Recently this column highlighted problems that arise for nonprofits when private foundations and corporate funders don’t support reasonable overhead cost reimbursement in their grants.
Ignoring these real costs weakens nonprofits and forces them to expend additional resources to cover them by other means.
The same quandry exists for nonprofits receiving grants or contracts from local, state or federal governments, often referred to as pass-through funding. In 2012 that quandry may have impacted as many as half the nearly 56,000 nonprofits that received $137 billion in government contracts and grants.
While the majority of these nonprofits were large, 47 percent with operating budgets of $1 million or more, 53 percent had smaller budgets, with 32 percent operating on budgets between $100,000 and under $250,000.
The figures were reported in a nationwide study published by the Urban Institute in December. One in four nonprofits participating in the study reported being paid nothing for the indirect costs of programs funded by government contracts and grants. Half were limited to receiving 7 percent or less of these costs.
Imagine trying to run programs and services without adequately covering your real costs for heat, lights, managerial oversight and accounting, to name a few.
In late December, new guidelines from the federal Office of Management and Budget addressed this problem — at least in the government arena — with its new “Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards.”
The guidelines require state and local governments using federal funds to reimburse their nonprofit contractors and grantees for “reasonable administrative or overhead expenses.”
A related victory for nonprofits in the new OMB guidelines is that in some instances program administration can now be reported as a direct rather than indirect cost. Another significant change is an increase in the threshold for requiring a single audit for government grants and contracts.
Now nonprofits receiving $750,000 and above must be audited. Previously, an audit was required for nonprofits receiving $500,000 and above. This increase allows nonprofits, still needing to watch every penny, to spend less while benefiting from government-received income.
The positive impact of the OMB guidelines is expected to be felt, too, by nonprofits not currently enjoying government grants or contracts. With the decreased need of nonprofits to make up their indirect costs elsewhere, competition for funding in the “philanthropic marketplace” may decrease.
It’s also hoped the acknowledgment by OMB will get the attention of corporations and foundations whose grants funding still operates under the 7-10 percent indirect costs principle. Conversations and policy changes about these issues are already happening in leading-edge philanthropic organizations.
To benefit fully from the new guidelines, nonprofits advocate the National Council for Nonprofits recommends nonprofits up their game in several areas.
First, they must be able to accurately identify and track their real overhead costs. Second, they’ll need to develop the skills for negotiating higher reimbursement rates with government organizations. Third, since no additional monies were added to available government contracts and grants funding with the new guidelines, nonprofits must “become more adept at advocacy on appropriation and tax matters.”
This advice will be more of a challenge for those smaller nonprofits seeking government contracts and funding. But these skills are badly needed and well worth it in the end, as these organizations can least afford to be underpaid for their real costs.
If over time the OMB’s policy expands throughout the philanthropic sector, it will significantly change the way nonprofits have had to function.
Grant money will be able to support more fully staffed programs. Nonprofits can back off the endless special events needed to recover their operating costs. More staff will be able to focus their time on mission, not money.
Nonprofit leaders can help make it happen by letting their key funders know about these new developments and through honest dialogue with them about the problems unreimbursed indirect costs bring to even the best run nonprofits.
Sarah Todd is principal of Change Pioneers, a resource for positive social change. She can be reached at 912-224-2120 or changepioneers@gmail.com.