deliver social value. An easy way to tell the difference: if you have to invoice for services rendered, it’s a contract; if you have to report on how the money is spent, it’s a grant.
For a social enterprise, it is arguably better to engage government as a client, rather than as a funder, for the following reasons: You will be forced to perform against market standards; you’ll be tapping into dedicated government expenditure budgets; you have access to transparent processes for recourse to address changes in contract terms; your administrative burden will decrease; you can pay your staff market wages; and there is a significant possibility of longer term contracts if you meet your client’s expectations.
Oh…and invoicing is far easier (and more rewarding) than reporting!
Jonathan Wade is the President of Social Delta, a social enterprise consulting firm based in Ottawa. He co-founded the non-profit Centre for Innovative Social Enterprise Design (CISED), is a member of the Social Enterprise Council of Canada and an advisor to Enterprising Non-profits (enp Canada), frequently speaks on social enterprise policy and business design, and works directly with a diverse client base seeking to start or expand their social enterprise.
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