The Ford Foundation works with thousands of nonprofits, each with different needs and structures. Yet its program grants pay for related indirect costs at a single rate — 20 percent of the grant.
Such one-size-fits-all grant making ignores enormous variations in nonprofit costs and virtually guarantees that grantees are shortchanged, according to a new study. Digging into the finances of a small sample of nonprofits, the report found that indirect costs ranged from 21 percent to 89 percent of direct costs. The median indirect cost rate was 40 percent, more than two-and-a-half times the 15 percent reimbursement rate common among major foundations.
“Our sense is that the way we finance nonprofits is broken,” said Jeri Eckhart Queenan, a co-author of the report by the Bridgespan Group, a nonprofit consultancy. “What we see in the data is that one-size-fits-all just doesn’t work. Many funders are systemically and chronically underfunding the very nonprofit organizations that they rely on to achieve impact and solve society’s most pressing problems.”
The report calls for research to establish benchmark indirect-cost rates based on various types of nonprofits. A local arts organization, for instance, might have a lower reimbursement rate than an international development group with staff around the globe.
Ms. Eckhart Queenan said Bridgespan is working on such ideas with Ford and other large foundations. “We’re very excited about that,” she said. “We’re also mindful of how hard this is. Each of them has a different portfolio, different types of grantees, different challenges.”
More Sophistication
The report arrives at a time when advocates of new approaches to nonprofit financing point to changing attitudes about overhead costs and traditional grant making. Jacob Harold, CEO of GuideStar, said the Bridgespan report is one of several efforts to analyze the economics of social change. “I’m excited about this,” he said. “It’s an indication of the field getting more sophisticated about some really hard questions.”
Antony Bugg-Levine, head of the Nonprofit Finance Fund, called the Bridgespan report a “positive contribution” to the conversation about financing alternatives. But he cautioned that foundations, armed with benchmarks, might simply set new indirect-rate policies rather than work with grantees to understand their true costs.
“We have this little bit of an opening in the conversation about what it takes to provide organizations with the full funding they need,” he said. “It would be unfortunate if all that energy is absorbed into simply renegotiating indirect rates.”
‘Shadow Economy’
In its report, Bridgespan studied 20 nonprofits with annual budgets ranging from $2 million to $650 million. They were a mix of direct-service and advocacy groups such as Good Shepherd Services in New York and Achieve, an education group in Washington, D.C.; global networks like Heifer International; and research organizations such as Seattle’s Center for Infectious Diseases Research.
The research labs in the study had the highest median indirect expenses, at about 63 percent of their full costs. The median for the others was 44 percent for international networks; 40 percent for advocacy organizations; and 25 percent for direct-service groups.
Bridgespan’s definition of indirect costs included administration; field and network operations; project-related equipment and facilities; and “knowledge management,” including staff with program and subject expertise.
The report notes that it’s common for program officers and nonprofits to tweak financial data to get around indirect-cost limits. “As a result,” it says, “we do not know as a sector what it really costs to achieve impact.”
Talking about this “shadow economy,” one nonprofit leader says in the report that her organization has two budgets, “one that has the real numbers, and another that shows the funders what they want to see.”
Note: An earlier version of this story said the report found that indirect costs ranged from 21 percent to 89 percent of total costs, not direct costs.
