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For all its flaws, government contractingof social services offers opportunities toimprove services for vulnerable people.This view underlies much recent debateabout the virtues of privatization. Govern-ment contracts also impose significantburden and risk on nonprofit entities.Public interest advocates and nonprofitleaders have common interests thereforein ensuring that nonprofit entities candeliver effective, responsive service whilesustaining themselves as important com-munity resources. Here I set forth a briefoutline of important issues for publicinterest attorneys representing nonprofitentities seeking to strike this balance.1

I. Public Interest Lawyers and Nonprofit Transactional Legal Needs

Throughout the country, nonprofit andneighborhood organizations attempt toaddress the needs of their communitiesdirectly by serving individuals and spon-soring projects to improve their commu-nities. They provide child care, primarymedical care, job training and counsel-

ing, and referral services to low-incomepeople, and they build and rehabilitateaffordable housing, renovate deteriorat-ing commercial buildings, help local res-idents start and manage new businesses,and much more. In doing so, they areinvolved in business, albeit not for prof-it, and they require the same level of busi-ness law representation as for-profit com-panies. All of the community-buildingefforts cited above involve transactionallegal tasks, from incorporating a nonprofitcharitable organization and seeking tax-exempt status, acquiring land through alease or purchase and syndicating interestsin low-income housing tax credits, toforming joint ventures.

Transactional legal advocacy differsfrom litigation, obviously, in that the attor-ney’s role is to help the client pursue agoal by reaching agreement with otherparties on a mutually acceptable ex-change.2 This is precisely the kind of assis-tance needed by nonprofit entities seekingcreative solutions to pressing problems.Unfortunately, without a resource for find-ing free representation from a legal ser-

Privatizing Better: Representing NonprofitService Providers Contracting with the Government

By Peter Manzo

Peter Manzo is executive

director and general counsel,

Center for Nonprofit

Management, 606 S. Olive St.,

Suite 2450, Los Angeles, CA

90014; 213.623.7080;

pmanzo@cnmsocal.org.

1 This article is based primarily on my admittedly limited experience and is meant to behelpful to legal services and especially pro bono private attorneys who may not befamiliar with government contracting for human services.

2 From the perspective of empowering clients, transactional legal services work may bemore client-driven than litigation. In transactional matters, clients presumably know farmore about their business goals and the practical concerns involved than their attorney,they are much more in charge of decisions, and the attorney’s role is simply to advise theclient of potential risks and try to protect the enforceability of the benefit the client seeks.

vices organization or a pro bono program,getting legal assistance is “catch as catchcan” for most nonprofit groups. Most sim-ply do not have the money to pay an attor-ney, and further, unless they find an attor-ney through a board member or otherhaphazard contact, they do not knowwhere to find competent, experiencedlegal assistance. As a result, most smallernonprofit groups forge ahead without legalassistance, often running catastrophic risks.

By representing charitable organiza-tions, public interest attorneys can im-prove the quality of life for low-incomeand disadvantaged people. Besides advo-cating on behalf of nonprofit clients inparticular matters, public interest transac-tional attorneys can work within private-public coalitions on broader issues; theattorneys have knowledge of the law ofpublic benefit organizations and the abil-ity to bridge diverse constituencies suchas neighborhood residents, local govern-ment, and business and civic groups.

The transactional legal needs of com-munity groups are well suited also to theuse of volunteer attorneys from the pri-vate bar, perhaps more so than with civilrights litigation matters. In many cases, pri-vate bar volunteers can bring resourcesotherwise unavailable to public interestattorneys and their clients. Affordablehousing projects, for instance, requireattention from real property, tax, and cor-porate and securities attorneys. By lever-aging efforts of volunteer transactionalattorneys, public interest attorneys canserve far more clients.

