For anyone who cares about the health and viability of the nonprofit sector, recent regulatory changes in the way the federal governments fund nonprofits deserve attention. The new rules stipulate that nonprofits should receive additional funds to cover their indirect costs.
Indirect expenses, overhead, administrative costs: these terms mean roughly the same thing in the nonprofit sector. They are costs associated with running the non-constituent-facing operations of an organization. This includes such indispensable organizational activities as fundraising, executive management, human resources, and information technology.
Regardless of what service or program a nonprofit is delivering, it cannot do so without adequate funds to pay for these operational needs. Under the new regulation, nonprofits are now able to seek reimbursement for more of these indirect costs when they receive funding under federal government contracts.
What is at stake?
Many nonprofits do extraordinary, transformative work in neglected and under-resourced communities. But they are typically underpaid. Bridging that gap — between what nonprofits are paid for their services and what it costs them to deliver those services — remains one of the most pressing issues of organizational health and sustainability across the sector.
This is a story I hear every day. My firm, Fiscal Management Associates (FMA), has worked exclusively with nonprofits, foundations and government for the past 15 years to strengthen financial and operational acumen. We are deeply invested in instilling a spirit of operational excellence across the sector.
Making much happen with meager resources is, unfortunately, more the norm than the exception for nonprofits. A client of mine recently faced more than a hundredfold increase in their operating budget for community programs — from $500,000 to over $5 million — in less than six years. Despite this significant growth in programming, their administrative staffing and infrastructure remained largely untouched. This particular organization continued to thrive — delivering high-quality services to families in underserved communities while attending to the many demands of high-profile funders — through the sheer force of will and prowess of a virtuoso Executive Director.
But relying on exceptional individuals in the absence of appropriate business processes and systems is a recipe for chaos when it comes time to change the guard. It is also unfair to those who rely on the smooth delivery of sometimes life-sustaining services.
One of the consequences of the chronic under-investment in nonprofit administration is that finance staff become a neglected constituency within the organization, detached from the programming lifeblood. When the excitement, mission glow, and attraction of grant dollars lie elsewhere, the back office becomes a forgotten part of the organization.
This status quo is exacerbated by the anemic funding most nonprofits receive for their administrative functions. It is not uncommon to hear nonprofit leaders say that funders and donors would prefer having their names associated with an innovative program rather than pay for the salary of a skilled controller to manage the books.
There are exceptions of course. FMA’s capacity-building work with nonprofits is often underwritten by philanthropic partners who understand well the relationship between mature business processes and stable, effective programming. These funders intuitively get that organizations that are not distracted by chronic cash crises and that have faith in the integrity of the data in their systems have greater management bandwidth to devote to their core business.
The overhead battle is hardly over. It’s true, as the new regulation trickles down to countless government agencies, nonprofits will receive additional cash for programs that have tended to cost them more to deliver than they were paid, freeing up dollars that were used to plug the deficit. But, there is concern that the funding increases still won’t cover the full cost of program delivery.
The bigger win of the regulatory change is this: With a shift in thinking on what constitutes fair pay for nonprofits, the federal government is signaling that the sector matters, as do the populations it serves.
We can hope that this recognition will extend beyond the federal government’s relationship to its nonprofit contractors, sparking heightened awareness among foundations and donors about the full costs associated with running a nonprofit in a responsible, effective and sustainable way. After all, as anyone who has been party to a salary negotiation can attest, part of feeling valued is getting paid.