New Regulations Spotlight Nonprofit Overhead

By Henry Berman, Exponent Philanthropy

It’s January in Washington, DC, and there is no shortage of pundits, politicians, and pollsters with wisdom as to what the 114th Congress and President Obama will do, or try to do, in the coming year. As philanthropists faced with funding opportunities today, we are likely better served by looking back and taking notice of a real change in regulations that took effect last month. The change could – and should – have a significant impact on all of us who make grants.

The federal Office of Management and Budget (OMB) issued new regulations that rewrite the book on federal grantmaking in ways that will transform the relationship between nonprofits and governments at all levels – federal, state, and local.

The new rules mandate that nonprofits hired by government to provide services must be paid for the indirect costs they incur in doing so. In simple terms, OMB is declaring that nonprofits have overhead and administrative costs that should be paid. Kudos to OMB for recognizing the need to cover these costs that many of us as funders are called upon to help cover, effectively subsidizing what governments have, until now, refused to pay.

The National Council of Nonprofits (full disclosure: I serve on its board and here is why) began working closely with OMB in 2012 to include this important reimbursement for nonprofits into the rules.

The new rules apply only to federal agencies and “pass-through” entities using federal funds to pay contracts or grants to nonprofits, so technically don’t apply to private grantmakers. Yet all of us in the funding community have a responsibility to be sure our grantees and other nonprofits who contract with government at any level are aware of this new rule. 

And there is a far greater obligation we all share. I firmly believe funders must embrace the spirit – if not the specifics – of the regulations and incorporate overhead funding into our grantmaking.

Call it overhead. Or administrative expenses. Look for it as a line item in a proposal or perhaps as a request for general operating expenses. That really doesn’t matter. What does matter is that funders – whether foundations, trusts, individuals, or giving circles – understand what it takes to run a nonprofit. We can buy all the books we want for a literacy program, but, if the school can’t afford to heat the building, it isn’t hard to recognize that no learning will take place during the winter.

Don’t agree? Next time your board meets during the winter, turn the heat down to 45 degrees (or the set the air conditioning to 85 degrees for those in warm weather locations) and see just how focused and productive you are after a few hours.

Frankly, not recognizing that nonprofits have overhead costs is absurd. If we are leaders and funders who really want to make change, regardless of our program area, we need to be willing to help pay for that change. To be clear, I’m not suggesting funding overhead in lieu of programs or specific projects. I am saying that each of these has associated overhead costs that are equally important to a successful endeavor.

No matter what you call it, overhead is not a luxury. It is a necessity. Imagine trying to run your household without spending any of your income for heating and cooling, electricity, cleaning, or that new smartphone.

Let’s be the leaders we aspire to be. Let’s use the new rules as a catalyst for embracing overhead funding and, in doing so, enrich the culture and impact of philanthropy.

The reality of overhead: Recognize it. Understand it. Fund it.

Read more and share with your grantees this special edition of Nonprofit Advocacy Matters, published by the National Council of Nonprofits.

Henry Berman became Exponent Philanthropy’s CEO in 2011, previously serving as acting CEO, board member, and committee member. Through his experience as a foundation co-trustee and Exponent Philanthropy member since 2003, he brings a firsthand understanding of the needs of members to his role. Follow Henry on Twitter @Berman_Henry.