A grant-making process that works is one that provides enough money for nonprofits to pay for all their operations, not just programs and services. While the needs of every nonprofit will vary depending on what they are doing, when any nonprofit organization is able to invest adequately in staffing and infrastructure they are better able to carry out their missions.
Anytime foundations or individuals donate to an organization, they expect their money is going directly to impacting the nonprofits mission – sheltering displaced animals, feeding children, providing care to the elderly – and not to paying for things like office space, salaries, or equipment. Instead of paying for all of a nonprofit organization’s indirect costs, most U.S. foundations allow an organization to allocate only a small percentage of its grant to paying overhead – typically 15 percent – with the bulk of the grant having to go towards direct program-related expenses. This leaves nonprofits scrambling to make up the difference when they fall short.
It is critical to the success of any nonprofit that they are able to invest in things like information technology systems, skills training, marketing and program administration as it leverages them to have a higher success rate than those that do not. Yet funders are still reluctant to provide operational funding to be spent at the discretion of the nonprofit’s management. This bolsters a vicious cycle by straining the very systems that allow a nonprofit the success of delivering services because it creates increased dependence on antiquated systems that often end up increasing overhead and reducing time spent on fulfilling an organization’s mission.
Each year, every nonprofit should be performing an assessment of what it actually costs to operate its business, administer its programs, deliver its services and measure its success. Right now too many organization’s functional expense allotments are unrealistic and intended to show the least amount of overhead. It’s important that nonprofit leaders understand exactly how much is spent on all aspects of their operations, including both the direct costs and indirect costs so they can articulate that information to funders – explaining how you came up with the figures, why you included overhead costs and why you need support for all of those costs in order to effectively run the program.
Ford Foundation President Darren Walker doubled its “overhead rate” (the percentage above direct project costs that can be used to pay for indirect costs) to 20 percent as of January 1, 2016. In doing so, he hoped “to encourage more honest dialogue about the actual operating costs of nonprofit organizations” to other funders.
Additional funders such as the Weingart Foundation, the William and Flora Hewlett Foundation and the newly formed Real Cost Project, are also moving towards the paying-what-it-takes philanthropy by working with grantees on new application processes and providing tools to help them better understand their costs. If you know the real cost of providing services and operating your organization you can begin the process of identifying what investments should be made to improve service delivery, information gathering and reporting and evaluating funding opportunities to determine if the funders expectations are achievable. When funders are obsessed with measuring their impact on a per-dollar basis, it can have overall crippling effects on the communities nonprofits are serving.
There is still much work to do in getting nonprofits the money they need to fund the full costs of their work and change may not happen immediately, but if you know the real cost of providing services and operating your organization you can begin the process of educating your donors and having an open dialogue with them. Nonprofit leaders must have the confidence to ask for the funding to cover those costs and stop accepting less than what the nonprofit really needs.