Nonprofits funded by U.S. government grants receive full reimbursement for administrative costs as determined by individually negotiated indirect-cost rate agreements, known as NICRAs. Outside of this full-cost recovery safe haven, nonprofits experience wide variations in the amount of indirect costs — so-called overhead — funders will pay for. It takes special expertise to manage the non-NICRA funding landscape. Unfortunately, many grantees lack these skills, which puts their organizations in financial peril.
In my 30-plus-year career leading the overhead functions of international nonprofits or working as a consultant to them, I’ve seen organizations use five survival skills to succeed in the non-NICRA, low-overhead-funding environment:
- Cost impact understanding: ensuring that program staff and leadership know the overhead shortfall that will be incurred by saying yes to a given grant
- Grant portfolio management: making sure the organization has sufficient sources of flexible funding to plug the gaps created by insufficient coverage of overhead
- Adaptive budgeting: interpreting what the funder is looking for in a financial plan and crafting a proposed budget that meets those expectations
- Synchronized reporting: keeping track of what the funder expects to see in a report while tracking the amount of actual unrecovered overhead
- Careful negotiating: learning and testing the limits of what a funder will pay for, and conveying how the project’s financial plan remains within those limits
I have seen repeated examples of organizations failing to build the necessary survival skillset and therefore putting themselves at risk. I have also seen organizations invest in the skills required and thrive in the non-NICRA landscape. Here are two contrasting examples.
Nonprofit A: Scrambling to Cope
Nonprofit A built its program and reputation working with funding from a U.S. government agency using the NICRA method of full overhead cost recovery. When its U.S. funding dropped due to a change in emphasis by the agency, Nonprofit A turned to the non-NICRA landscape and found funders very willing to support the work — but with limited funding for overhead. Nonprofit A’s program staff members were excited about the new sources of funding and agreed to the grants without the cost impact understanding required to determine full program costs and the potential overhead shortfall. Insufficient funds for actual overhead costs led to draining unrestricted reserves while Nonprofit A’s leaders scrambled to improve their grant portfolio management by ramping up an unrestricted fundraising effort to cover the shortfalls.
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Nonprofit A’s leaders considered this use of unrestricted funds a bad practice. To minimize its effect, program staff used adaptive budgeting techniques to shift costs typically thought of as overhead to direct program. Some funders tolerated a certain amount of this “direct charging” or “cost uploading,” but not as much as was needed to substantially reduce the use of unrestricted funds. This shift in costs required synchronized reporting by finance staff to make sure a special financial report was prepared matching the assumptions made in the proposal budget.
As a result, Nonprofit A’s leaders dedicated substantial time and effort searching for unrestricted funding. With reserves dwindling and few prospects for near-term results, the organization faced a variety of unpleasant decisions: terminate grants, cut overhead staffing to lower the shortfall, ask the board of directors for substantial contributions, or go hat in hand to the new funders asking for a special grant to solve the problem. All these choices were suboptimum and wouldn’t solve the long-term problem.
Moreover, if the new funder discovered what it considered to be unjustified cost uploading, the grantee’s reputation could be tarnished and the funder could demand a partial grant refund. Careful negotiating with new funders could have steered the conversation to project outcomes and total program costs in an effort to minimize the overhead shortfall.
Nonprofit B: A Holistic Approach
Nonprofit B built its program using individual contributions garnered through a substantial fundraising effort. When individual contributions waned during an economic slowdown, leaders turned to institutional funders to support taking the organization in a new strategic direction. They knew that some funders would not fully pay for overhead incurred by the new programs. Nonprofit B reduced existing program spending to free up funds to cover the overhead shortfall from new grants, and it introduced individual contributors to the idea that their contributions would facilitate and complement much larger grants from institutional funders.
Unlike Nonprofit A, this organization looked favorably on using unrestricted funds to make up for a shortfall in the reimbursement of indirect costs. Thus, individual funders helped to plug the gap left by foundations. If not for this cofunding, Nonprofit B’s strategic shift would not have worked. While the program spending slowdown reduced impact in the short run, Nonprofit B’s return to longer-term sustainability revived ongoing impact. Thus, Nonprofit B took a holistic approach to grant portfolio management to carefully plan for covering the full costs of its programs.
The special expertise needed to evaluate and manage non-NICRA grants requires a blend of cost impact understanding, grant portfolio management, adaptive budgeting, synchronized reporting, and careful negotiating. In my experience, NGOs and nonprofits that master these skills experience a healthier financial outlook and achieve greater impact. Admittedly, developing these skills adds costs measured in staff time and effort. But it’s an investment that pays dividends for an organization and, more importantly, for its beneficiaries.
Eric Walker, now retired, spent his career working to address the key operational challenges of international NGOs. He was a cofounder of InsideNGO (now part of Humentum) and served as CFO of the Population Council and vice president of corporate services at PATH.