Nonprofit Purchasing Policy Considerations

November 23, 2020

Nonprofits have a multitude of compliance standards to juggle, and constructing a comprehensive nonprofit purchasing policy is no exception. Maintaining tax-exempt status requires adherence to very specific behaviors, and written policy should be reviewed periodically to ensure your organization meets or exceeds standards.

Under the new procurement standards, all NPOs receiving federal awards must have a written procurement policy that outlines these five allowable methods of procurement.

Micro-purchase method – for supplies or services costing less than $10,000, no competitive quotations need to be solicited. This threshold was raised from $3,500, much to the relief of NPOs like research universities and institutes. Certain NPOs may also request an approval process for micro-purchase thresholds higher than $10,000.
Small purchase procedures – for items costing $10,000 or more but below the simplified acquisition threshold (currently raised to $250,000): price or rate quotations must be obtained from an adequate number of qualified sources. However, each NPO can determine what is an “adequate” number and it could be any number greater than one. Also, the price quotations can be in writing, oral, or by finding a price list on a website or via an online search engine. Due to the threshold increase, more procurements will likely fall under the small procurement method rather than the more stringent competitive proposal method.
Sealed bid method – for items over the $250,000 threshold, this is the preferred method for procuring construction services. Sealed bids are publicly solicited through formal advertising and a firm fixed-price contract (lump sum or unit price) is awarded to the responsible bidder whose conforming bid is the lowest price.
Competitive proposal method – for items over the $250,000 threshold, this more complex method involves RFPs in which qualifications of the chosen vendor are more important than the pricing of services.
Non-competitive proposal method – for sole-source contracts, which are only feasible in certain situations, such as when a unique type of service or product can only be provided by a specific vendor or in emergency situations.

Small charities operating under 501(c)(3) guidelines in particular may need to review rules from the IRS and U.S. Department of Housing and Urban Development (HUD) as well as their state regulators. HUD, for example, requires written policy be established for purchasing. Under 24 CFR § 84.44 guidelines, organizations are required to:

Avoid purchasing unnecessary items;
Where appropriate, make an analysis of lease verses purchase alternatives to determine the most economical and appropriate decision;
Provide a clear and accurate description of the technical requirements in a manner that does not restrict competitive bidding, including
a. Details on how bidders shall comply,
b. Your policy for providing opportunities to minorities, women and small businesses, and
c. Preferences for energy savings, environmental safety and natural resource conservation.

Does your current nonprofit purchasing policy meet with these procurement standards for exempt rules and selection of vendors? While policy structure certainly differs from one organization to another, best practice would likely include a framework that addresses these common compliance issues:

Procurement methods — This includes how small purchases are handled verses larger purchases, and establishing threshold dollar amounts for when more stringent guidelines should be followed.

Competitive and noncompetitive negotiations — This includes policy for how (and where) RFP requests will be advertised; the structure of proposals; how the organization will address often-purchased or perishable items; and what to do when only one qualified bid is received, among other issues.

Contract structure — This includes the contractual provisions required by the “Common Rule” as described by HUD.

Documentation required — What information will be regularly required by all vendors on purchases and contracts? This includes describing what information is to be collected and guidelines for how this information will be saved.

Set aside rules — This describes your accommodations for small businesses, woman-owned and minority-owned businesses.

Avoiding conflicts of interest — Set clear instructions as to how conflicts of interest will be mitigated. It requires NPOs to have strong policies preventing organizational conflicts of interest, which will be used to protect the integrity of procurements under federal awards and subawards. Therefore, a non-federal entity must disclose in writing any potential conflict of interest to the federal awarding agency or pass-through entity in accordance with applicable federal awarding policy.

Penalties — Delineate specific remedies for instances when vendors and/or employees/board members violate your policy, including fines, separation or termination, etc.

Procurement for nonprofits that includes procedures for addressing these critical matters builds confidence that the organization is well prepared to provide employees, board members and potential vendors with a roadmap for successful relationships. Above all, you can ensure that all transactions meet in concurrence with regulations.

If you are a CFO of a nonprofit property management company that is involved in affordable housing and have questions or concerns regarding any financial compliance issues — including updates to your nonprofit purchasing or procurement policy — please contact the LvHJ team. We are ready to help you succeed.