NPT Instant Fundraising Newsletter

Foundations Willing To Fund Nonprofits' Overhead

By Marla E. Nobles
A recent study showed a surprising disconnect between the willingness by most foundations to fund overhead costs, and either a lack of awareness or an unwillingness by nonprofits to accept that support.

The study found that more than two-thirds of the foundations surveyed said they're willing to fund all types of nonprofits' overhead costs. On the other end, many nonprofits are hesitant to use foundation funding to cover overhead costs despite some claiming inadequate infrastructure, according to "Paying for Overhead: A Study of the Impact of Foundations' Overhead Payment Policies on Educational and Human Service Organizations."

"They're afraid they'll become addicted to (the support), and the funding source then will go away in a few years," said Patrick Rooney, director of research at the Center on Philanthropy at Indiana University and co-author of the study. According to Rooney, the nonprofits surveyed cited worry that the tendency by foundations to fund short term would leave them in worse shape, in terms of administrative funding, once the grant runs out.

The study surveyed foundations and nonprofits, and included case studies of educational and human service organizations to provide context to the survey results.

Results from the foundation survey indicate that 18.5 percent of foundations do not fund any type of nonprofits' administrative or fundraising costs. Slightly more than 12.5 percent fund only some types, and 69 percent fund all types of overhead costs. Foundations are much more likely to fund nonprofits' overhead costs when they're part of a program budget, according to the study.

The current state of overhead funding differs by organization size and type. The study found that the more revenue raised by an organization, the more likely they were to report adequate overhead funding. Of those nonprofits reporting adequate funding, nearly 40 percent received more than $1.5 million in charitable revenue each year, and were more likely to report no foundation funding. Educational organizations were more likely to report adequate funding for overhead, and human service organizations were the most likely to report under-funding.

More than half of the nonprofits surveyed attributed their inadequate overhead funding to foundations desiring to support programs and not administrative expenses.

Case study results found that nonprofits with good or excellent infrastructure had diversified funding (i.e. they did not solely rely on foundation support) and had a high percentage of unrestricted funding, which could be used for overhead, yet they were still chronically understaffed.

"So, on the one hand, they have good or excellent infrastructure relative to many other nonprofits, but it's things like, they've got an IT system that works, they've got a roof that doesn't leak," Rooney explained. At the same time, many nonprofits are hesitant to commit to ongoing, recurring costs of staffing, accounting practices, and other resources that are integral to most organizations' infrastructure.

Although the study does not examine the long-term trends, Rooney said there's evidence of an enduring problem, and the implications for nonprofits, large and small, are daunting. Said Rooney: "They face this every year: How do we pay for overhead costs?"

Rooney advised nonprofits initiate conversations with foundations around the application for operating support, and ask that they include operating support as part of their project-supported grants. "Foundations are more amenable to this than nonprofits may suspect," said Rooney, who also advised having discussions with foundations about renewing support from year to year.

"The other piece is that for nonprofits, the ones who were able to diversify their funding streams -- for instance, use gifts from individual donors, corporations, and earned revenue to help pay for the infrastructure as well as programmatic costs -- they're more likely to be able to withstand a hiccup in one stream of earnings," said Rooney, "and not have all their eggs in one basket."