A group of five leading foundations has been experimenting with funding practices designed to address the nonprofit "starvation cycle" — a popular term for the chronic underfunding of nonprofits — a report from the Bridgespan Group finds.
Based on a two-year collaboration led by the Ford, Hewlett, MacArthur, Open Society, and Packard foundations, the report, Momentum for Change: Ending the Nonprofit Starvation Cycle (PDF, 37 pages), found that more than three-quarters of U.S. foundation giving and nearly all government funding is awarded in the form of project grants, which routinely discount a nonprofit's core administrative and operational costs. At the same time, foundations involved in the collaboration learned that the indirect costs of grantees in their portfolios exceeded what the foundations actually paid by an average of 17 percentage points; that more than half of the best-funded nonprofits suffered chronic budget deficits; and that more than 10 percent of the nonprofits had negative reserves and were technically insolvent.
According to the report, the practice of underfunding or ignoring indirect costs — defined as expenses that are not directly tied to a specific project but instead are shared across multiple projects — in project grants was the result of postwar government policy focused on research and development at universities, with Congress passing legislation in 1958 that capped the indirect-cost rate at 15 percent.
Guided by a shared understanding of the problem and the needs of both funders and grantees, the five foundations identified a menu of alternative grantmaking approaches that include flexible enterprise-level funding — variously known as unrestricted or general operating support — and, in hybrid contexts, more flexible programmatic support, as well as project funding that eschews the indirect-cost rate altogether in favor of all-in project pricing or funding determined by outcomes.
"Indirect costs include essential capabilities that drive impact, such as executive leadership, information technology, strategic planning, and knowledge management," said Jeri Eckhart-Queenan, a partner at Bridgespan and co-author of the report. "When you underfund these indirect costs, you limit a nonprofit's ability to do its best work. Through the five foundations' collaboration and research, a consensus emerged that the solution for insufficient cost recovery must be adaptable to accommodate more than one way for funders and nonprofits to proceed, and it must provide some degree of standardization to increase transparency and facilitate scale."
(Image credit: Gettyimages, Sakkmesterke)