The John D. and Catherine T. MacArthur Foundation has announced that, starting in 2020, it will support an indirect cost recovery rate of 29 percent on all new project grants, nearly double its current rate.
The foundation's decision to boost the indirect cost recovery rate is based on an analysis of Form 990 data from more than a hundred and thirty thousand nonprofits which found that the minimum indirect cost rate of financially healthy organizations is 29 percent, which includes costs associated with finance and accounting, human resources, bank fees, board meetings, and fundraising. The new policy does not apply to general operating support grants, endowment grants, or grants made to large, well-established organizations for the purposes of supporting the general operations of a separately managed center.
The change has its roots in a collaborative effort announced by the MacArthur, Ford, Hewlett, Open Society, and Packard foundations to address the chronic underfunding of nonprofits. Based on a Bridgespan report which found that the indirect costs of grantees in their portfolios exceeded what the foundations actually paid out by an average of 17 percentage points, the foundations identified a menu of alternative grantmaking approaches that includes unrestricted or general operating support, more flexible programmatic support, and all-in project pricing or funding determined by outcomes.
"Our hope is that the collective efforts of several funders committed to examining the true cost of project grants and working to de-stigmatize and correct misconceptions regarding overhead expenses will lead to more funders adopting similar approaches," MacArthur Foundation president John Palfrey wrote in a blog post. "After all, these basic expenses are not only necessary to carry out the work but to grow and increase the impact of that work. We hope to partner with our peers to help the sector clarify an indirect cost calculation — so grantees are better positioned to tell their financial story to funders, and foundation staff are well-equipped to support grantees’ work."
(Image credit: Gettyimages, Sakkmesterke)