For the broad range of communitygroups to find the help they need, pub-lic interest lawyers should partner withprivate bar attorneys to coordinate effortsto match volunteers with needy nonprofitentities. In many cities across the coun-try, bar associations and legal servicesgroups are organizing themselves toaddress this problem. For example, PublicCounsel in Los Angeles brings togetherthe Los Angeles County and Beverly Hillsbar associations to sponsor pro bonotransactional representation for nonprof-

it entities. At the national level, organi-zations such as Power of Attorney, theAmerican Bar Association–National LegalAid and Defender Association partner-ship called “A Business Commitment,”and the Pro Bono Institute support suchprograms and encourage private attor-neys to get involved.3

II. Potential Issue ConflictsPublic interest attorneys representing non-profit entities may confront issue conflictswhen the interests of a charitable organi-zation client conflict with the interests ofa class of clients the legal services pro-gram also represents. For example, legalservices organizations may represent low-income tenants or people who use ser-vices provided by homeless shelters, andmay feel they cannot assist nonprofitaffordable housing and homeless serviceproviders with designing or enforcing evic-tion policies.4 Another potential conflictsituation would be a dispute regarding eli-gibility for services or treatment of an indi-vidual or family by a service provider—similar to the kind of adverse situation thatwould arise if the government itself pro-vided the service. Still another area of con-flict may be the employment practices andlabor policies of the nonprofit, includingresistance to unionization drives.

Unpleasant as evicting tenants, dis-qualifying people seeking services, ter-minating employees, and even resistingunionization may be, nonprofit charitableorganizations are business enterprises andtheir directors and officers owe a fiducia-ry duty to the organization and to thepublic to ensure that they pursue theirmission as effectively as possible andcomply with grant and contract terms.Legal services and pro bono programsmust make very clear to nonprofit clients,in advance, the kinds of matters the pro-grams will not accept. One possibleapproach may be to rule out representingnonprofit clients in litigation matters ingeneral; this would avoid involvement inactual instances of issue conflicts but pre-serve some flexibility for exceptions.

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3 See www.powerofattorney.org; www.abanet.org/buslaw/probono; www.probonoinst.org.4 Counsel might also view this as an opportunity to try to influence the development ofmore fair, compassionate practices than might be established without their involvement.

III. Negotiating Contracts withGovernment Agencies andGovernment Counsel

As the chief executive of a nonprofit thatprovides access to subsidized child careobserved, cutting costs and preserving thegovernment’s administrative options arekey goals of government agencies in con-tracting with nonprofit entities. Thesegoals and the peculiar role of governmentcounsel color the contract terms andnegotiations.

A. Government Agency InterestsSome believe that government con-

tracts intentionally pay nonprofit con-tractors less than the true cost of provid-ing services. The unstated assumption isthat nonprofit organizations will bringdonated funds and volunteer labor tomake up the difference. For example, LosAngeles County has a public-private part-nership program, which seeks to shift pri-mary care services from county facilitiesto private nonprofit clinics. Payments tocommunity health clinics under this pro-gram are typically well below the actualcost per patient visit.5

Beyond pricing of direct program ser-vices, virtually all government contractsset unrealistically low limits on reim-bursement for the costs of direct admin-istration of the social services and indi-rect costs.6 In many cases the contractsalso deny payment altogether for indirect

costs to organizations that have not gonethrough the arduous negotiation of anindirect cost rate from the source of fed-eral funds.7 This inhibits the ability of non-profit providers to hire and retain ade-quate staffing in program assistant,clerical, and administrative positions; thisoften means that skilled professionalssuch as licensed clinical social workers orphysicians’ assistants must spend moretime doing administrative and clericaltasks, and less time serving clients, thanwould be optimal. The reimbursementlimits also inhibit nonprofit providers’ abil-ity to improve systems, equipment, andfacilities to support the level of case man-agement, data collection, evaluation, andfinancial management (not to mentiongood customer service) that governmentand private funders demand and thatclients deserve.8 Whether the purpose isto maximize service to clients, preventwaste and inefficiency, or both, there isgood reason to doubt that this approachis effective.9 Whatever its purposes, thisflawed approach to monitoring servicecontracts is relatively straightforward forgovernment agencies to administer, andthis may be the point.

Preserving the contracting agency’sflexibility in changing program prioritiesand staffing levels may be another impor-tant government interest. Local legisla-tures and department chiefs may use sub-contracting in the same way private

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5 Telephone conversation with Lucien Wulsin Jr., project director, Insure the UninsuredProject (Jan. 2, 2002).

6 See, e.g., Office of AIDS Programs and Policy, L.A. County Dep’t of Health Servs.,Capacity-Building Initiative for HIV/AIDS Service Providers, Addendum to Request forProposals, Capacity-Building Contract (Oct. 18, 2001), available at www.lapublichealth.org/aids/rfp.htm.

