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This Is How Much Bad Contracts Cost Nonprofits Each Year

Risk & Compliance

Running a nonprofit organization is not an easy task. Many nonprofits operate on rather tight budgets, and even for those that have a fair amount of funding, they are often restricted with respect to how they spend because of donor conditions. As with running any operation, many nonprofits must contract with vendors for various goods and services in order to fulfill their missions. As nonprofit leaders know all too well, there is very little room for error when it comes to these contracts in light of the budget constraints. Unfortunately, all contracts may succumb to efficiency issues or cost overruns, but the impact on nonprofits can be a bit more severe. This is how much a bad contract can cost a nonprofit:

Budget Shortages

When contracts run into unexpected delays, schedule changes, and/or price increases, the impact on the organization, and particularly its budget, can cause some major problems. More than likely, a nonprofit has a tight budget with very little wiggle room. As a result, when something with a contract goes awry, there likely is not much available cash to work with in order to get things sorted out quickly. Money may have to be shifted around or completely pulled from another area, causing an unplanned shortage, which of course will continue to have a ripple effect.

Service Cuts

Once a nonprofit organization’s budget has been affected, it is only a matter of time before the services that the nonprofit provides have to be cut back as well. Even if the contract issue is not a financial matter, a delay in the delivery of a good or some other hiccough related to a contracted for matter is likely going to affect the organization’s ability to carry out its normal service operations.

Reputation Damaged

Bad contracts will impact a nonprofit’s budget and operations, but they can also have undesirable, intangible effects. If there are other organizations, agencies, or communities that are depending on the nonprofit to fulfill its normal course of services, a failure to meet those obligations will not go over well. Depending on the nonprofit’s area of work, people may simply seek similar services elsewhere.

Funding Pulled

Unfortunately, a single negative transaction can have a host of deleterious effects, and sometimes those problems linger on far beyond the initial event. Whether the budget is affected, money is moved around, or services are cut, corporate donors and other agencies that provide some of the key funding may lose interest in sustaining a flailing nonprofit organization. A bad contract that leads to a series of misfortunes may be construed as poor management and planning on the part of the nonprofit organization’s leadership. Sadly, if this happens, the donor funding needed to keep things afloat may be diverted to organizations that have not encountered these issues.

Mission Impeded

Obviously, the summative consequences of one or more bad contracts may well impede the nonprofit’s mission. Although many nonprofits are smaller organizations established to serve a community in need, there are large organizations with nonprofit status as well, such as hospitals, legal aid societies, and research institutes. Many of these organizations have admirable missions to contribute to the greater good. Thus, bad business decisions that result in faulty contracts may cost a nonprofit years of dedication and hard work to some worthy cause.

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