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How Much Indirect Cost? Empower Nonprofits: Let Them Decide

Funders: Let's focus on making efficient grants, and stop micromanaging nonprofits’ indirect costs Tweet This

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For decades foundations (and government) have worried over how much indirect cost to allow their nonprofit grant recipients to charge on grants. Five percent? Ten percent? Some universities have government-approved rates over fifty percent. How much do nonprofits need? How much is too much?

But there’s a simple answer to the question—an answer we apply every day in our normal consumer lives: Don’t even ask. Let the marketplace decide.

When I buy a new car or a bottle of wine or really, anything, I never know how much of the price is going to the company’s accounting department or the CEO’s salary as opposed to the cost of the materials in the product. I don’t care. All I want is the best car or the best wine for a single price that I consider affordable.

Foundations should be making grants where what the nonprofit accomplishes is worth whatever it costs the nonprofit to accomplish it.

And so too it should be for foundation grants. Boards and staff of foundations have been entrusted with responsibility for putting donors’ funds to their best use, to obtain as much public good as possible with the money entrusted to them. Foundations should be making grants where what the nonprofit accomplishes is worth whatever it costs the nonprofit to accomplish it. If the total cost is too high and, therefore, the program ceases to be worth the cost, then the grant shouldn’t be made and the foundation should grant its funds elsewhere.

In the private sector, it’s called market competition. Companies typically compete to provide the best service for the best price. Companies have to control costs unless they offer a unique or extraordinary product.

So rather than trying to micromanage how nonprofits manage themselves, foundations might simply tell them: Apply to us for the total cost of delivering your program, inclusive of direct and overhead costs. But recognize that you are competing with other applicants delivering programs at a cost too—and our foundation wants to see the most program delivered to the community for our donors’ dollars.