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3.4 Surpluses

An important part of the overall contract management system is how to deal with any surplus that remains when the agreed outputs have been delivered. The ability of an NGO to retain part of any surplus can provide an important incentive to achieve efficiencies and to innovate – something always worth encouraging, including through other means, such as willingness to consider proposed innovations.

On the other hand, Government agencies need to seek value for money, avoiding providing for large, easily earned surpluses, after all expenses including depreciation and a normal return on capital have been covered. (In this context, surpluses do not include a moderate return on capital or expenses necessary to cover infrastructure costs such as depreciation.) Similarly, departments should be confident, when negotiating a lower price, that this will not put service quality at risk of falling below agreed standards. The Government agency will also need to keep the price under review when contracts are renegotiated in the light of knowledge acquired about costs and surpluses. There are a number of approaches that can be adopted in relation to a surplus:

  • The NGO returning any surplus. This is appropriate where the surplus is due to the NGO under-delivering on the quantity or quality of the services.
  • The Government agency and the NGO agreeing to the provision of more of the same services.
  • The Government agency and the NGO agreeing to the delivery of additional related outputs.
  • It may be appropriate for the NGO to retain the surplus as profit. This approach relies on a robust contract management system, and good information on service delivery.
  • Grant money that is not spent for the purposes originally provided should be returned to the Government Agency. It may be appropriate to renegotiate the conditions of a grant to reflect changing circumstances.

Deciding on the most appropriate approach to dealing with surpluses may also depend on an assessment of risk. The basis for these assessments should be documented. This may be particularly relevant when the NGO is a not-for-profit organisation. Government agencies should assure themselves ahead of time that the NGO has appropriate internal controls or governance structures to ensure that any agreed surpluses are applied by the NGO appropriately. At the least, agencies should verify how the surplus has been spent by the NGO.

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