Are your grantees spending too little on overhead? Or are they under-reporting how much they actually spend on such expenses? Chances are, both, according to the Bridgespan Group. In an article in the Fall Stanford Social Innovation Review, the nonprofit consulting firm’s Ann Goggins Gregory and Don Howard write that nonprofits under-spend and under-report operating expenses because they feel anti-overhead pressure, especially from funders. Although nonprofits need to be more assertive in reporting how much it costs to run their organizations, Gregory and Howard say that funders should take the initiative to stem what they call a “vicious cycle” that is “slowly starving” nonprofits. Based on Bridgespan’s research, foundations generally only allow overhead or indirect expenses to total 10 percent to 15 percent of each grant, when the true cost percentage is likely to be twice that. And this compares to an average for-profit rate around 25 percent of total expenses. In fact, the authors cite a survey reporting that most funders realize their overhead allocations don’t adequately cover grantees’ needs, but they proceed as usual anyway. The authors call for a coordinated, sector-wide effort to put pressure on foundations to curb their unrealistic expectations about overhead.
Beyond confirming a wealth of prior research that finds an unhealthy obsession with low overhead costs in the sector, this article underscores the general need for foundations to be more actively engaged in candid and realistic discussions with their grantees. There is a crucial need for more general operating grants, especially given the difficulty many nonprofits are having staying afloat during the recession. However, this need for general operating support will not fade as the economy recovers.