Failure to Fund Overhead Penalizes Nonprofits, Study Finds

Funders' reluctance to fully fund overhead costs prevents many nonprofits from maximizing their impact, a report from the Bridgespan Group finds.

According to the report, Pay-What-It-Takes Philanthropy, the typical 15 percent cap on reimbursement for nonprofit overhead falls short, in many cases, of the actual indirect costs associated with the delivery of a service or services. In response to the finding, the report, which appears in the Stanford Social Innovation Review, urges grantmakers to re-think the 15 percent cap on nonprofit overhead reimbursement and calls for an approach that takes into account the actual costs associated with providing a given type of service, or what it calls "pay what it takes" philanthropy.

In conducting the study, Bridgspan examined the financial records of twenty well-known high-performing nonprofits and discovered that indirect costs make up a much larger percentage of their total costs than is widely understood. Indeed, for the study group, organizations' actual indirect costs comprised between 21 percent and 89 percent of their direct costs, leading the study's co-author and Bridgespan partner Jeri Eckhart Queenan to comment, "We now have proof that we are systematically and chronically underfunding nonprofit organizations, and this evidence should inform foundation and government policy on the reimbursement of indirect costs."

The report's authors also argue that there is no one-size-fits-all reimbursement model and explore how new models could be established by segmenting nonprofits based on what they do and how they do it, whether it’s providing direct service, working to influence policy, providing humanitarian assistance overseas, or conducting research. The article further notes that Ford Foundation president Darren Walker, one of the more outspoken foundation leaders on the issue, pushed his foundation to double its overhead reimbursement rate to 20 percent, and in so doing said he "hoped to encourage more honest dialogue about the actual operating costs of nonprofit organizations."