Nonprofit organizations have an obligation to their donors and supporters to spend their money wisely, and if it's a registered charity, there could be a legal obligation as well. A procurement policy is a written document that specifies how money is to be spent. While a procurement policy can vary from one organization to another, most have several traits in common.
Fiscal Responsibility and the Law
Before drafting a procurement policy, check your state requirements for registered charities. You may be required to open your books for an independent audit in addition to any audits done by the IRS. If you are applying for grants, the grantor may have requirements on how you spend your money as well.
You can use a nonprofit procurement policy template or a procurement policy sample for nonprofit organizations that is available online. However, you should run this by your organization's lawyer and accountant before using it. State laws vary for nonprofits, and your requirements can vary depending on what type of work your organization does.
A Procurement Policy Sample for Nonprofits
Your procurement policy should spell out how purchases must be made and by whom as well as who is responsible for overseeing purchases. It should reference internal controls used by your organization to reduce the chances of abuse. As an example, a purchasing policy for a nonprofit organization should specify the processes for:
- Small purchases (up to $1,000, for example)
- Large purchases (above $1,000, for example)
- Competitive sealed bids and proposals
- Competitive negotiations
- Noncompetitive negotiations
In addition to these methods of procurement, your policy should also specify what documentation is required, how your organization should work with small, local businesses and businesses owned by women or minorities and the code of conduct for your organization regarding purchases.
Internal Controls and Procurement
Internal controls are the financial management practices your organization uses that prevent anyone from misusing or misappropriating funds, such as embezzlement.
A common internal control for procurement is to require two signatures on checks for large purchases. This way, no single person can spend money on behalf of the organization. Your organization should limit who has access to its bank accounts and credit cards and who specifically can spend money, including checks, credit cards, online transactions or cash.
Purchases should be reviewed by someone holding a specific job title to ensure that the costs are appropriate and to prevent duplicate purchases. Your policy should state explicitly that your organization does not engage in procurement practices that are arbitrary or restrictive.
Policies for Small Purchases
Small purchases usually require some flexibility and leeway compared to larger purchases. The office manager, for example, may be allowed to approve purchases below $500, whereas the treasurer may be required to sign off on larger purchases.
Purchases between $500 and $1,000, for example, would require three quotations to get the best price. Purchases above $500 need to be documented by the person doing the purchasing, including the two quotes that were rejected.
Purchases between $1,000 and $10,000 would require written quotations from at least three vendors. If three vendors don't reply, this should be documented by the purchaser.
Competitive Sealed Bids
When the cost of a purchase is more than $10,000, your organization should strongly consider getting bids. An invitation for bids (IFB) notice should be written and published in a major local newspaper at least seven days before the proposal due date. Your organization should also contact suppliers to invite them to bid.
The IFB should include:
- Complete and accurate specifications and descriptions of the goods or services required
- The required bid deposit amount as well as a payment bond and bond performance if needed
- Whether the contract will be awarded on the lowest price or the lowest evaluated price
- Where the bid forms and specifications can be accessed
- The time and location for opening bids
If the lowest evaluated price is to be used, the measurable criteria must be detailed. The job title responsible for opening bids and overseeing the process should also be included in the procurement policy.
Your organization should use competitive negotiations when it's determined that bidding on a set of specifications isn't feasible or when you require professional services. In this case, a request for proposal (RFP) should be issued instead of an IFB. The process should be followed like that for an IFB. An RFP should always use cost as one of the selection factors regardless of what the other factors may be.
For some professional services, a request for qualifications may be preferable to an RFP, such as accounting services or consultant services.
There are times when bids or proposals just aren't feasible, and your organization requires goods or services immediately or from only one supplier. This is often the case in an emergency situation, like when you have to book an emergency flight for someone or your building's roof is leaking. There are also occasions when only one vendor has what you require.
In this case, your policy needs to ensure that your organization remains impartial toward all suppliers. Your organization should only accept bids from suppliers who have proven their ability to provide what is needed. In the case of contractor work, like plumbing or heating services, contractors should have proof of liability insurance.
Policies on Contracts
Specify the spending threshold that requires your organization to have a written contract with a supplier, such as $200 or $500. When a purchase is made above this amount and a contract isn't feasible, the reasons for not having a contract should be documented.
All contracts should contain language giving your organization the ability to cancel with cause. Cause should include things like:
- Demonstrated inability to perform the required work
- Unwillingness to complete work in a timely manner
- Cancellation of liability insurance or workers' compensation
- Failure to pay suppliers or workers
- Failure to keep accurate records and make them available on request
Policies on Documentation
Supporting documents for procurement transactions, including purchase orders, receipts, invoices, bids and proposals as well as supporting documentation should be filed and saved in an appropriate manner.
Documentation used internally that records why the purchase was necessary and how the supplier was selected should also be saved. Not only are these important should there be a problem with goods or services purchased but it will serve as a paper trail that can be used for auditing.
Policies on Affirmative Action
You should consider including a section in your organization's procurement policy on how it will interact with local businesses, small businesses and those that are owned by women or minorities, including their ability to submit bids and proposals. When it's appropriate, your criteria for selecting bids and proposals should give some weight to these types of businesses.
Both the Minority Business Development Agency of the Department of Commerce and the Small Business Administration can provide you with assistance in finding and working with these types of businesses. Successful bidders for contracts should also be required to use this criteria when possible when selecting their suppliers and subcontractors.
Procurement and Your Code of Conduct
No one in your organization should be involved in awarding procurement contracts when there is an apparent conflict of interest. This can include, for example, family members who own a business or someone who has invested in a business. No one in your organization should ever accept gratuities, favors, discounts or anything else of monetary value from potential suppliers.
Your policy should detail your code of conduct on procurement and state the penalties for violations by employees and potential suppliers. Normally, this would be grounds for dismissal for your employees, and suppliers would be banned from further contracts with your organization. Your policy should also state that violators may be open to civil suits without the legal protection of your organization.
- Kentucky Housing Corporation: Sample Nonprofit Procurement Policy
- National Council of Nonprofits: Internal Controls for Nonprofits
- City of New York: Internal Controls and Financial Accountability for Not-for-Profit Boards
- IRS: Compliance Guide for 501(c)(3) Public Charities
- IRS: Charity and Nonprofit Audits
A published author, David Weedmark has advised businesses on technology, media and marketing for more than 20 years and used to teach computer science at Algonquin College. He is currently the owner of Mad Hat Labs, a web design and media consultancy business. David has written hundreds of articles for newspapers, magazines and websites including American Express, Samsung, Re/Max and the New York Times' About.com.