7 Id.8 In some cases nonprofit entities turn down contracts or turn down increases in fundingand caseload because they cannot recover the required investment in boosting capacityor, even where they have capacity, they would lose money by taking on more work.

9 For-profit contractors doing identical work may not face the same restrictions. E.g., anonprofit organization serving immigrants and low-income people in east Los Angelesand a for-profit business both prepare meals for children and seniors under contractfrom the same government agency. The for-profit may charge its full costs and a per-centage for profit, while the nonprofit may charge only the direct costs of producing themeals and a fraction of the associated indirect costs. (Ironically the nonprofit is consider-ing purchasing the for-profit provider but will do so only if it may continue to operatethat business as a for-profit, with the more favorable terms.) In other contexts, such asaffordable housing or community development projects, apparently architects, attorneys,consultants, and construction companies are paid their industries’ standard fees, whilenonprofit entities may not fully recover their costs.

corporations do, as a strategy that allowsthem to downsize more cheaply whennecessary. Terminating a contract with anonprofit subcontractor is much easierthan laying off government employeesprotected by civil service rules or collec-tive bargaining agreements. Indeed, thepractice of making annual contracts andreserving the right to terminate contractsfor convenience, discussed below, shiftsthe risks of employment liability and bro-ken lease and finance obligations to non-profit contractors.

The irony is that flexibility is a virtueif it functions to allow nonprofit contrac-tors to experiment with innovative waysof delivering service and to introduce anadditional point of contact in terms ofaccountability.

B. Government CounselGovernment counsel have a different

attorney-client relationship from what pri-vate attorneys have. Where private barattorneys view their role as providing legaladvice and leaving business decisions tothe client, government counsel may notbe so deferential to the business judgmentsof agency officials. A common complaintof nonprofit entities regarding governmentcounsel is that they become in effect athird party in the negotiations, opposingbusiness terms of the deal or withholdingapproval of the agency’s authority to enterinto the agreement without specifyinglegal reasons. Government counsel attimes view themselves not as serving gov-ernment agency clients but rather as equal-ly entitled to decide the government’sinterests in the matter. As a practical mat-ter the views of government counsel aboutdeal terms tend to decide the issue for thegovernment, unless very senior agencyofficials get involved; midlevel agencymanagers are likely to be uncomfortabledeciding whether the argument concernsa business issue, which should be theirresponsibility, or a legal issue.

Attorneys representing nonprofit enti-ties should ask government counsel tospecify the legal reasons for their objec-tions. Government counsel often citeestablished practice or convenience toresist making changes in draft agreements;they claim that to make such changes

would be unfair to other nonprofit entitieswith similar contracts or, more to thepoint, would require the agency to makesimilar changes in those contracts. Onegood approach to avoid this problem is togather many nonprofit organizations withsimilar contracts and negotiate with thegovernment as a group. In Los AngelesCounty, for example, the CommunityClinic Association of Los Angeles County,a nonprofit organization comprising thir-ty-five nonprofit clinics, and the LosAngeles Alternative Payment Alliance, acoalition of fourteen nonprofit child careresource and referral organizations, havesuccessfully increased their bargainingpower by negotiating contracts together.In turn, the government agencies withwhich they contract appreciate the abili-ty to negotiate common issues at onceand depend upon the coalitions to helpresolve disputes with coalition members.

Government counsel may raise pro-cedural issues, such as the necessity ofgetting express approval from the citycouncil or county board of supervisorsfor concessions or changes in standarddocuments; this introduces the prospect ofsignificant delay in completing the agree-ment. Whether this objection is sincere oris simply a negotiating tactic is difficult totell. Since the rules are unclear and gov-ernment counsel themselves have prima-ry responsibility for determining whetherboard action is required, nonprofit entitiesand their attorneys are unlikely to prevailin disputes over procedural issues.

