A Funder’s Message to Other Funders About Overhead

Article Highlights:

• The assumptions funders have about overhead may be wrong.
• Fear of talking about overhead
• New software? Staff training?
• Having the Conversation

The assumptions funders have about overhead may be wrong.

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

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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.

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