Cost Escalation and Nonprofit Sustainability

Those following the news in the human services realm over the last few years know that the financial situation of many nonprofits has become increasingly concerning. In our recent report on the precarious fiscal condition of New York’s nonprofit sector, we at HSC outlined how chronic underfunding of contracts, development of programs and metrics without meaningful input from service providers, late payments by government agencies, and failure to pay interest when it is due can lead to financial strain or collapse for even our largest and most robust organizations. You also know that the cost of living and the cost of doing business—particularly in New York City—have skyrocketed over the past decade, while funding of human services contracts has stagnated. For this reason, HSC has continuously called for the addition of cost escalation clauses to human services contracts.

A cost escalation clause, or escalator clause, guarantees that the funder will adjust payment to reflect any cost increases that are out of either party’s control, usually expenses that haven’t been adjusted for inflation.[1] Nonprofits report that expenses for rent, insurance, repairs to infrastructure, supplies, and improvements in technology have all increased at a rapid pace over the last decade[2]. In the absence of cost escalation clauses, agencies must scramble to cover rising costs by pulling money from other budget areas. For many organizations, this has meant laying off or furloughing staff, reducing salaries or benefits, freezing hiring, or even shuttering certain programs. Ultimately, these actions have the effect of reducing the quality of and access to critical services that uplift communities.

Government agencies often blame nonprofits for failing to properly oversee their financial affairs, and recommend that they should run their agencies more like for-profit businesses. Cost escalation clauses are a perfect example of how nonprofits can better plan for the future, and they come right out of the for-profit sector’s playbook. Any good contract lawyer would advise a construction company to include a cost escalation clause to account for future increases in the cost of materials and labor. Those who provide necessary and life-saving care for our fellow New Yorkers deserve the same protection.

While ideally every business that contracts with government would have a cost escalation clause in its contracts, human services organizations are particularly susceptible to inflation because so much of their business is tied to the astronomical rent increases that are happening across the City. Not only do these increases affect the spaces that the organizations operate from, but the lack of affordable housing[3] has also led to a drastic increase in homelessness, food insecurity, and overall financial pressure on New Yorkers, thereby increasing the number of individuals who are in need of human services.  This is to say nothing of the staff at these organizations, whose rent is also going up while their wages are not.[4] This keeps nonprofits in the position of being unable to attract and retain the most talented candidates for jobs and leads to high levels of turnover. This also doesn’t help sustain a well-run agency that can keep track of its financials and deliver the high-quality services that communities need.

Cost escalation clauses are only one thing out of many that we can fight for to make our organizations stronger and better equipped to serve. No organization whose mission it is to help everyone in our City live a fulfilling and healthy life should have to close its doors because of rigid contracts that fail to keep pace with rising costs. HSC will continue to advocate for contracts that are reasonable, fair, and equitable, and we look forward to working directly with the newly created New York City Nonprofit Resiliency Committee and New York State Not-for-Profit Contracting Advisory Committee to achieve this goal.

Meara Levezow, HSC Policy Intern 


[1] http://www.referenceforbusiness.com/encyclopedia/Ent-Fac/Escalator-Clauses.html

[2] http://nynmedia.com/news/nonprofits-call-for-contract-increases-to-cover-administrative-costs

[3] http://www.nytimes.com/2015/02/25/nyregion/new-york-rents-outpaced-inflation-over-3-years-census-data-say.html

[4] http://www.bizjournals.com/albany/blog/health-care/2016/01/15-minimum-wage-for-health-care-human-services.html

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About Human Services Council

The Human Services Council strengthens New York's nonprofit human services sector, ensuring all New Yorkers across diverse neighborhoods, cultures, and generations reach their full potential.
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