(Illustration by James Yang) 

In the nonprofit sector, unpredictability is a fact of life. Over the past four years, our organization—Open Road Alliance—has provided grants to nonprofits that face project disruptions because of unexpected events. Our portfolio includes more than 70 grantees that have required this kind of contingency funding. In working with these groups, we have seen a wide variety of ways in which untoward circumstances can stall or halt a project.

  • In 2012, an NGO that specializes in community-based infrastructure projects undertook the construction of a 60-kilometer road. It had full funding in place. But after 40 kilometers of roadway had been built, an out-of-season flood washed out a portion of the road and damaged some of the heavy equipment used for the project.
  • In 2014, an NGO that had received pre-approved, multi-tranche funding from a corporate social responsibility (CSR) program at a large corporation had its funding cut off. The company, as it turned out, had enacted a freeze on new expenses throughout its procurement department, where the CSR team was housed. The account freeze was unrelated to the NGO’s performance, so the organization requested an alternative means of payment. Yet because the company had no procedure for allowing a release of funds under these circumstances, staff members denied the request.
  • In 2015, an international health organization was in the final stages of gaining accreditation from the government of a South American country. Then, without warning, the government announced a change in regulations: To finalize the accreditation, the organization would need to replace a previously approved generator with a new $25,000 industrial model within 90 days.

These examples convey the nature of the contingency funding problem but not its scope. So last year we set out to collect systemic data on this topic. We commissioned a 30-question survey that targeted a random sample of 200 funders and 200 nonprofit grantees. The survey focused on common contingencies that, although they are potentially detrimental to a given project, are not catastrophic in a global sense. Contingency funding, by our definition, covered “requests for additional funding during the lifetime of the grant related to unforeseen disruptive events.” The requests in question had to concern “specific projects for which money had already been granted.”

Nonprofit respondents in our survey reported that in cases when they had requested contingency funding but had not received it, more than 80 percent of affected projects experienced a slowing of progress, a significant reduction in scope, or termination. These outcomes adversely affect project impact, and they can lead to a loss of trust among beneficiary populations, a loss of trained staff members, and serious reputational damage. Funders that do not support a grantee through an unforeseen disruption, in other words, not only endanger their own investment but also put the grantee’s future effectiveness at risk.

In no other sector do investors expect organizations to deliver every project on time, on budget, and with no reduction of impact. Too many funders assume that grantees can overcome unfortunate events within their existing budget. In our survey, 63 percent of funders reported believing that grantees could fill a funding gap if a request for contingency support was denied. Yet only 35 percent of grantees in the survey reported being able to find alternative sources of funding in such cases.

This spring, we launched an initiative called the Unexpected Fund. It’s a matching fund that will help donors provide contingency funding to grantees that encounter unanticipated setbacks. As our survey indicates, however, funders and nonprofits need to take steps on their own to prepare for unexpected events. No project that a nonprofit has carefully conceived and that a funder has carefully vetted should be cast adrift because neither party was willing to take risk seriously.

Two Important Steps

Perhaps the most surprising result of our survey is that everyone understands the reality of risk—but no one talks about it. In the survey, 76 percent of funders reported that they do not ask grantees about circumstances that might require additional funding mid-cycle. As a result, they fail to discover the risks associated with a given project and how grantees plan to mitigate those risks.

After all, if donors don’t ask, grantees are unlikely to tell. Not surprisingly, people in nonprofits often fear that approaching a donor for funds mid-cycle will have negative consequences for future funding. Silence encourages false assumptions and unwarranted expectations, making it doubly difficult to raise the issue of contingency funding when a disruption does occur.

For this reason, a necessary first step toward managing contingencies is to incorporate discussions about project risks into the grant application process. Throughout the RFP (request for proposal) and vetting stages, funders and nonprofits should conduct an ongoing conversation about risk, risk mitigation, and contingency planning. Pursuing that conversation can go a long way toward preventing future problems.

