How aid implementers can avoid a post-coronavirus accounting fiasco

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The COVID-19 crisis has upended development contractors’ spending. Photo by: Oleg Magni from Pexels

BURLINGTON, Vt. — The coronavirus outbreak has brought unprecedented challenges to global development implementers, forcing staff to work from home, disrupting project activities, and even raising questions for some organizations about whether they will be able to weather the pandemic.

With those anxieties comes another concern: With so much disruption of aid organizations’ spending, performance, and workforce, the COVID-19 crisis could set the stage for a huge variety of financial risks that might leave aid contractors buried in audits, investigations, and funding disputes when the dust eventually settles.

“We are fielding dozens of phone calls a week from clients asking how to set up their billing codes and how to make sure they are following the most recent available guidance to minimize audit and investigation risk later,” said Robert Nichols, a partner at the law firm Nichols Liu, which specializes in development contracts.

With its focus primarily on America’s own crisis, the U.S. government’s global funding response to the COVID-19 pandemic has been relatively modest, with roughly $900 million committed so far by the State Department and U.S. Agency for International Development for international health and humanitarian assistance. As the disease spreads in low-income countries — with increasing economic and health consequences — many expect that more U.S. government funding could follow.

“Can you imagine how long it’s going to take to go through all of those requests, audit them, and understand whether the government is paying the right amount?”

— Robert Nichols, partner, Nichols Liu

If that funding does appear, spending it could prove even more fraught with risk than usual. Given the nature of this health and economic crisis, development organizations might resort to emergency, noncompetitive bidding processes to procure goods and services.

With many staffers working from home and travel almost entirely impossible, U.S.-based organizations will also likely have to rely more heavily on subcontractors — and with less ability to vet those organizations in person. As visits to project locations are much more difficult now, development contractors might struggle to monitor shipments or services they procure, increasing the opportunity for goods to be diverted or for fraud to occur during the procurement process.

More money would inevitably mean more risk, Nichols said, but there are things that the leaders of development contractors can do now — both to mitigate their exposure to waste, fraud, and abuse allegations and to avoid future battles with the U.S. government over how money was spent during the crisis.

“The company has to set themselves up right, and they have to get the employees to follow the guidance. … That’s really what this boils down to,” Nichols said.

The COVID-19 crisis has upended development contractors’ spending. Since organizations are no longer able to perform many of the program-related activities that they agreed to in their contracts, their direct costs — which they charge to the U.S. government — are decreasing. As they still have to pay rent and salaries, that means a larger percentage of their spending is going to overhead — or indirect costs — of which they can typically only include a fixed percentage in what they bill the government.

The White House Office of Management and Budget has issued “vague” guidance, Nichols said, which encourages government contractors to keep their workforce employed but does not make any guarantees about which costs they might be able to recover, opting instead for a case-by-case review process.

“Can you imagine how long it’s going to take to go through all of those requests, audit them, and understand whether the government is paying the right amount, whether contractors are passing along just the COVID-related costs, or whether they had other costs they’re passing along as well, whether the COVID-related costs are reasonable costs?” Nichols asked.

“The whole system is practically unworkable,” he added.

USAID has set up an email inbox — covid19_indirectcosts@usaid.gov — for implementing partners to notify and inform the agency about challenges related to indirect costs resulting from COVID-19, Mark Walther, director of the agency’s Office of Management and Budget, said in an industry webinar last week.

“The reality is that people are bracing themselves for these audits and investigations months down the road.”

— Annie Kim, investigator and special counsel, Nichols Liu

Nichols Liu is advising contractors to be very diligent in how they set up the billing codes that categorize their expenses. In addition to codes for coronavirus-related direct costs — such as travel associated with evacuations — Nichols said contractors should prepare billing codes for indirect costs that result from not being able to perform project-related activities as they usually would.

Contractors should not expect the U.S. government to take an overly generous view of the costs that their implementing partners submit just because of a crisis, according to Annie Kim, Nichols Liu’s investigator and special counsel who previously served in USAID’s Office of Inspector General.

“I don’t think there’ll be much leniency,” Kim said.

She added that while the government’s message about flexibility reflects an “earnest intention,” there have been past instances in which agencies have changed their position on guidance or faulted contractors for misunderstanding it. The somewhat vague guidance that exists now is leading to some “stalling” and “spinning wheels” in terms of the coronavirus response, but Kim said the government’s position is also understandable.

“The alternative would be what — that the government says, ‘We’ll make sure that you guys are covered no matter what?’” Kim asked, adding that taking such an accommodating approach could lead to a lot more abuse and fraud.

“Both sides are stuck in a difficult position, but I think the best you can do is prepare for it,” she said.

Kim advised contractors to be proactive in their communication, both with the USAID contracting representatives who serve as their counterparts on the government side and with the government watchdogs who might eventually seek to audit or investigate their expenditures.

“The [inspector general’s office] is still working,” Kim said, but since its staff — like everyone else — cannot currently travel to physical project sites, more of the onus is on contractors to demonstrate they are doing their best to mitigate risks, communicate challenges, and provide oversight bodies with the information they need.

“Building that relationship and letting them know the issues you’re facing might help appease some of that fervor that the IG have in typical situations post-crisis,” Kim said.

These kinds of proactive efforts might also help to prevent concerns about waste, fraud, and abuse of foreign aid funding from serving as arguments against a robust U.S. government response to the pandemic, both Nichols and Kim said.

“We know that the reality is that people are bracing themselves for these audits and investigations months down the road,” Kim said. “Instead of just holding your breath and waiting, there are things that people can do now.”

About the author

  • Michael Igoe

    Michael Igoe is a Senior Reporter with Devex, based in Washington, D.C. He covers U.S. foreign aid, global health, climate change, and development finance. Prior to joining Devex, Michael researched water management and climate change adaptation in post-Soviet Central Asia, where he also wrote for EurasiaNet. Michael earned his bachelor's degree from Bowdoin College, where he majored in Russian, and his master’s degree from the University of Montana, where he studied international conservation and development.