IV. Legal Issues in Government Contracts

A distinguishing feature of contractsbetween government and nonprofit enti-ties is that the intended beneficiary is thepublic or a designated population, not theprivate interests of the parties themselves.The parties’ organizational interests arevery much involved, and may even pre-dominate, but they are in the background,at least in the writing of the agreement.The legal documents themselves aim toensure delivery of goods or services tothe third-party beneficiaries. Oddly, how-ever, the rights of those beneficiaries arerarely addressed in the contract docu-ments probably because the beneficiaries

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are not typically in the room. Public inter-est legal advocates can monitor andobserve contract negotiation with theinterests of the contract’s ultimate benefi-ciaries in mind.10

A. Securing Service Delivery, NotProperty RightsIn a typical private contract the focus

is on protecting the property rights of theparties, both to ensure the benefit of thebargain and to protect against harm in theevent of breach. In human and social ser-vice contracts, in contrast, the governmentagency is purchasing services to a cho-sen population of third parties, and thereis no appropriate property for collateral.

The government’s primary security in suchagreements is structuring payment inarrears, enforcing a strict regimen of re-porting and auditing requirements, andthreatening significant penalties on orga-nizations that cannot justify their perfor-mance under the contract.

This approach places emphasis fore-most on proving costs, rather than seek-ing improved services to clients. Further,it builds in inefficiency by placing signif-icant burdens on nonprofit contractors.As described further below, nonprofitcontractors typically must (1) cover sub-stantial up-front costs to earn paymentand carry interest costs, which they can-

not recover under the contract, whileawaiting payment, and (2) dedicate sig-nificant staff time and energy to keepingrecords and meeting reporting require-ments, the costs of which usually exceedthe level of administrative costs eligiblefor reimbursement under the contract.

We can reasonably expect a govern-ment agency to do its best to ensure thatpublic funds are put to their intended use;we can also reasonably expect a nonprofitto guard against the threat of penaltiesthat could damage the organization’s rep-utation and even put it out of business.But we are not being naïve to expect gov-ernment officials to develop better waysto exercise their oversight responsibility,although this may require placing moreresponsibility with, and expecting morework from, agency officials.11 The pri-mary emphasis should be on maximizingbenefits for clients.12

B. Key Contract ProvisionsThe cardinal rule for transactional

attorneys is to stick to legal issues andleave business issues to the client. Ef-fective representation, however, requiresthat the attorney clearly understand thedeal terms in order to ensure that the con-tract accurately reflects the client’s intent.This aspect of the attorney’s role may beeven more important when representingnonprofit organizations entering into gov-ernment contracts than it is in a privatebusiness transaction. Nonprofit managersin most cases are very smart, skilled, andsophisticated people who know theirbusiness field well. They tend to focusfirst on meeting the needs of their clients,however, and perhaps may not be as like-ly as for-profit businesses to consider howperforming the contract will affect their

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10 For an excellent article that makes this point strongly, see Jane Perkins & Kristi Olson,An Advocate’s Primer on Medicaid Managed Care Contracting, 31 CLEARINGHOUSE REV. 19(May–June 1997).

11 A similar point can be made about private foundation officers managing performance bygrantees.

12 Much of this “don’t trust, verify” regime may have arisen as much from concerns aboutavoiding patronage and corruption in selection of contractors as from a need to holdcontractors accountable. Also, part of the problem may be the negative incentive struc-ture for government officials: pain is very likely to result if procedural requirements arenot met, while success in meeting important social needs is both hard to measure and,only partly as a result, unlikely to lead to rewards and recognition.

A poorly planned program or badly drafted contract can destroy a nonprofit contractor by imposing performance targets or onerous reporting requirements that it cannot hope to fulfill.

interests as an organization. A poorlyplanned program or badly drafted con-tract can destroy a nonprofit contractorby imposing performance targets or oner-ous reporting requirements that it cannothope to fulfill.13

The following is a brief outline of afew key contract provisions for nonprof-it counsel to review with their clients.

� Contractor’s Obligations: Scope ofWork: The objectives that a nonprofit con-tractor is expected to fulfill, and the meansby which it may pursue them, are oftenset out in a lengthy appendix or attach-ment to the main body of the agreement,commonly entitled “Scope of Work.” Thedescription of the scope of work is criti-cally important. The nonprofit contrac-tor’s performance will be measuredagainst the objectives in the scope ofwork, and poorly drafted or neglectedprovisions in the scope of work can resultin very costly surprises.

