More than 65,000 people in Washington State work in the human services sector, delivering child protection, affordable housing assistance, job training, and disability support to millions of residents. Yet many of these providers are operating on the financial edge, unable to sustain their core organizational functions under current state contracting structures.
The Washington State Department of Commerce released a comprehensive legislative report, “Impacts of Contracting Structures on the Sustainability of Human Services Providers,” examining the effects of state contracting practices on human services providers (HSPs), which are most often nonprofit organizations.
The Atrómitos team, retained as the external consultant for this study, engaged with human service providers across the state and collaborated with a diverse workgroup of experts and stakeholders to understand the systemic failures and develop actionable solutions.
The Financial Squeeze
Most state contracts use a cost-based reimbursement model, in which providers deliver services, submit documentation, and receive reimbursement for allowable costs. But this creates significant financial hardships in the human services sector.
Providers must pay all costs upfront (including payroll, rent, and supplies) and wait weeks or months (sometimes more than a year) for reimbursement. For many HSPs, securing state contracts may require loans to cover expenses, forcing them to decline state contracts they cannot afford to accept.
State human service provider contracts generally do not cover the full cost of providing the services. More than 80 percent of HSPs surveyed for the study reported that state contracts covered 75 percent or less of their actual costs, while indirect costs are limited to between 0 and 10 percent, despite actual indirect costs typically ranging from 25 to 35 percent.
The contracting system offers no upfront funding to cover the cost of starting a new program or service. Organizations must cover their costs before receiving state reimbursement, but many HSPs lack the resources to do so.
The result? An estimated 363 human services organizations in Washington are technically insolvent, meaning their debts exceed their assets. Another 1,160 lack the liquidity to meet immediate financial obligations, and 870 organizations have less than one month of cash reserves.
Beyond the Bottom Line
These financial constraints create cascading problems. Providers cannot offer competitive salaries, leading to turnover rates of 30 percent or higher. Every departing staff member takes relationships, institutional knowledge, and expertise with them, directly impacting service quality and performance outcomes. Turnover costs, including recruitment, training, and lost productivity, are significant, ranging from 25 percent to 200 percent of an employee’s annual salary.
Chronic underfunding also prevents investment in modern operational infrastructure. Without adequate data systems, fiscal management tools, or risk mitigation strategies, organizations struggle to operate efficiently, further straining already tight operating budgets.
Death by a Thousand Processes
The entire contracting lifecycle (from application through execution to monitoring and reporting) presents operational obstacles that disproportionately burden smaller providers. Complex procurement processes, unclear requirements, inconsistent procedures across state agencies, and lengthy delays in contract awards all create administrative headaches. Extensive monitoring and reporting requirements consume valuable time and resources.
State agencies cited staff shortages, high turnover, and outdated technology (including payment systems over 40 years old) as contributing factors to antiquated and cumbersome contracting processes.
A Path Forward
The workgroup developed eleven recommendations to address systemic problems, including:
- Allow advance payments to prevent providers from having to finance state services out of pocket.
- Ensure full cost coverage, including adequate indirect cost reimbursement that reflects actual operational expenses.
- Establish a technical assistance center tailored to support HSPs of various sizes and geographic locations.
- Require state agencies to adhere to timely contracting and payment processes to ensureaccountability for any reimbursement delays.
- Adopt relational contracting approaches that treat providers as partners rather than merely vendors, emphasizing collaborative contract management.
- Increase state agency staffing and training to address internal capacity issues driving delays and inefficiencies.
Why it Matters: Real-World Impacts
When human services providers fail, communities suffer. The state loses expertise, cultural competency, and trusted relationships that cannot be replaced quickly.
The report’s recommendations offer a roadmap toward a more sustainable human services sector. Implementation will require legislative changes, regulatory reforms, and cultural shifts in how state agencies approach contracting relationships.
Washington State has a unique opportunity to demonstrate leadership and fulfill the government’s commitments to residents by investing in the human services sector’s essential infrastructure.
Organizations facing similar challenges, and government entities rethinking their contracting approaches, can learn valuable lessons from Washington State’s experience. Efforts to support and strengthen those who serve our neighbors start with acknowledging what is not working and committing to meaningful change.