Five Minutes for Finance - Government Contracts
Understanding Government Contracts for Nonprofit Organizations
Federal, state, and local government contracts constitute a major portion of earned revenue for many nonprofit organizations. In contrast to government grants, which are non-repayable financial awards provided by the government to support a specific purpose (e.g., research, public service, or economic development), government contracts are legally binding agreements between a government agency and a private entity to provide goods or services for a defined price. They often come with strict reporting requirements and expectations for service delivery.
Types of government funding to nonprofits may include:
Service contracts (e.g., delivering mental health counseling)
Purchase of goods (e.g., supplying medical equipment)
Program administration (e.g., managing housing voucher programs)
Research and evaluation services
Why Pursue Government Contracts?
For many nonprofits, government contracts can be a sustainable revenue stream that supports long-term growth. Benefits include:
Stable funding: Multi-year contracts can offer more predictability than donations or short-term grants.
Scalability: Larger contracts may allow organizations to expand their services or geographic reach.
Credibility: Partnering with government agencies can enhance an organization’s reputation and open doors to future funding opportunities.
Challenges Nonprofits Face
While the opportunities are significant, government contracts also present several challenges:
Complexity and compliance: Contracts often come with extensive requirements related to performance, financial management, and reporting.
Cash flow issues: Many contracts are reimbursable, meaning the nonprofit must front the costs and wait for reimbursement.
Administrative burden: Government contracts can require extensive documentation, audits, and detailed recordkeeping.
Mission drift: There’s a risk that chasing contracts may lead organizations to move away from their core mission to meet funders’ goals.
How to Get Started
For nonprofits looking to enter the world of government contracting, preparation is key. Here are some steps to consider:
Register your organization: Ensure your nonprofit is registered in government procurement systems such as SAM.gov (System for Award Management).
Understand eligibility: Review contract announcements carefully to ensure your organization qualifies and can meet all requirements.
Build capacity: Strengthen financial systems, program management, and data tracking processes.
Develop partnerships: Collaborate with other nonprofits or government agencies to build credibility and increase capacity.
Write a strong proposal: Clearly demonstrate your ability to deliver services, manage funds responsibly, and achieve measurable outcomes.
Best Practices for Success
To thrive in government contracting, nonprofits should adopt the following practices:
Stay mission-focused: Only pursue contracts that align with your strategic goals.
Invest in infrastructure: Strong financial, HR, and compliance systems are essential.
Engage experienced staff or consultants: Expertise in government contracts can help navigate regulations and reporting.
Monitor performance: Track metrics and outcomes to ensure contract compliance and improve service delivery.
Maintain transparency and accountability: Open communication with stakeholders, including funders, builds trust and long-term relationships.
Conclusion
Government contracts can be a powerful tool for nonprofits seeking to expand their impact. With proper planning, strong infrastructure, and a clear mission focus, these partnerships can help organizations deliver critical services to those who need them most—while ensuring accountability and long-term sustainability.
About this Series
Subsequent articles in this series will cover other topics related to nonprofit financial management. Here is a list of, with links to, previous articles:
About the Author
For over 30 years, Robert Pascual has been a leader in nonprofit financial management as a CFO, consultant, conference speaker and educator. He holds an MBA from the Haas School of Business at the University of California and is the founder and principal of Robert Pascual, MBA LLC. He has worked with small, mid-size, and large nonprofit organizations spanning the fields of education, workforce development, housing, health, philanthropy, social services, media, fiscal sponsorship, nature, and the environment. Each of these organizations has faced both unique and common challenges, some of which are probably similar to ones that you wrestle with.