A Funder's Message to Other Funders About Overhead

This article is adapted from a presentation made to Grantmakers for Effective Organizations (GEO). Our deepest thanks to Unmi Song for speaking these truths:

Good afternoon; I am Unmi Song, President of the Lloyd A. Fry Foundation. The overhead issue is one of the most important -- and most neglected -- topics that funders should be thinking about and discussing.

There is a lot of buzz around "impact" and "outcomes" and "evidence-based practices." But there is not enough buzz around what it takes for nonprofits to achieve these things.

What I've learned recently is that the assumptions we funders have about overhead are wrong! If we think we know how one nonprofit calculates overhead, we are probably wrong. The variation in practice is extremely wide. And accounting principles -- surprise! -- provide little guidance.

So we need to have a conversation with the organization. We can't assume we know what they mean when they say overhead.

Fear of talking about overhead

But this was even the bigger lesson for me: many nonprofits are afraid to initiate a conversation about overhead with their funders. And this fear is partly because they have their own assumptions about us: that we funders are unwilling to fund overhead.

I didn't think that we at the Fry Foundation were so different, and I'm still not sure that we are. The Fry Foundation wants to cover overhead expenses: we believe they are essential for the operations of a well-run organization.

I also want to point out that indirect costs are not the same as administrative overhead. Indirect generally refers to "fixed costs" (as compared with variable costs). What most people think of as indirect costs -- such as rent, utilities, office supplies, technology -- are not administrative or overhead costs. They are program costs. They absolutely should be in all program budgets: it's impossible to run a program without these expenses! Such expenses should be appropriately allocated across all programs.

In addition, the budget for an effective program should also include staff training and professional development: activities necessary to keep up on the latest research and understand best practices. If an organization does not provide high quality training for staff, it is not likely to have an effective program. If they do train their staff, those expenses should be in their program budget and we as funders need to cover them.

New software? Staff training?

Every once in a while we get a request to send staff to a conference or to buy new software. If you ask me, those costs should not be covered through special one-off requests. Those costs should be in every program budget. After all, how do you run an effective program with outdated software? How do you manage high-performing staff if you don't provide training and effective supervision?

Having the Conversation

Here are some discussion items we typically take up with grantees:

  • What are the components of your line item called overhead or administrative expenses?
  • We are concerned because this number seems too low/too high to us . . .
  • The budget in your proposal doesn't have any indirect costs or overhead in it; let's discuss what is needed.

When we as grantmakers do not have these conversations, we inadvertently enforce an implicit cap on overhead. We are not encouraging nonprofits to make the investments necessary for strong budgeting, improving programs, and maintaining quality.

Our strongest grantees -- the ones with the most effective programs and the strongest outcomes -- are the ones who:

  • Provide the most and the strongest training to their staff
  • Do the most research into evidence-based practice
  • Have the strongest and most rigorous monitoring and assessment programs.

Such activities are not "overhead" activities to be kept as low as possible.

This conversation about overhead starts with the acknowledgement that an overhead rate is not a meaningful measure of very much; it is certainly not a measure of effectiveness or even efficiency. Talking about overhead is almost a distraction.

The conversation needs to get to how to allocate costs in a meaningful way: in a way that provides insight into efficiency, the effectiveness of scarce resources, and in a way that helps us understand the outcomes we are getting from society's investments.

And we as grantmakers are the critical link. Grantees are not going to bring this up to us. We have that responsibility. If we do not initiate the conversation, it won't be had. It's too important an issue to continue to be ignored.

Unmi Song is President of the Lloyd A. Fry Foundation in Chicago. The Fry Foundation helps organizations which serve low-income families in Chicago:

  • Build capacity to enhance the quality of services and better assess the impact of programs;
  • Develop successful program innovations that other organizations in the field can learn from or adopt; and
  • Share knowledge so that information which can help low-income communities and individuals is widely and readily available.

Unmi enjoys having a roof "overhead" and the technology to share Blue Avocado with everyone she knows. :)

See also in Blue Avocado:

Comments (14)

  • Anonymous

    Thank you Unmi for recognizing this important issue and sharing it!

    Apr 22, 2014
  • Anonymous

    Great article. More funders and grantees need to recognize the important difference in indirect vs. admin costs.

    Apr 22, 2014
  • Anonymous

    Ok, good article. But what is considered "Administrative" costs and what is considered "indirect" costs? Are they the same?