� Payment: Cost Reimbursement: Mostgovernment contracts pay on a reim-bursable basis for work that the contrac-tor already performed. An important issuefor nonprofit entities is whether they willbe able to pay the up-front costs requiredby a new, significant government con-tract. To perform, they may need to hireadditional staff, lease space and equip-ment, and take on other expenses beforethey are able even to request payment.Payment may come anywhere from thir-ty days following the invoice to severalmonths later. (For example, a not unusu-al local government contract may requirea nonprofit bidder to certify, with a letter

from its bank or outside accountant, thatit can carry the costs of implementing thecontract services for at least ninety days atany point in time.) The carry costs typi-cally cannot be recovered by chargingthem to the contract, so they consumecharitable funds from private sources. Onlarge contracts, this “float” can cost theequivalent of a part-time or even full-timestaff person, and this means that fewerclients are clothed, housed, providedmedical treatment, and so on. Nonprofitcounsel may pursue an advance of con-tract costs (one or two months is notuncommon) or payment of interest onreceivable amounts. (A governmentagency is unlikely to agree to pay theinterest, but counsel should request it.)

� Payment: Eligible Costs: Most gov-ernment contracts specify a maximumamount that contractors can recover forboth (1) direct administrative expenses(i.e., the salary and support costs of seniorstaff who supervise the nonprofit’s workand compliance with contract require-ments) and (2) indirect expenses, some-times poorly described as “overhead” (i.e.,costs which cannot be allocated directlyto the contract work, such as necessaryimprovements in computer networks,case management systems, telephone sys-tems, or improved facilities). These directand indirect expenses are essential toeffective operation, and they are sorelyunderfunded in the nonprofit sector ingeneral. Very likely the nonprofit client’sactual costs will exceed the contract lim-its; this means that unless the nonprofitcan raise funds from other sources, it willlose money on the contract.14 There is

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13 In one case an organization that provided training and placement for low-income minor-ity youth in well-paid production jobs in the entertainment industry, with significant suc-cess, was sued by the state attorney general to recover job-training funds for services theorganization had not properly documented. With funding cut off, the organization hadto stop its services while it spent nearly a year trying to prove that it had complied withthe contract requirements. The organization succeeded in proving that of $300,000 thegovernment claimed had not been documented, it had properly spent $290,000. Theattorney general still would not drop the suit, and to settle the case the organization’sfounder had to guarantee repayment of the remaining $10,000 personally. EmploymentTraining Panel v. Maga Link Inc., Case No. BC 100260 (Cal. Super. Ct. L.A. County Mar.9, 1994).

14 Also, such arbitrary, one-size-fits-all limits disproportionately affect smaller community-based organizations that have not achieved sufficient economies of scale. They createstrong incentives for cost shifting or misstatement of actual indirect costs; this, besidesmisleading funders and donors, distorts the information that nonprofit managers andboard members use to make important decisions.

often little room for negotiation here, butcounsel should review cost-eligibility pro-visions with their clients, ensure that termsare clearly described and, if applicable,request parity with terms afforded any for-profit contractors with similar agreements.

� Term: Many contracts specify an ini-tial term of one year, and most allow thecontract to be renewed upon mutualagreement. Many contracts give the gov-ernment the unilateral right to renew.Nonprofit counsel should make sure thatrenewal requires the agreement of bothparties. A one-year term for a program ofany size exposes the nonprofit to signifi-cant risk of loss if the contract is notrenewed; nonprofit contractors may berequired to make significant up-frontinvestments in staff, facilities, and equip-ment to accommodate the contract work,and they could suffer potential employ-ment liability (and damaged morale) aris-ing from layoffs and heavy losses onequipment and office leases. Whereverpossible, nonprofit counsel should assistthe nonprofit in pursuing either a multi-year term of agreement or reasonableadvance warning that a contract will notbe renewed.

� Termination for Convenience or Lackof Funds: Local government contracts com-monly give the government the right toterminate for convenience. This is essen-tially efficient breach, for which the gov-ernment should pay. Counsel should re-quire that on termination for convenience(as it is different from termination forcause) the government give significantadvance notice or pay or both notify andpay the nonprofit for its work during areasonable period of winding down theservices (e.g., three to six months).Counsel should also ensure that the gov-ernment make reasonable compensationfor the cost of commitments, such as prop-erty or equipment leases, that the non-profit incurs because of the contract. Evena few months’ rent may enable the non-profit to negotiate its way out of commit-ments with less harm. Some governmentagencies, such as community college dis-

tricts, make the contract contingent uponappropriation of funds by the relevant leg-islative body, which can include the dis-trict’s own board.15 In these cases, thecontract should make allowance for pay-ment to the contractor; the allowance forpayment should be similar to provisionson termination for convenience.

