State government contract structures and policies profoundly shape the way providers deliver human services, often with unintended consequences. While well-intentioned regulations aim to ensure accountability and efficiency, they frequently create bureaucratic hurdles that prioritize compliance over outcomes.

As a result, providers spend more time navigating administrative processes than delivering essential services.

The Hidden Costs of Bureaucratic Inefficiencies

The structure and processes inherent in contracts between state agencies and human service providers (HSPs) impose significant financial and operational hardships. 

One of the most pressing challenges is chronic underpayment, which is driven by artificial limits on administrative costs. An Urban Institute study found that government contracts typically covered only 70 percent of direct program expenses and even less for administrative overhead. 

Delayed payments further exacerbate these financial hardships. Under cost-based reimbursement contracts, the most used government contracting model, providers must deliver services upfront and then wait for agencies to process reimbursement invoices—a delay that can stretch for months.  

Payment lags force HSPs to rely on financial reserves, lines of credit, or personal loans to keep programs running. Smaller providers, particularly those led “by and for” the communities they serve, lack the financial cushion to absorb payment interruptions, forcing them to either scale back services or exit the state contracting process entirely.

The Administrative Burden: Process Over Impact

Beyond financial stress, human service providers also contend with complex application and contract management processes. Application language is often overly legalistic, and many contracts require extensive documentation, such as detailed proof of insurance, staff resumes and audited financial statements.  

Inconsistent guidance across state agencies and short turnaround times for application questions create additional barriers. 

Once a contract is in place, providers must navigate cumbersome compliance and reporting requirements. The time and resources required to meet administrative demands divert attention away from service delivery, undermining the purpose of human service programs.

Consequences of an Overly Rigid Contracting System

The consequences of bureaucratic inefficiencies extend far beyond administrative frustration—they directly impact the stability and effectiveness of the human service provider sector. 

Providers often face delayed reimbursements, burdensome reporting requirements, and unclear or changing contract terms. These challenges make it difficult for HSPs to maintain consistent cash flow, plan, or invest in staff development. 

This financial instability contributes to staff turnover, as human service employees may face job insecurity, delayed paychecks, or unsustainable workloads due to staffing shortages. High turnover rates disrupt service continuity and erode the institutional knowledge necessary for effective service delivery.

Restrictive contracting policies also create inequities in funding distribution. Organizations led by and for marginalized communities receive, on average, 24 percent less revenue and 76 percent less unrestricted net assets (e.g., available cash flow) than their larger counterparts.

Solutions: Moving Toward Outcome-Based Contracting

To improve the human service contracting structure and address process hardships, states should shift from compliance-heavy models to outcome-based contracting. Performance-based contracting offers a promising alternative by linking payments to service outcomes rather than rigid process adherence. This model incentivizes efficiency and flexibility, allowing providers to tailor services to community needs rather than bureaucratic dictates. 

Simplifying and standardizing application and reporting requirements also can alleviate administrative workload. Automatic contract extensions, cost of living adjustments, prompt payment policies, and more allowable administrative costs also would enhance the financial sustainability of service providers.

Collaboration between state agencies and HSPs is crucial to any reform efforts. By establishing regular feedback loops, providing technical assistance, and engaging providers in contract development, state agencies can ensure policies reflect providers’ on-the-ground realities rather than top-down assumptions.

A Call to Action

The human services sector is at a crossroads. Ensuring strong, sustainable services for our communities requires partnership between human service providers and government agencies. Together, they can work to evolve contracting policies that prioritize meaningful outcomes over bureaucratic compliance. 

By shifting to performance-based contracting, streamlining administrative processes, and ensuring fair compensation for providers, agencies can strengthen the human services ecosystem and better serve communities in need.  

Human service providers also play a crucial role in transforming the contract process by understanding their right to negotiate contract terms and work with state agency staff to develop balanced and sustainable partnerships. 

Ordinary citizens can push for contracting reforms by supporting community-based organizations, staying informed, and advocating for fair and effective contracting systems.

The time for reform is now. A system designed solely for compliance will never achieve the outcomes people living in our communities deserve.