USAID shifts away from large contracts and looks to build internal capacity — prompting advocacy from development contractors

A month ago, the Coalition of International Development Companies (CIDC) sent an email to my Find What Works email address.* I can only assume they want me to blog about it.

The email itself was pretty straightforward: 50 companies (including the big names like DAI, Chemonics, MSI, etc.) had formed a new coalition to advocate for their interests on Capitol Hill. Well, it didn’t quite say that. The email wasn’t entirely clear about CIDC’s purpose. There was a dusting of development buzzwords: “results-driven approaches”, “entrepreneurial”, “transparent”, “accountable” and so on. And then there were lines like this:

the new coalition believes it can serve as a valuable resource to key decision-makers and the media in the ongoing debate about how to optimize US foreign assistance”

Intriguing. The implication seems to be that foreign aid would be better spent if policymakers listened to this group of private companies. No doubt these companies have expertise in spades. But you don’t form a new coalition and hire a K Street PR firm unless you have an actual policy agenda. That’s not cynicism talking. It’s just politics. What would bring this group of companies together? And, tellingly, why would they advocate for their interests separately from the international nonprofit NGOs that often do similar work?

I checked out the group’s website for more. It was pretty thin, but I drew a few inferences from it. I replied to the email to check whether I was right. I never heard a response. I waited three weeks. Now I’m taking the blogger’s prerogative to post my reaction. (Note to CIDC: If I’ve misinterpreted, please make liberal use of the comments section below.)

CIDC: More contracts, fewer grants

What I gathered from the website is that the coalition would like more foreign aid to be administered through contracts rather than assistance awards (which include both grants and cooperative agreements – more on that distinction in a moment). That’s the closest thing to a concrete policy that I could see. Here’s a bit from their “Did You Know” page:

To be certain, there are times when grants and cooperative agreements make good sense: when, for example, a public purpose strongly coincides with a grantee’s existing program. There are many other instances, however, when the US government needs specific activities implemented in a specific manner, and in those cases contracts may be most effective because they provide greater government control over objectives and results.

In 2007, the HELP Commission, a bipartisan collaboration of the best foreign assistance minds appointed by Congress and the president, reported that “using a grant when a contract would be more appropriate weakens program effectiveness and responsibility.” The commission also found that “USAID officers reported they had few avenues to use when faced with poor performance by a grantee.” A contract, on the other hand, is the easiest aid delivery mechanism to modify or terminate when it is in the government’s and taxpayers’ interest to do so.

(Emphasis in original.)

It makes sense from a self-interest perspective: most assistance awards go to non-profit organizations, while contracts go to both non-profits and for-profits. For-profit companies can apply for grants, but there’s no profit in them. So if this coalition successfully convinces the government to shift more of its foreign aid spending from assistance awards to contracts, and the contractors merely maintain their current market share of contracts, they stand to profit more.

What about the public interest perspective? Forget for a moment that the contractors stand to benefit from a shift. Should more US foreign assistance be given through contracts than grants? What are the pluses and minuses for each?

Before we get to that, a short interlude. I can hear what you’re thinking:

“Wow, Dave. You’re just totally in the weeds on this one. Procurement policies? Yawn.”

What inspired you to be interested in international development? Was it a concern for poverty? Clean water access? Democratic rights and freedoms? Or was it an overwhelming desire to understand the nuance of USAID policies and procedures?

I’m pretty sure it wasn’t that last one. Yet for many of us, these granular issues dominate our professional lives. And for good reason. These are the issues that determine the flow of resources and accountability in the industry. Their effect on development results is wildly disproportionate to their inherent value. They’re not sexy. They’re not fun. You’ll have a hard time getting George Clooney to care about them. But they matter, so bear with me.

Current policies and future reforms at USAID

I checked the current USAID policy documents for guidance on when funding should be provided through a contract or a grant. There isn’t much guidance given. ADS 304 specifies the difference in terms of the relationship between USAID and the awardee. To summarize:

  • Assistance grants and cooperative agreements are transfers of funds to support the awardee in the accomplishment of a public purpose. If USAID will be substantially involved during the actual administration of the program, the award should be a cooperative agreement rather than a grant.
  • Acquisition contracts are exchanges of funds for the contractor’s goods/services.

The document provides a few other guidelines, but it leaves a lot of wiggle room. Many activities could fall into either category. This might be a good thing, as it allows USAID staff to use their own discretion. And they’re pretty smart people, so I’d be inclined to trust their choices.