� Mediation and Alternative DisputeResolution: As prevalent as alternative dis-pute resolution has become, many gov-ernment contracts do not provide for orrequire arbitration or mediation. Altern-ative dispute resolution forums can helpnonprofit entities avoid the disaster thatmay result from conflict by requiring theparties to get together quickly and in-volve the assistance of a neutral party.Nonprofit counsel should see whetherthe contract allows recourse to mediationor arbitration, and may want to considerrequiring disputes to be submitted firstto an affordable, relatively quick alterna-tive forum, such as mediation by a partyidentified in advance.

� Recourse: Real Property Security forServices: In real property transactions,such as government financing for con-struction of affordable housing or com-munity service facilities (secured by apromise of services), the loan documentsshould specify that the loan is “nonre-course,” meaning that the governmentlender’s only remedy is to foreclose onthe property. This is fair to the govern-ment interest, which is that the propertyasset be used by some other contractorcapable of providing public benefit, andwill enable the nonprofit contractor towalk away from a potentially cripplingfinancial burden in the event that it can-not raise the funds from other sourcesneeded to meet its service obligationswithout endangering its other programs.Reducing liability risk also removes a sig-nificant barrier to the nonprofit recruitingand retaining the volunteer leadership itwill need to be effective.

� Recourse: Reimbursable Payments forServices: As described above, government

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15 Conversation with Catherine Endo Chuck, counsel for Los Angeles Community CollegeDistrict (Nov. 21, 2001).

agencies try to secure adequate perfor-mance by paying on a reimbursable basisand imposing strict requirements regard-ing eligible costs and reporting. The gov-ernment reasonably expects to recovermisused funds or payment for ineligiblecosts. Unfortunately some governmentcontracts go further to require the con-tractor to acknowledge that, in the eventthe contractor becomes unable to deliverthe contract services, the agency cancharge to the nonprofit contractor thecosts of hiring someone else to providethe services, not just the difference incost.16 Attorneys representing nonprofitcontractors should seek to limit the gov-ernment’s recovery to payments alreadymade for ineligible costs, with appropri-ate penalties, which are usually dictatedby regulations or statute.

� Public Notice, Meeting, and Disclosure:Nonprofit organizations are private enti-ties, and, although they are subject toextensive reporting and public disclosurerequirements, they typically are notrequired to meet public notice require-ments and allow the public to attend boardmeetings. Nonprofit counsel should reviewthe contract to see whether it imposes pub-lic notice requirements or otherwise bringsthe nonprofit contractor under thoserequirements (e.g., by involving the gov-ernment agency in selecting or approvingmembers of the board of directors).Counsel should seek to limit application

of those public notice and open meetingrequirements to meetings at which thenonprofit contractor’s board makes deci-sions about the contract services.

� Evaluation: Government agencieshave sought to evaluate programs basedon their “outcomes” rather than simplycounting activities, and this method ofevaluation has become a dominant trendin the nonprofit sector. Counsel shouldreview the means of evaluation that thecontract requires and whether it permitsthe use of contract funds to pay for thecost of evaluation. Counsel should en-courage their clients to review thoserequirements in light of the scope of work.

MORE GENERAL DRAFTING TIPS ARE BEYOND THE

scope of this article, but I should makeone key point here. Make the document fitwhat the parties actually do. Many con-tracts include requirements which areunreasonable, inappropriate, or impossi-ble for nonprofit entities to fulfill (e.g., inde-pendently checking backgrounds of childcare providers, as opposed to simplyrequiring providers to supply proof oflicense), or extremely onerous, such asrequiring a nonprofit to pay the cost of hir-ing a successor service provider. Govern-ment agency officials commonly respondto concerns by saying that they are unlike-ly to try to enforce such clauses. If so, theyshould remove them from the document.

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16 Assuming that the government has not lost contract funds or will recover them, chargingthe costs of paying another contractor to a nonprofit that may be providing other impor-tant services using charitable funds does not make sense.