CalNonprofits Articles

CalNonprofits' Nonprofit Overhead Project

Imagine you went to your local coffee shop tomorrow and ordered a coffee. But, instead of paying the posted price of $2.50, you told the owner you only wanted to pay $1.50 to cover the direct costs of the coffee -- not the rent, insurance, or accounting expenses necessary to run her coffee shop.

This type of problem has plagued nonprofits for years- funders (including governments) who were willing to pay the direct costs of a nonprofit program, but unwilling to fund (or fully fund) the indirect costs incurred by the nonprofit in order to administer the program, like rent, insurance, or accounting.

In 2015, as new guidance from the federal government went into effect, it created an opportunity to take on this problem, and CalNonprofits' Nonprofit Overhead Project was born. We're including an update on what we've accomplished and what we have planned for 2018 below. Improving nonprofit grants and contracts isn't necessarily high profile or glamorous work, but it is high impact. By accelerating the implementation of the Office of Management and Budget Uniform Guidance, hundreds of millions of dollars are flowing and will continue to flow to fund essential operating costs in nonprofits. This can help stop the nonprofit starvation syndrome too many organizations face, in part because of unreasonable grants and contracts that don't cover the full costs of providing programs.

We look forward to continuing our collective work towards supporting nonprofit financial sustainability and we welcome your feedback and perspectives.

Update on our activities and our plans for 2018

1. LA County pilot project to simplify contracting
In California, nonprofits most frequently receive government funds through county governments. Much of this funding may originate as federal or state funds, but it is awarded and administered by county agencies. With the super-important OMB Guidance becoming effective in 2015, we've done more than 25 workshops and in-person meetings on this, plus 12 webinars involving well over 500 California nonprofit folks, to help nonprofits understand their own indirect costs and to negotiate for better, OMB-compliant rates. Although implementation of the OMB Guidance is not yet universal, it is continuing to go forward (government rules can take a long time to be fully implemented!).

Along with the LA County Chief Executive Office, the Weingart Foundation and the Los Angeles members of our Nonprofit CFO Task Force, we've been working to launch a pilot for nonprofits that have contracts with multiple LA County departments. This experiment would allow one department to negotiate an indirect cost rate with a nonprofit that would then be applicable to all the contracts that nonprofit has with LA County. (Right now it's not uncommon for a nonprofit to have six, seven or more different indirect cost rates in different contracts.) This would make it easier for county administrators, easier for nonprofit finance staff, and make it easier for everyone to be in compliance with the OMB Guidance, resulting in fairer overhead cost rates for nonprofits.

Next steps: This pilot -- hopefully -- will lead to a larger, revised pilot that can also be extended to other counties. With approximately one-third of nonprofit revenue coming from government, moving the needle on indirect cost rates -- even a little -- keeps nonprofits from having to sign financially disastrous, underfunded contracts.

2. Working with California State Association of Counties to improve overhead rates and administration in county-nonprofit contracts
Recognizing the mutual interest of counties and nonprofits in streamlined, fair contracting practices, the California State Association of Counties (CSAC) and CalNonprofits have conducted workshops on the OMB Guidance. Perhaps more importantly, these have provided rare opportunities for county administrators and nonprofit leaders to discuss the nuts and bolts of contracting and to understand the others' point of view.

Next Steps: In 2018 we anticipate additional workshops in partnership with CSAC.

3. Advocating for reasonable overhead rates in the context of budget cutbacks in human services, health, environment, and the arts
Since the start of the Nonprofit Overhead Project, new, substantial threats have arisen to government funding in all areas of the nonprofit community's endeavors. The pressures on government frequently translate into nonprofits being asked to "do more with less." But we cannot allow our shared commitment to communities to lead us to accept contracts that make it even harder to pay reasonable wages and maintain the internal infrastructures that are essential to our work. Next Steps: As financial pressures on government increase, we are also watchful for more frequent problems with late payments on undisputed invoices -- already a longstanding issue hurting nonprofits.

4. Advocating with the foundation community on the importance of unrestricted funding and of program-based funding that supports the full costs of those programs
Over the past two years, we've seen very strong discussions in the foundation community on the importance of funding the "full costs" or programs. Too often, foundations and philanthropy take the stance of "funding programs, but not overhead," even going so far -- for example -- of funding meals for seniors but not the staff that cooks them or the rent on the space where they are served. The result is foundations inadvertently contributing to the nonprofit starvation syndrome, where nonprofits struggle to deliver impact with inadequate funding.

Next Steps: Particularly with the likelihood of decreased government funding, foundations need to be sure their grantmaking practices do not exacerbate financial problems in nonprofits. As the landscape continues to change rapidly, more than ever nonprofits need unrestricted, core support funding to enable them to adapt quickly and responsibly. We applaud the new and growing awareness of foundations about the priority of nonprofit financial sustainability.

5. Using our research to support nonprofits in crafting fundraising messages related to overhead
Our research (including our recent article in Nonprofit Policy Forum journal) has included interviews with county elected and administrative officials and with random samples of mid-level California donors. This research shows that government officials, foundation staff, and individual donors are receptive to different messages about overhead.

Next Steps: Look for a report on this research in the near future.

You can visit the Ovehead Project here.

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