Many nonprofits are very relieved when a donor steps in to fund the proposed activities. It seems like a good sign. And of course, life is much easier if you have financial resources for the work you want to do. But if you do not read the contract carefully your life might actually get more difficult instead of easier. So before you accept the grant a donor wants to provide, read your donor contract – and read it carefully.
But what could be hiding in there?
It almost sounds as if I think you would find something horrible in a contract. And indeed, most donor contracts do not include horrible things. But they do include things you need to know about and be aware of before you start implementing. So that you can make sure you implement everything properly. It may even be that you need to decline the contract if you already know you cannot comply with its stipulations.
OK, so what then?
What could be so challenging then? There are three areas of a contract that require your more than careful attention. Keep in mind that any time you do not comply with a stipulation in the contract (including its annexes) the donor has the possibility to stop the grant and to ask for their money back. Remember, also, that donors do talk to each other. And in cases of very bad non-compliance, they do warn each other.
Challenge 1
The first thing to check is the general conditions. These are very often attached as an annex. And yes, this is fully part of the contract. You should read it and make sure you understand what it written there. Ask questions to the donor if you are not sure you get it right.
General conditions help you understand, for instance, what the donor considers eligible costs – expenses they are prepared to reimburse through the grant – and what are not eligible costs. Also, the general conditions usually include articles clarifying requirements to your accounting system and your record-keeping. Be sure that you understand all these requirements and make sure to comply, right from the start.
Challenge 2
The second thing to check is how to handle changes. What to do if you cannot implement all the activities as planned? What fluctuations in spending are acceptable, and when do you need to request a budget adjustment?
Don’t assume the donor will understand that life is different from a project plan. Don’t assume that buying a car is the same as renting a vehicle, in terms of budget use, even if you spend the same amount. Check what the rules are, and make sure you discuss timely (in advance!) with your donor in case of any significant changes.
Challenge 3
The third thing to check is the payment schedule. Check what amount you can expect to receive, when and under what conditions. Most donors do not pay out the whole amount contracted in advance. Many pay out 80% and some even 95% in advance. But there is usually a % of the contracted amount that will be transferred only after approval of the final report.
No problem, many nonprofits think.
Without realizing that this means they will receive that missing 20% (or 5% if they are lucky) only if and when their final report shows the full 100% of expenses.
Indeed, you will not receive the missing % if you have not spent it, and do not show this as spent in your final report.
So if you spend only the amount you have received in advance, the donor will consider themselves lucky that you were able to implement all the promised activities for 20% less than planned.
I know that for many nonprofits this would be a very unpleasant surprise. Because they were counting on the 100%.
So check the payment schedule and its conditions and discuss this with your board in advance. Make sure you can prefinance expenses for the part of the grant that will be reimbursed only at the end. (And know that this can take a few weeks or even months after you have submitted your final report to the donor!) Plan accordingly. And if you cannot find a way to handle this, discuss with your donor about this as soon as possible. So, as soon as you have received the contract and discussed this issue with your board. And not at the end of the project when you are facing cash flow problems.
Is that all?
These are just three issues I wanted to point out. The most common issues that I have seen cause trouble for nonprofits. Of course, you need to read the whole contract carefully and make sure not to miss anything else that you need to know before you start spending grant money.
Make sure you follow all the details, so that you don’t miss for instance conditions for reimbursement of travel costs or required checks that you need to visibly do that someone you hire is not a terrorist (yes, for real).
Visualize
It helps if you try to put yourself in the shoes of the donor. What are issues you would be concerned about if you would invest in a project? What would you like to know about the implementing organization? Which standards you would like them to follow? At what moments would you like to be consulted before changes are applied?
Remember, the donor needs to account for their investment in your project toward their managers and maybe toward their home office or Parliament, too. Contracts, and all the details in them, are there to help donors get certainty on quality implementation and impact. And they help them be accountable towards others in the chain. It does help if you keep that in mind when you accept funds from an institutional donor.
My one tip
- Read the donor contract and all its annexes and templates carefully before accepting any support. Ask at least one other member of your team or board to read these papers and discuss together. Make sure you both understand what you are agreeing to and need to comply with. And be compliant from day 0.
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