In its response to the Government's review of the third sector, the umbrella body said greater regulation was needed to bring funding allocation at local government level into line with Whitehall policies on third sector public service delivery.
If the Government intends to devolve more public services to the voluntary sector, it must also create a level playing field so that public, private and voluntary sectors can compete fairly, said the CFDG.
"Central government is putting in place policies supportive of a balanced relationship that aren't being implemented at local level, where much of the funding is taking place," said Keith Hickey, chief executive of the CFDG. "There is a need for real understanding of charities and how they are structured at local level so that funders understand the importance of full cost recovery, the need for timely payment of services delivered and an appropriate level of risk sharing."
He added that the absence of any recognised reporting standards among government commissioners meant charity and voluntary sector organisations had to prepare contract proposals in a range of different formats.
Ernese Skinner, policy and campaigns officer at the CFDG, said the group wanted to see "a more adult relationship between government and the third sector". She added: "At the moment, we are working with our members to address some of the issues they face in contracting with the public sector, understanding and managing costs and negotiating contracts."
Skinner said charities should use advisory resources such as the Treasury's Guidance to Funders as "levers" to promote better practices by local government commissioners.
The CFDG is also considering providing training so that local government officers can gain a more sophisticated understanding of the sector's needs.
Charles Nall, finance director at the Children's Society, said government funding levels "create a tension" for charities.
"Charities want to be treated as grown-ups, and it is an outrage that local government won't pay for services properly," he said.
"But charities often agree to provide services on the cheap because this brings in money that could help their beneficiaries."
Nall said there should be a political debate about "what government's priorities are and how the aims will match up to the means".