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Re: Grant Writing Compensation Question Smith, Marjorie K. 20 Jan 2007 02:47 EST

There are many reasons for why payment on a percentage / commission basis is considered unethical and unprofessional. These include the stance of the Association of Fundraising Professionals and other similar entities, the fact that many factors outside the grant writer's control affect the likelihood of success in the grants arena, and the possibility that such a payment arrangement inures to the benefit of an individual and therefore could jeopardize the organization's 501(c)(3) status. Following my comments are opinions from consultants who responded to queries on the PNDTalk Board. There is probably similar information on CFRNET.

Several years ago while attending a conference for grant writing professionals, I had the opportunity to broach the subject of percentage- or commission-based grant writing with an IRS representative. He was very clear that although there is no law that prohibits grant writers or others from engaging in this practice, doing so can place the non-profit's 501(c)(3) status in jeopardy since hiring a grant writer, professional fund raiser, public relations professional, or anyone else on a percentage or commission basis would inure to the benefit of an individual. Given the standing of the IRS on this matter, it could be considered both unprofessional and unethical for a grant writer to enter into such an agreement.

Another reason to avoid such an arrangement is that the organization cannot use grant funds from private foundations to pay for services rendered prior to the grant award. Foundations will not generally cover pre-award expenses, and it can decrease the applicant's chances of success if these costs are included in the budget. If the budget does not include these costs but the non-profit intends to pay the grant writer from the grant, that would be a misuse of funds. The non-profit should already have the funding in hand to pay for grantwriting costs or find a volunteer, and a grant writer (unless s/he has agreed to serve as a volunteer) is entitled to receive fair compensation regardless of whether the proposal is successful.

Success in the grants world is dependent on a number of factors, including the grantworthiness of the institution (well-defined mission, activities that meet community needs, fiscal stability, a diverse donor base, prior history with foundations, a Board that is actively engaged in fundraising, etc.), thorough research on the prospective funder to ensure a good fit in terms of funding priorities and to decide on an appropriate ask amount, (sometimes) a strong connection between the Board of Trustees / Directors of the foundation and the applicant, a competitive well-thought-out project, and a well-crafted proposal that balances the need for support with the organization' capability to implement the project. Some of these factors are within the control of the grant writer, and many are not.

Following is a section from the AFP Code of Ethical Principles and Standards of Professional Practice, as well as thoughts from others.

M. Karen Smith
Grant Writer and Grants Administrator
Department of Family Medicine
James H. Quillen College of Medicine
East Tennessee State University
P.O. Box 70621
Johnson City, TN  37614
xxxxxx@etsu.edu
423-439-4693

From the AFP Code:

Compensation

16. Members shall not accept compensation that is based on a percentage of contributions; nor shall they accept finder's fees.

17. Members may accept performance-based compensation, such as bonuses, provided such bonuses are in accord with prevailing practices within the members' own organizations, and are not based on a percentage of contributions.

18. Members shall not pay finder's fees, or commissions or percentage compensation based on contributions, and shall take care to discourage their organizations from making such payments.

Related articles by Tony Poderis:

Positioning Grant Writers For Success
http://www.raise-funds.com/040202forum.html <http://www.raise-funds.com/040202forum.html>

"The Argument Against Paying Development Professionals Based Upon The Amount Of Funds Raised For Non-Profit Organizations"
http://www.raise-funds.com/898forum.html <http://www.raise-funds.com/898forum.html>

Input from Carl Richardson, Richardson Development:

Commission sales takes a percentage of earnings off the top for having made the sale. In this way, salesmen share in the earnings of the company.

It would follow then that commission fees for grant writing participate in the earnings of the nonprofit. The IRS states clearly that the earnings of the nonprofit may not inure to any individual or individuals singularly or severally. For these reasons, I believe raising funds on a commission basis endangers the 501(c)(3) status of the nonprofit.

Here is a quote from the IRS web site regarding eligibility requirements of nonprofits:

"To be tax-exempt as an organization described in IRC Section 501(c)(3) of the Code, an organization must be organized and operated exclusively for one or more of the purposes set forth in IRC Section 501(c)(3) and none of the earnings of the organization may inure to any private shareholder or individual."

In the eyes of the IRS grants paid to perform services that are stated in the mission statement are actually earnings. Revenue made for any other service is considered unearned income and often carries an unearned business income tax. Therefore, if a charitable organization allows a grant writer to participate in its legitimate earned income by paying the grantwriter a percentage of the earnings, then the charity has allowed earnings to inure to an individual. The charitable organization, not the grant writer, has broken the IRS Code (if not the state's laws).

I [Carl] think I've found something worth considering. The following is an excerpt from an article on FindLaw's website. FindLaw is a web crawler that searches legal findings and documents for any topic. I have found them useful in the past.

This excerpt is from an article "Exempt Organizations: Will Wright Patman Ride Again?" prepared by Anthony Walsh of Saul, Ewing, Remick & Saul LLP, December 1999. I am quoting without permission, but believe the author would find this use of his work in keeping with the spirit of the original article.

At any rate, according to Atty. Walsh, a 501(c)(3) has lost its status by misuse of a fundraiser. Here's the excerpt:

"We urge our friends in the foundation world to review the reality of their current practices. In the final analysis, substance can be expected to prevail over form. The ruling of the Tax Court in December, 1997 that the United Cancer Council's use of a professional fundraiser resulted in inurement of the organization's net earnings to the fundraiser -- and therefore, loss of tax exemption -- carries a great deal of significance for the community of exempt organizations. The Court looked at the reality, that the fundraiser came in when UCC was close to bankruptcy, and not the form to conclude that the fundraiser was an insider. And so it may be the appropriate time to reexamine the reality of our current practices before others do it for us. Are your programs donor directed or are they truly donor controlled? Are you renting public charity status as such by paying an 8% administrative fee when you really control the program?"

________________________________

From: Research Administration List on behalf of Louis Lafrado
Sent: Fri 1/19/2007 5:04 PM
To: xxxxxx@hrinet.org
Subject: [RESADM-L] Grant Writing Compensation Question

Good afternoon everyone.  I have a question concerning contract grant
writing services.  I recall that grant writing services may not be paid as a
percentage of the final grant award (if funded).  My question is the
location of a formal discussion of this issue.

Lafrado

Louis J. Lafrado, Ph.D.
L&D Associates Consulting Group
54 Prestwick Court, SE
Rio Rancho, New Mexico 87124
(505) 856-2539 Voice/FAX
(505) 238-0122 Cell
xxxxxx@landd.net

Visit L&D Associates on the web at www.landd.net

Visit and participate in the L&D Associates Grant and Evaluation Blog

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