Charities creating ‘unrealistic expectations’ by taking on cut-price council contracts, think tank warns

Charities risk creating “unrealistic expectations” if they take on cut-price council contracts, a think tank has warned.

The paper, written by New Philanthropy Capital for Kent County Council, says charities and council commissioners should instead work more closely together on how contracts are designed and delivered.

It advises charities against deliberately taking on contracts that do not meet the full cost of delivery.

The research looks at the implications of full cost recovery, an approach to contracting that assumes charities will be paid the total cost of delivering a contract to an agreed quality.

The paper says: “Knowingly taking on non-FCR contracts, for mission-driven or competitive reasons, can undercut peers and hide the true costs of delivering a high-quality service from commissioners.

“In the long run this can create unrealistic expectations as to what can be delivered at what cost.”

The research also acknowledges that contracts may appear to be FCR but then require subsidy, because delivery is more complex or because inflation drives up costs.

The paper warns that, if charities choose to subsidise contracts through other funds, it might become harder for them “to argue for an uplift in cost, either within the same contract period or for subsequent contracts”.

There is a risk to beneficiaries if charities agree to contracts below full cost and deliver lower-quality services, because this leaves “the market reliant on poorer-quality providers”, NPC argues.

The think tank says charities and local commissioners should work together more closely on “the design and price of contracts to ensure they are based on the best insight about the nature and scale of needs and the cost of delivering a quality service” and to “reframe” the relationships involved so commissioners and charities are viewed as partners.

The paper also warns that rising prices will “erode the value” of charity contracts, and says councils and charities both have “good reason to fear the impact” if voluntary organisations are not paid in full for the services they provide.

Previous research from the think tank found that before the Covid-19 crisis, most charities subsidised contract income from their charitable funds.

This trend is likely to continue as inflation reduces the real value of contracts, the paper says.

Experts predict that inflation could reach more than 10 per cent in the months ahead, a level not seen in the UK since 1981.

Leah Davis, head of policy at NPC, said: “Charities and community groups can be vital partners in delivering public services, using their knowledge, trust and ability to act nimbly and innovatively to achieve better outcomes for service users and taxpayers.”

She added that issues with charities subsidising public contracts are “only going to get worse as inflation undermines the value of payments already agreed, and pressures on charity income and on communities mount up”.

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