New York City Contract Delays: The Facts

New York City Contract Delays: The Facts 
By John MacIntosh, Partner at SeaChange Capital Partners. This article was originally published by NYNMedia on August 27,2018.

Over the years, SeaChange Capital Partners has been approached by many nonprofits literally pushed to the brink – forced to stiff vendors, furlough staff, max out credit lines – while waiting to get paid under city contracts. A recent report from the Office of New York City Comptroller Scott Stringer showed how consistently late the city’s contracts actually are. It also raised some additional questions for us about the financial burden this creates for nonprofits. So we asked for some additional data which we’ve spent the last few weeks analyzing. Our resulting report – New York City Contract Delays: The Facts – may not shock foundations whose grantee’s do lots of business with the city, but it still makes for sobering reading.

Here are the main takeaways:

•           Social service contracts registered in 2017 were an average of 210 days late; the odds that a contract was registered on time was 9 percent; within 90 days (33 percent), within six months (50 percent); and within one-year (81 percent). A full 19 percent of contracts remained unregistered after a year.

•           Nonprofits faced delays on multiple contracts: 84 percent experienced registration delays on all of their city contracts; 10 percent had some delayed contracts; only 6 percent had no delayed contracts. One nonprofit had 26 delayed contracts!

•           Nonprofits beginning service on the start date would have completed 29 percent of the work under contracts before they were registered. (this was 78 percent for one-year contracts). 

•           223 contracts imposed individual cash flow burdens over $500,000 because of the delays, 119 imposed burdens over $1 million, 57 over $2.0 million and 17 over $5 million. Eleven organizations faced total burdens of over $10 million because of multiple contract delays. Delays of this magnitude pose an existential threat to even the best run nonprofits.

•           The total burden imposed on all nonprofits due to registration delays in 2017 was $675 million: $662 million in negative cash flow associated with the expenditures from the start day to the registration date and a further $13 million in imputed financing costs; financing costs which come directly out of the nonprofit’s precious unrestricted net assets.

Fortunately, the crisis appears to be getting more attention from the De Blasio Administration but addressing the root causes of registration and payment delays will take time. Our report suggests four strategies that the city could pursue to help mitigate the problem: lend nonprofits the money for the large number of itsy-bitsy contracts that every agency registers really late; make it easier for nonprofits to borrow from banks against their larger contracts; establish a procurement SWAT team to handle the largest, latest contracts; and collect late fees from the offending agencies.

The risks associated with late registration and delayed payments are only going to grow. Interest rates are rising and with them the cost of bridging government funding with borrowed money. Many nonprofits – including most of the larger “battleship” organizations that are individually vital for New York City – face increased demands on their resources from the movement toward managed care. In this environment, nonprofits must be laser-focused on liquidity even if this sometimes means rejecting otherwise attractive city contracts with potentially fatal timing delays.

New York City needs healthy nonprofit partners more than ever, but these partners cannot be healthy without timely and predictable payments. The amount of spending on contracts is a thorny political issue – there is only so much money to go around – but paying on time seems much more straightforward provided the necessary political will. Now is the time for more foundations to consider providing last-resort working capital to grantees pushed to the brink.