Every nonprofit organization wrestles with the challenge of trying to cover its indirect costs. Donors have a well-known preference for funding programs and projects rather than infrastructure — administrative personnel, rent, office expenses, etc. — that a nonprofit organization must have and maintain to fulfill its mission. Nonprofit leaders work hard to keep these costs as low as possible, but you do have to be able to make critical investments in capacity to be effective and stay in business.
Even before our organization, Generation Citizen, participated in the funder collaborative’s pilot to test whether outside financial firms can accurately calculate nonprofits’ indirect costs, we knew we were not fully covering costs on most project-based grants. We also knew we needed to get a better sense of our actual cost structure before we could start thinking about addressing the issue with funders.
The pilot gave us a great opportunity to do that. We worked for just under five weeks with FMA, a national organization that provides financial management services for both nonprofit organizations and foundations. In this work we were able to test our own assumptions about assessing indirect costs, gain new insights into how to think about them, and start preparing some new strategies for those difficult conversations with funders.
Probably the biggest insight for us was realizing how much we underestimate time spent on administration, once FMA helped us understand how we should be counting it. For example, we had always thought that if we had a planning meeting on program matters, then that was a program cost; if we had a planning meeting on fundraising, that was a fundraising cost. But FMA pointed out that all our planning should be counted as administrative time. We also had not known that board-related expenses, expenditures on fiduciary governance, and board meetings should be counted as administrative costs.
Another major insight about accounting for administrative costs was that we had to look more closely at personnel time. For most staff members, we allocated only a fixed percentage of their time for administrative costs, when in many cases the actual time spent on administration exceeded the percentage allocated. So now we are learning to account more precisely for this time for all our managers. Clarifying the distinction between fundraising and administrative time has been another huge benefit to us from the pilot. On FMA’s advice, we now classify all donation-processing fees as administrative expenses.
In addition to these lessons, we received strong validation for what we were already doing. We found that most of our existing classifications for indirect costs, and the assumptions behind them, were largely on track. But we had never before had these assumptions tested by anyone external to the organization, and that was another invaluable part of the pilot. This gives us more confidence in talking about our costs with nonfinancial team members and sets the stage to be more assertive in discussing the issue of indirect costs with funders and potential funders.
That is, and will continue to be, a hard conversation to have. We now understand that our actual indirect costs can be three or four times more than what we have typically asked for in grant proposals. This data is not hidden. Funders who view our 990 form or our audit can make an approximate calculation of what our indirect-cost rate should be, though it varies by project. However, barriers still remain to proactively initiating this conversation with funders.
One thing that makes this difficult for nonprofit leaders is not knowing, in many cases, a funder’s approach to providing money for indirect costs. Every grant maker is different. There’s a fundraising trope we often hear that says “If you’ve met one donor, you’ve met one donor.” As grant seekers, we usually have limited visibility on how a particular foundation or its leadership approaches these issues. Many foundations do not discuss indirect rates in their guidelines, and those that do often suggest an indirect rate of 15 or 20 percent or less or cap the amount of support they will provide for indirect expenses, or do both.
Another big unknown, in most cases, is what a funder’s context and assumptions might be when it comes to indirect costs. As grant seekers, we worry about reinforcing a program officer’s assumption that “high” overhead is wasteful or a sign that you aren’t investing enough in your programs, even though the number reflects actual indirect costs and investments you need to achieve program effectiveness. This charged assumption deters nonprofit organizations from initiating these conversations.
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Therefore, what can we, as nonprofit leaders, do to advocate for ourselves and help funders understand what it takes to make a typical nonprofit financially sustainable? The common default is to say nothing and hope that the program officer brings the indirect-costs issue up. But that is just a reactive strategy and rarely advances the conversation. As for how to be proactive, we, like the larger field, are still at an early stage of figuring this out. When applying for grants, we assess whether the funder has any relevant guidance about acceptable indirect-cost rates, and as a default we ensure that our development and finance staffs include at least a modest indirect rate, if allowed. However, there are still power dynamics in play, and it will remain hard to raise this issue if the funder’s guidelines say nothing about indirect costs or if the guidelines include a cap. And even funders that say they will cover indirect costs may place different restrictions on which ones and at what rate.
We have not yet made a consistent push to use what we learned from the pilot analysis to strengthen our approach to counter the prevailing notion that overhead is bad. We expect it to be easier to talk about all this with existing donors than with prospective new ones. The more this conversation is had openly in the field, the easier it will be for us, and other nonprofits, to consistently advocate for the resources we need to make our programs and organizations successful.
We think there is at least one simple thing that funders could do now as the first step toward more open conversation: state on their websites and in their grant guidelines their approach to indirect costs. In addition, indicate whether they are open to discussing costs with grant seekers — an approach that is now relatively rare. Even if funders largely stick to their existing caps, just opening space for grant seekers to make their case would transform the situation to one of analysis and inquiry rather than assumptions and lack of dialogue. Nonprofits, of course, have to do their research and preparation for each proposal. But because of the power imbalance between grant seekers and grant makers, funders taking the lead in opening up this conversation could go a long way toward changing that dynamic.
Josh Solomon is chief operating officer of Generation Citizen, and Isa Ballard is finance manager. Generation Citizen works to ensure that every student in the United States receives an effective-action civics education, which provides them with the knowledge and skills necessary to participate in our democracy as active citizens.