Once a project is under way, funders and nonprofits often face another obstacle when it comes to contingency funding: a lack of clear guidelines for handling requests for additional funds. In our survey, only 35 percent of funders reported that they have a specific policy to govern requests for contingency funds, and only 28 percent of nonprofits indicated that they have procedures in place for communicating with funders when problems arise.

Without such guidelines, staff members at both funder and nonprofit organizations are vulnerable to internal pressures that may inhibit their willingness to take action. A grant officer in a foundation might be wary of granting more funds to an organization that hasn’t fully met the terms of its original contract. Within a nonprofit, similarly, a program officer might worry that approaching a funder for extra money in the middle of a grant cycle will reflect negatively on the organization.

A crucial second step, therefore, involves creating internal guidelines that clarify how staff members should handle off-cycle requests. Funders should adopt a policy that requires grant officers to consider those requests. Such policies set a cognitive frame that encourages open communication about risk: Staff members need not fear that managers will automatically question their actions if they accommodate off-cycle funding requests. Grantees, meanwhile, come to see that their funder is prepared to explore potentially disruptive problems in a nonjudgmental way. For their part, nonprofits should establish procedures for communicating with funders about anticipated problems.

The One-In-Five Benchmark

Both funders and grantees reported that in the previous year roughly 20 percent of their projects had required extra funding because of unexpected events. They also reported that they expect the same percentage of projects to require contingency funding in the following year. That both parties agree on the frequency of disruptions suggests that “one in five” is a good benchmark for evaluating the true scope of the risk they face. In offering this benchmark, we don’t mean to suggest that organizations must put aside exactly 20 percent of their project funding to cover contingencies. But the “one in five” figure highlights the urgency of the problem.

With this benchmark in mind, donors should consider adopting one of two basic approaches. The first is to identify and mitigate specific known risks up front. If the success of a project depends on environmental conditions, for example, a donor might set up a contingency fund that is triggered by weatherrelated events. That kind of mitigation isn’t always possible, of course. In that case, donors can pursue a second approach—putting allpurpose contingency reserves in place. They can establish these reserves either at a portfolio level or on a project-by-project basis. They can invest contingency funds or hold those funds in a cash account. Funders can and should experiment with various methods to find the one that suit their needs.

Many donors will find the idea of keeping funds in reserve problematic. They may deem it wasteful to let funds sit idle when they could deploy those resources. But unless funders are operating on a venture capital model in which they expect a significant percentage of grants to fail, it is in their interest to set aside what amounts to “impact insurance.” Most foundations have insurance policies that protect them from various forms of harm. They view the cost of that insurance not as wasteful spending but as a necessary part of doing business. Underwriting impact, similarly, is an appropriate way to protect against threats to a foundation’s core work.

The one-in-five benchmark should send a cautionary signal to nonprofits as well. Our survey found that only 23 percent of nonprofits have formal risk management policies that enable them to plan for project disruptions. Many nonprofit leaders might argue that the scarcity of unrestricted funding makes it impossible for them to set aside money for contingencies. Yet they do have options. They can discuss the need for such funding with donors before starting a project, for example. Or they can raise a separate emergency fund to cover a portion of their risk. Prudent nonprofit leaders, we believe, will shift from a policy of allocating all available funds to programming to a stance in which they reserve funds for inevitable disruptions. Managing risk is a dual responsibility.

For donors and their grantees, a failure to manage the risks associated with a project can lead to a poor business outcome. But the real losers when funders and nonprofits fail to plan for risk are beneficiaries. When a program officer is afraid to ask for more money, or when a foundation official is unable to alter a grant cycle, people lose access to vital services.

Yet the problem of funding for contingencies is eminently fixable. Indeed, it’s a much easier problem to solve than the complex social problems that funders and nonprofits routinely tackle. Working to confront issues such as poverty, hunger, and climate change can be overwhelming—but figuring out how to support projects to the point of completion is not.

Read more stories by Laurie Michaels & Maya Winkelstein.