Contracts versus grants: Challenges to international development aid

Friday, 02 June 2017 Print

The UK and international development sector is facing a period of unprecedented challenges. More than ever, the sector needs to come together to defend civil society.

Most large bi lateral donors such as USAID, DFID and the EU are shifting their funding modalities and disbursement from granting to using contracting model.NGOs need to build systems and capacity to respond and compete with the private sector. Priti Patel, UK Secretary of State for Development, gave the plenary address at the recent BOND development conference, noting that UK Aid more than ever needs to act in the national interest. She stated the UK Government’s continued commitment to the international aid agenda, but emphasised that this would be linking increasingly to defence and diplomatic leverage. “Aid spending needs to be fair,” said Ms Patel, “and seen to be fair by UK public.”

UK Aid/DFID, USAID, the EU and national European bi lateral donors are moving toward the same approach in their development financing.

International Aid must now work in the national interest. Taxpayers in North America and Europe need to be persuaded that scare funding should be allocated to development. This is one of the reasons for the enhanced focus on due diligence and reporting, value for money, and contracting replacing granting in funding development projects.  

The private sector is now a siginificant player in the global development sector –a major industry worth $135bn in Official Development Aid (OECD 2016 Report). 

However, recent concerns over pricing and profit margins suggest that the private sector is not always best placed to deliver development programming. It is time for NGO sector to step up, showing it can provide cost effective and ethical models of programming that are sustainable and reaching those in need.

Global Context

Globally, sustainable development is in crisis. The fundamentally shared values of post war era are all under threat. There is a public/policy disconnect with anti-development, migration, and aid views in the ascendance. In the United States, Trump’s USAID and State Department cuts represent a major setback for international development and poverty reduction.

The current refugee crisis is also an example of a global failure to respond collectively. Failing to invest in Syrian refugee camps and support host countries in 2012 and 2013 led directly to migration crisis of 2015/16.

There are new forms of cooperation, such as the Sustainable Development Goals and Agenda 2030, with 17 truly integrated global goals. There are signs of greater Global South leadership emerging in the form of India and China as the US in particular retreats.

Change already happening, the population in Africa will double by 2030, tax income for African countries combined now stands at $600bn pa – compared to development grants of $42bn in 2016. The North/South dynamic is changing. Aid cannot replace real economic growth.

USAID under the Trump administration

The initial budget from Trump was for complete elimination of USAID budget, this now looking more like a 38% cut with some global programmes and some agencies being ended or eliminated completely.

Development business models are increasingly models of leverage, gearing of investment relevant to the local context – northern NGOs acting as intermediaries for funding and delivery will need to justify their costs and very existence. NGOs can play a role filling gaps where markets and government fail.

Some points on contracting:

DFID. USAID and EU are pushing contracting, rather than traditional granting and it is not a new concept. Most of DFID funding now being disbursed using contracting forms of funding disbursement.

Contracts are increasingly large and complex. NGOs need to build systems and capacity to respond and compete with private sector with organisational positioning required, to link up with the right partners to develop consortia bids to complex contracts. 

Ethical considerations have to be agreed at Board levels about generating a surplus/profit.

For NGOs new to contracts, first steps need to be ‘learning on the job’ via the sub-contracting/sub recipient route. For example a national, regional or international palliative care network could work within a global health/UHC consortium providing niche specialist programming, advocacy and technical experience and services

Being a contract lead involves huge operational and financial risk – the risk is on the contractor to deliver a set of results within a strict finance envelope – there are huge risks and challenges in ways of working especially for smaller financially constrained NGOs and charities within the palliative care sector, with pre financing and payment by results required that need to be financed from reserves.

There is a clear commercial risk linked to non-compliance – risk is on the ‘supplier to deliver’

Payment by Results (PBR):

All DFID funding is now using this approach – followed by EU, Norad and others. A PBR contract pays the contracting party after the intended results have been achieved, that is cash on delivery. The most important difference to traditional grant funding is that PBR contract sets key targets between a donor and contractor and only reimburses the contractor for results that are actually delivered. Typically, the donor will not advance any funds.

A PBR contract is therefore something we are all familiar with in our daily lives when negotiating and paying for work done or in some case holding payment if work is not done or is substandard. After all, you only pay your plumber, car mechanic or pizza home delivery after you received the services or goods. It incentivizes, promotes quality and supports timely delivery of final outcomes.

Other contracting considerations

There is a huge initial outlay involved in developing a response to a contracting opportunity. It has been estimated that a £40-60k investment in internal time and resources is required to bid for large contract/tender (excluding requirement to ensure internal systems and processes in place to manage contracts). AND only one in four contract submissions successful.

However, grants themselves are  adapting to a more contract model and it is difficult to distinguish between grants and contracting, tendering opportunities with needs for robust reporting, value for money and Payment by Results being introduced across all donor funding modalities. Grant opportunities are diminishing anyway. The global development sector, including hospice and palliative care organisations need to respond and address contracts/tenders.

NGOs need to professionalise to respond. Contracting can be transformative.

Commercial contracts are a real source of income for many NGOs, yet they remain a major challenge. Pursuing these opportunities is often viewed negatively by NGOs with concerns about the impact on an organisation’s nonprofit ethos and moral compass.

However, managed correctly, contracts can help overcome some of the many funding challenges NGOs face today such as falling grant income, the end of unrestricted funding, more competition among NGOs, new private sector entrants and an increasingly challenged or shrinking civic space in some countries.


Contracting is NOT a viable option for many of the individual palliative care organisations working in development.

However, working together, investing in capacity and linking to health prime implementing agencies as a sub-contractor are feasible in the short to medium term.

The immediate priority is to focus on relationship building with larger US, European and UK contracting agencies (private, INGO and social enterprise). 

Contracting tips:

Plan, strategise and invest – organisational capacity, systems and processes to manage contracts, investment is required and may take time to achieve results

Address ethical considerations of profit versus programmatic fit and beneficiary reach

‘Go/No go’ decision making –Commercial contracts often work on a tight timeline: The time for proposals is frequently no more than four weeks. That means NGOs need to be able to make a fast go or no-go decision

Budget –NGOs usually work with a capped cost budget plus a management fee; usually 7 to 10 percent, both set by the donor. Commercial contracts do not usually come with a predetermined price tag. Bidders need to put the most innovative, cost-effective and relevant cost structure in place to suit the projects. Payment by results is another potential challenge that needs to be understood and its risks mitigated.

Build alliances and consortia –rarely in a large commercial contract does the lead agency – whether an NGO or a firm – implement a project alone. Alliances, subcontracting and consortia are the norm. As in the grant world, these alliances are critical to functioning properly, starting from the proposal submission. If partners do not perform, the entire consortium may risk not getting paid.

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