The Drawbacks and Costs of Request for Proposals (RFPs) for Impact Buyers and Producers
Introduction
Did you know that grantmaking through the traditional Request for Proposals (RFPs) process costs about $51 for every $100 dollars granted? Surprisingly, the burden of these costs falls primarily on the nonprofit organizations that produce the positive impact these grants aim to achieve. In this blog post, we will explore the drawbacks and financial implications of RFPs for both impact funders and producers.
Assumptions
To understand the costs associated with RFPs, we have relied on a combination of research conducted by Grantcycle, Instrumentl, Time to Spare, GrantAdvisor.org, and Professional Grant Writer, as well as our own market research and interviews with nonprofits and donors. For the purposes of our calculations, we assume that the average salary for someone working in a nonprofit organization is $62,400, while for someone in a foundation or corporate giving role, it is $145,600. We also assume that 50 organizations applied, five organizations (10%) were selected, and the average grant amount per organization is $100,000 for one year.
Costs for Impact Buyers
The expenses for impact buyers—the organizations seeking to award grants through RFPs—begin even before the RFP is issued. Below we’ve outlined the cost per organization.
Cost breakdown to impact buyers (funders)
Creating and distributing RFPs require both financial investment and time. On average, this process takes around 2 weeks. This means that per selected organization, funders are spending 16 hours each on creation and distribution.
Once the proposals are received, evaluating and comparing them demands significant time and resources. Allocating 1-2 months for this stage is common, again, keeping in mind that only 10% of organizations reviewed are selected (1).
Conducting due diligence on the organizations being considered can also be time-consuming. Many impact buyers rely on service providers for this task, which can cost anywhere between $1,500 to $3,500 depending on the level of diligence required (2).
Transaction costs come into play as well. A simple wire transfer fee of $35 is often incurred (2).
Following the grant award, impact buyers must allocate approximately 1 hour per month (12 hours / year) (1) to manage the grant, which includes activities such as following up with nonprofits, reviewing reporting, and asking questions.
Another cost arises when reporting to stakeholders. Consolidating metrics across different grantees and analyzing the total impact requires about 2 weeks, or 16 hours per selected grantee (1).
Considering all these factors, the total cost for the impact buyer can amount to approximately 10.38% of the grant.
Costs for Producers
Nonprofits, as the producers seeking grants through RFPs, also face significant financial burdens.
Cost breakdown to impact producers (nonprofits)
Monitoring and evaluation costs can consume approximately 10% of the grant itself (3).
The process of finding qualifying grants can be time-consuming, taking up to three days (6), with only 10% success rate (7).
On average, it takes nonprofits 11 hours to complete grant applications (8). Considering one in ten application is accepted, grant writing becomes very time consuming. Note that some organizations (about 10%) hire grant writers, which can be even more resource intensive (4)(5).
Post-award management can include allocating grants to specific activities, tracking employee time against those activities, procuring resource management technology, etc., accounting for approximately 20% of the grant (6).
Preparing a grant report tailored to meet the requirements of donors and structuring data accordingly takes an average of one day per month (6).
Taking all of this into account, the total cost for nonprofits producing grants through the RFP process can add up to roughly 40.98% of the grant.
Other Shortcomings of RFPs
Beyond the financial costs, RFPs have other significant drawbacks:
Uncertain Impact: RFPs do not guarantee impact, as the focus is often on proposals rather than measurable outcomes.
Administrative and Compliance Focus: The relationship between nonprofits and funders tends to be centered around administrative tasks and compliance, rather than fostering true partnership and innovation.
Insufficient Capacity Building: RFPs often fail to dedicate sufficient time and resources to building the capacity of nonprofits, hampering their ability to improve and deliver consistent impact over time.
Limited Focus on New and Local Organizations: The high costs of due diligence and sourcing often discourage funders from working with new or local organizations, limiting their ability to support innovative solutions and grassroots initiatives.
A New Model: Sourcing Outcomes with OutcomesX
To address these drawbacks and costs associated with RFPs, a new model called OutcomesX has emerged. This model aims to source outcomes rather than proposals, shifting the focus to guaranteed impact and cultivating a more collaborative relationship between buyers and producers.
The process involves:
Sourcing nonprofits that align with the goals of the impact buyer.
Having the nonprofits register with the Impact Genome to gain insight into their programs, taking approximately 15 minutes.
Selecting the most promising organizations and verifying their impact with the Impact Genome, which typically takes around 1 hour.
Purchasing outcome units based on the desired impact. Outcomes units meet eligibility requirements ensuring that only organizations that have been vetted and have a sufficient level of impact evidence are able to generate outcome units.
The adoption of OutcomesX offers several benefits compared to traditional RFPs:
It guarantees impact, shifting the focus from proposals to measurable outcomes.
The relationship between buyers and producers becomes more of a partnership, enabling shared responsibility and fostering innovation.
There is a stronger emphasis on building the capacity of nonprofits, enhancing their ability to deliver consistent and meaningful impact over time.
OutcomesX promotes equity by supporting new, local, and community-based organizations, prioritizing minority-led organizations, and targeting vulnerable beneficiaries.
By retroactively purchasing outcomes and providing unrestricted funds, OutcomesX acts as catalytic funding, allowing nonprofits to innovate and scale.
The model benchmarks costs and prices for outcomes, providing transparency and efficiency.
Ultimately, this new approach to RFPs aims to shift the financial burden completely from nonprofits, creating a more sustainable and impactful grantmaking process.
Conclusion
Request for Proposals (RFPs) have substantial drawbacks and costs. Both impact buyers and producers bear the financial and resource burdens associated with the traditional RFP process. The expenses for creating and distributing RFPs, evaluating proposals, conducting due diligence, and post-award management can be significant for impact buyers. Meanwhile, producers face costs such as monitoring and evaluation, grant writer fees, post-award management, and the time-consuming task of finding suitable grants.
However, there are alternative models emerging, such as OutcomesX, which offer guaranteed impact, foster partnership, and prioritize capacity building for nonprofits. It is important for stakeholders in grantmaking to explore and consider these alternative methods to overcome the drawbacks and costs of traditional RFPs, ultimately driving greater efficiency, equity, and impact in the sector.
Sources:
Interviews with funders.
Price analysis of at least four providers.
“Unlocking the Power in Numbers,” Kim Sabo Flores, PH.D., Hello Insight, April 6, 202
“Grant Writing Fees: How Much Does Grant Writing Cost?”, Instrumentl, April 11, 2023
“Is There a Grant Writing Season?”, Instrumentl, April 11, 2023
“Calculating the Trust Cost of Grants,” Grantcycle, February 15, 2023
“What is a good grant writing success rate?”, Professional Grant Writer, December 14, 2021
GrantAdvisor.org has around 2,500 reviews across almost 100 organizations in North America with median information about the time it takes to complete an organization’s grant application.