5 Tips for NGOs aiming at commercial contracts

Commercial contracts are a real and valuable source of income for many NGOs, yet they also remain a major challenge. Pursuing these opportunities is often viewed with skepticism about the impact on an organization’s non-profit mandate, its soul.

Many of these fears are justified, but they should not tempt us to ignore the alternative operating basis that commercial contracts represent. Managed correctly, these contracts can help overcome some of the formidable challenges many NGOs face today: falling grant income, the end of unrestricted partnership grants from DFID (PPA), more competition among NGOs, new entrants to the sector and an increasingly challenged or shrinking civic space in some countries.

Attracting and successfully winning  commercial contacts is also littered with potential tripwires. Together with my colleagues at MzN International, we have been  privileged to  help several major international NGOs get “commercial contract ready”. Here are the top five tips we have learned:

Christian working with small traders in Nigeria

Christian working with small traders in Nigeria

1) Get ready and get serious

For a commercial contracting strategy to work, an NGO needs to address any concerns up front. These could include whether the organization is set up for commercial contracts or the impact service contract work could have on the NGO’s values.

In our experience, a commercial contract strategy works well when it hits the sweet-spot between commercial viability and programmatic fit. Hence, the contract is just another way for the NGO to serve its mandate and earn unrestricted funding along the way.

Defining and developing a realistic plan to achieve this sweet-spot will improve the  project experience once a contract has been secured. This investment is worth it, even though it may increase the time and costs of preparation.

NGOs often compete directly with project management and consulting firms that are specifically built to bid, win and implement projects. NGOs do not need mirror a firm, but can still add the capacity, systems and processes needed to complement their existing practice.  Commercial contracting can become just one more leg supporting the NGO to implement its mandate.

2) Be prepared to make a fast decision

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, often before the official tender announcement.

Some NGOs struggle with this. They sometimes face an administrative burden to convince the office whose donor this contract would be with, e.g. UK for DFID, Germany for GIZ, etc.  This process needs to be streamlined in order to allow for this decision to be made within a few days, not weeks.

3) Get used to a new way of thinking about 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 pre-determined price tag.  Bidders need to put the most innovative, cost-effective and relevant cost structure in place to suit the projects. That might be a cost plus, fixed fee, or all-in price structure, or a mixture thereof.  Payment by results is another potential challenge that needs to be understood and its risks mitigated.

Developing a program with a competitive and reasonable budget requires a change in thinking and detailed knowledge about an organization’s own cost base. Capacity building can help ensure that NGO staff are prepared to operate comfortably in this new way.

4) Build alliances from the get-go

Rarely in a large commercial contact does the lead agency (whether NGO or a firm) implement a project alone.  Alliances, subcontracting and consortia are the norm.  Like in the grant world, these alliances are critical to function properly, starting from the proposal submission. If partners do not perform, the entire consortium may risk not getting paid.

NGOs are very accustomed to working ‘through partners’. In a commercial contract, they need to ensure that this cooperation works even beter and even before the bid is to put together. While not a big change to current thinking, this is a critical one.

5) Rethink project management

Managing a commercial contract to the required service level is different from managing a grant program. Requirements for administration, reporting and management are often more onerous.  The donor agency becomes less of a partner and more of a client expecting excellent customer service to satisfy taxpayer demands.

In principle, this is not too different from many grant contracts, but is becomes far more essential in a commercial contract.  To build long term success, a new project management mindset is required.

Going for it

Commercial contracting opportunities far exceed grant allocations. That in itself is not sufficient reason to start bidding, however. The ultimate reason why this type of contract cannot be ignored is moral one:  If NGOs fail to adapt, then there is a real risk of the development and aid sector becoming too commercial.

By nature, commercial contracts prefer achievable projects in which risk is manageable and the likelihood to get fully paid is very high. In this world, marginalized or difficult to reach communities could receive even less help. A commercially capable organization that remains an NGO at heart will make a huge difference here.

by Christian Meyer zu Natrup, May 2017