​​Funding options

Government agencies have several funding options to put in place with social service providers. These include:

• conditional or unconditional grants to help to develop a provider's capacity or pay for specified one-off projects
• contracts for the provision of services
• payment for results or outcomes - this is less commonly used and can be tricky to manage.

The choice of funding arrangement will depend on the:

• purpose and likely term of the funding
• accountability arrangements
• need for legally enforceable mutual obligations.

The appropriation type authorised by Parliament for the public funding will also determine the type of funding arrangement. The type of funding to be used will often be decided during the policy development.

Principles to underpin management by public entities of funding to non-government organisations – OAG

Grants

Unconditional grant

An unconditional grant is financial assistance paid by the government to an eligible organisation. The recipient has no obligations to perform in return for the money except the expectation that the funds will be used for the purpose stated.

When is it mainly used?

Unconditional grants are mainly used to help develop a provider’s capacity, support particular community activities or pay for particular one-off projects.

How do the Government Procurement Rules apply?

Gifts, donations and unconditional grants are not procurement activities and the Rules do not apply.

Conditional grant

A conditional grant is financial assistance from the government to an eligible organisation. The recipient undertakes to perform specific obligations in return for the money. The provider is entitled to payment once it satisfies the eligibility criteria.

When is it mainly used?

Conditional grants are mainly used to help develop a provider’s capacity or pay for particular one-off projects.

A conditional grant might be used when:

• a grant is required by law, eg the Education and Training Act 2020 describes the subsidy received by early childhood centres as a grant
• the legal framework makes it difficult to establish contractual intention, eg if the government agency has no discretion as to whether to enter into an arrangement
• the provider is not a legal entity - in these circumstances it's usually better to contract with members of the provider community that are legal entities
• the payment represents a subsidy for the work of an organisation.

How do the Government Procurement Rules apply?

Conditional grants are considered a procurement activity. The majority of the Rules apply, but an opt-out for some of the Rules (such as open advertising) may be available.

Contracts

Specified contracts for services are put in place. Payments are made by instalments against pre-set milestones or after the required services have been delivered.

When is it mainly used?

Contracts are used to pay for the provision of services. Payment can be either for services, or for results or outcomes.

Payment for services

As part of the planning process consider the price of the services. This should match (where possible) the:

• nature and scope of the services
• pattern of costs incurred by the provider.

The agency and provider must agree the payment structure. Consider:

• fee for service - a set amount paid each time a client uses a service
• block payments - a predetermined payment for delivery of the service
• cost and volume - combines aspects of fee for service and block payments
• paying the cost of a particular input (eg a staff salary)
• hybrid payments - a combination of some of the above payments. Typically relevant for complex services or a group of services
• special payments - made for activities outside the normal scope of the service (eg contributing to policy development, providing significant amounts of information above that required for monitoring)

There are a number of ways in which the payment can be structured, including:

• In arrears
• On delivery
• By time period
• In advance (at the beginning of the contract or before service delivery)
• At the end of the contract

No payment should be made until the contract is signed. This is equally important for a conditional grant.

Surpluses

As part of your planning consider how to deal with any surplus that remains when the agreed outputs have been delivered. The ability of a provider to retain part of any surplus can be an important incentive to achieve efficiencies and to innovate.

Government agencies also need to seek value for money, avoiding providing for large, easily earned surpluses. (In this context, surpluses do not include a moderate return on capital or expenses necessary to cover infrastructure costs such as depreciation.)

On the other side of the equation agencies negotiating a lower price will need confidence that this will not put service quality at risk of falling below agreed standards. The Government agency will also need to keep the price under review when contracts are renegotiated in the light of knowledge gained during the contract about costs and surpluses.

There are a number of possible approaches to a surplus:

• The provider returning any surplus. This is appropriate where the surplus is due to the provider under-delivering on the quantity or quality of the services.
• The agency and the provider agreeing to the provision of more of the same services.
• The agency and the provider agreeing to the delivery of additional related outputs.
• It may be appropriate for the provider to retain the surplus as profit. This approach relies on a robust contract management system, and good information on service delivery.
• Grant money that is not spent for the purposes originally provided should be returned to the Government Agency. It may be appropriate to renegotiate the conditions of a grant to reflect changing circumstances.

Deciding on the most appropriate approach to dealing with surpluses may also depend on an assessment of risk. The basis for these assessments should be documented.

This may be particularly relevant when the provider is a not-for-profit organisation. Government agencies should assure themselves ahead of time that the provider has appropriate internal controls or governance structures to ensure that any agreed surpluses are applied by the provider appropriately. Agencies should verify how the surplus has been spent by the provider.

Payment for results

Instead of paying for the delivery of services (outputs) or for resources (inputs like staff time) some or all of the payment under a contract can be made for client results or outcomes.

Although the concept is simple, it can be challenging in practice - you'll need to know:

• the agency and the provider have agreed on a clear, unambiguous result or outcome
• you can track and measure the outcome in a reliable way, at a reasonable cost and within a reasonable timeframe
• the outcomes can be confidently attributed to the provider - this may require randomised control trials or other rigorous evaluation methods
• the provider has sufficient capital and risk appetite to deliver the service while the results are achieved
• you can minimise perverse incentives and the risk of ‘gaming’ (eg the temptation for providers to target the easiest or least disadvantaged clients).

Successful implementation is likely to require consultation and negotiation, testing, adjustment and refinement. You'll need to seek further advice from your procurement, legal and finance teams.

How do the Government Procurement Rules apply?

The majority of the Rules apply, but an opt-out for some of the Rules (such as open advertising) may be available.