However, due to low staffing levels at USAID and a general bias toward contracting under the Bush administration, the agency has relied heavily on contracts in the past decade or so. Large commitments were often made through an Indefinite Quantity Contract (IQC) mechanism – the biggest recipient of which is Chemonics, a member of CIDC. IQCs often entail multimillion-dollar arrangements over multiple years, with significant subcontracting. Even when a grant is the more appropriate mechanism, USAID often contracts out for grants administration.

This may change soon. With Rajiv Shah at the helm, the agency has announced seven key areas for reform under the USAID FORWARD agenda. “Implementation and Procurement Reform” tops the list. Under that heading, USAID seeks to increase the grants and contracts given directly to local nonprofits and businesses. This includes a specific commitment to decrease the number and value of IQCs. (See here for USAID’s document, and here for CGD senior fellow Mead Over’s analysis.)

Furthermore, the procurement reform agenda includes the following:

Objective 6: Rebuild USAID’s internal technical capacity and rebalance the workforce.

….By FY 2015, USAID will also in-source key positions that are carrying out inherently governmental functions.

There are different schools of thought on the question of what activities an organization should outsource. A long-held maxim in the business world suggested that you should outsource whatever isn’t your core competency. Other thinkers emphasize that managing contracts requires certain capabilities and leads to transaction costs that may not be worth the improvement in efficiency.

Apparently, USAID has decided that the pendulum needs to swing back. If they can find the political and budgetary space to move forward with this, it will mean increasing their staffing levels.

Put it all together and what do you get? Fewer large contracts going to the big development companies, leading them to shrink their workforces, while their former staff start taking jobs at USAID. Given the shifting tide, it’s not surprising that contractors would form a coalition to advocate for their interests. Things don’t look good for them.

Let’s step back to a conceptual level: When is a contract or grant more appropriate?

If USAID increases its internal capacity such that it no longer needs to contract out its normal functions, the agency will have much more leeway to decide on the best funding mechanism for a given project, program or service. Rather than being driven by the kind of relationship the agency wants with an awardee, it could allow the conditions on the ground to determine the mechanism. In other words, let the development work itself guide how funding is managed. What a novel concept!

We need a conceptual framework for when it should use contracts and when it should use grants. USAID FORWARD promises new policies and guidelines, but it seems that nothing’s been decided yet. Here are a few thoughts:

  1. The specificity of a contract makes sense when the program can be clearly defined in advance. This requires a detailed level of knowledge before the contract is signed, a context that’s relatively unchanging, and easily measured results. If you want a road or a building, contracts will provide more accountability.
  2. Grants provide more flexibility for implementers. For nuanced programs in uncertain contexts, where there’s no way to collect sufficient advance knowledge for detailed planning, and the outcome metrics require a certain amount of interpretation, a grant can describe the broad outlines while allowing the program managers the autonomy to chart the right course. If you want human rights organizing or participatory community development, grants make more sense.
  3. However, between road construction and human rights, there’s a gray area. This is where the policymakers really have their work cut out for them – and why I’m so heartened to see “Rebuilding Policy Capacity” as the third key area in USAID FORWARD.

Coming back to CIDC…

I noted above that things look bleak for the contractors. This new coalition appears poised to advise USAID and other policymakers on the need to keep committing to contracts. But I don’t think they’ve made the case very well, at least not in what I’ve seen so far. And until they do, it appears as if the companies are putting their own self-interest first.

I’ll provide a final comment from CIDC. Here’s another bit from their “Did You Know” page:

We believe decisions about America’s development strategy should be based on facts, not anecdotes, assumptions or myths. We believe policymakers and other influencers will benefit from an evidence-based dialogue about the dedication, expertise, cost-effectiveness and impact of US development firms.

I agree. I hope you push the debate in that direction. But so far I’ve seen no evidence of that.


An interesting sidenote on the USAID FORWARD agenda: It appears the agency is also pilot testing small grant mechanisms for providing funding directly to local nonprofits in developing countries (see here, sixth question down). If anyone is familiar with these efforts, I would love to know more.


* Yes, my blog is important enough that Washington PR firms occasionally email me, but not yet important enough that I get offered free copies of books to review. Well, I’ve been emailed about two books. But one was offered right before I left the country (and had the words “savings souls” in the title…) and the other was a novel. Novels are not really my thing so I declined. Luckily, another aid blogger reviewed it for us.