    Apr 22, 2014
  • An excellent and frequently asked question! Sometimes Administrative and Indirect costs refer to overlapping expenses; often they are different. It all depends on an organization's definition and accounting approach. Indirect costs usually refer to costs which are "fixed" for the organization but which get allocated to programs because the programs use those expenses. These include things like rent, utilities, technology expenses. Administrative tends to refer to expenses that relate to the organization overall or supervisory staff, including finance, human resources, legal expenses, liability insurance, fundraising, board related expenses, corporate office expenses. I would welcome other comments and clarifications on this.

    May 02, 2014
  • Anonymous

    I hope that funders should reconsider increasing the percentage of the overhead cost from 5% to 15%.

    Apr 22, 2014
  • Anonymous

    Good article!! Thank you.

    Apr 23, 2014
  • Anonymous

    Our auditor tells us that our 15% admin/fundraising share is simply not sufficient for an organization of our size, that it indicates too much vulnerability to loss of key staff members who are carrying unreasonable loads. She says that a healthy nonprofit should be in the 25-35% range for these activities - yet many granting organizations will only pay 10-15% for them. Thank you for opening the discussion.

    Apr 25, 2014
  • Anonymous

    Thank you, Unmi, for raising this important and often maddening issue. In addition, I would like to remind funders that livable wages and supportive benefits must be included when they consider the real cost of doing business. At Third Sector New England, we have just completed a regional compensation study - a snapshot of the salaries and benefits of over 200 nonprofits in our region. From our sample data, one of the alarming findings is that 43% of the employees represented in this survey are earning less than $28,000 per year. Given the costs of housing, student loan payments, child care and other necessary expenses, this basic salary falls short of a living wage. This is especially concerning to those of us who believe a nonprofit career, even a career working in the smallest of organizations, should be a viable option for anyone who wants to travel that path. Better wages and benefits contribute greatly to developing a professional, high-performing staff for nonprofits and ultimately for the funders invested in their success. One should be able to dedicate their life to doing good without having to do without. And funders need to remember that livable wages don't constitute excess. Findings from our 2010 Compensation Survey are on available at http://tsne.org/valuing-our-nonprofit-workforce-2010 The new study will be available on our website by June 1. Lyn Freundlich Director of Administration and Human Resources Third Sector New England

    Apr 28, 2014
  • Thank you for your comments. Paying family supporting wages is so important. I would add that I am concerned the nonprofit sector is not doing enough to provide retirement benefits.

    May 02, 2014
  • Thank you for posting this talk. It's very much appreciate with its emphasis on Funders need to help reset the context and expectations related to nonprofit resilience and effectiveness. I would concur with Lyn Freundlich of Third Sector New England that Funders also need to start to look at the salaries and benefits of those working in nonprofits at the "lower" end of the scale. There is too much fragility within the nonprofit sector that is masked by the larger salaries of the E.D.s and development directors. Best, Judy Anderson, Community Consultants

    Apr 30, 2014
  • Anonymous

    It includes overall estimation cost of the project where not only direct expenditure related but indirect cost is also comes.Indirect cost means external expenditures includes which is use on project.read more

    May 01, 2014
  • Anonymous

    Providing funds for programs but only for overhead, indirect or administrative costs is like providing funds for a race car but not the gas. Good luck crossing the finish line!

    May 01, 2014
  • Anonymous

    Indirect cost is that which is use on project not only in the form of all that expenditure which are easily to predict but also that one which are excluded from that project.Within indirect cost you can estimate all the expenditure.Read more

    May 01, 2014
  • Ms. Song, I just want to say that you just won over a personal fan. As an executive director for a nonprofit, I can't tell you how many foundations that claim they are helping with capacity building refuse to pay the true cost of running a nonprofit. My organizations have PhDs, environmental engineers, etc. I once asked a foundation officer how much they pay for their car mechanic per hour. He told me $150-$200+/hr, but I wasn't allowed to charge more than $60/hr for my staff.

    This distinction between indirect rates and overheads are not understood by many. I feel that I am on the losing side because I refuse to take funds that do not pay for overhead without knowing how it will be otherwise subsidized.

    Truly, if they had a foundation hero, you would win the award. Please, please keep telling this story! I wish I could send you along to some of these foundations that have no clue about this stuff.

    Aug 27, 2015

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