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Misunderstandings and disagreements over "overhead" are common source of frustration both for nonprofits seeking grants from foundations, and for foundation staff. Fortunately the national conversation in the foundation community is raising the issue in a reasonable, thoughtful way. In fact, as this article "goes to press," the PIMCO Foundation announced that it has asked its grantees to allocate 25% of grant funds to overhead in order to pay the full costs of the programs it funds(!).

Do foundations have policies about what percentage of overhead they'll fund in a grant?

Research shows that most foundations do not have written policies about overhead in grant proposals, although many have informal rules of thumb they apply. In addition, among foundations -- and often within the same foundation -- there is typically no shared or common definition of what constitutes "overhead." A recent effort in California paired focus groups in five cities, with each city having one with foundation staff and one with nonprofit staff (sponsored respectively by the Real Cost Project and the California Association of Nonprofits). Some findings:

• There is extreme variation in foundation practice related to funding overhead.
• Most foundations do not have written policies about nonprofit overhead, but there are often informal rules of thumb.
• The topic doesn't even arise with most small grants such as those of $5,000 or so. In these instances the grant is more like a gift or perhaps an event sponsorship.
• Many foundations have unwritten policies not to fund overhead at all, but even these have very different definitions of overhead. Some consider all salaries and personnel costs as overhead. Others might consider direct salaries -- let's say a museum curator -- as overhead, but not salaries such as those of the accountant, the janitor, or the executive director.
• Foundation practice can vary greatly within a foundation: one program area may have different informal rules than others, or one program officer may have a different approach than another.
• A few foundations have explicit rules, such as "15% of direct costs allowed as overhead."
• A very few foundations make a point of asking grantseekers about overhead to ensure than the foundation is funding a reasonable share of overhead.

I've heard about a foundation initiative on "Fund the Real Costs." Tell me more about it?

There are some efforts around the country to engage foundations in dialogue about the importance of funding the full costs of a given program -- not just its direct costs. Each has a number of excellent resources:

• In California, the Real Cost Project, a collaborative effort among Northern California Grantmakers, San Diego Grantmakers, and Southern California Grantmakers
• In Illinois: the initiative of Forefront (formerly the Doors Forum of Illinois):
• The National Grantmakers for Effective Organizations (GEO) has held many forums and discussions on the topic and compiles many articles on their site. The discussion of funding nonprofit overhead is related to the issue of giving unrestricted, core support, and there are many articles and OpEds on this topic available on the web as well.

I'm a nonprofit grantwriter: what should I put into a grant proposal for indirect costs? 

• Try to find out the usual practice by the foundation. If the foundation provides a budget form with pre-set line items, see whether "indirect costs" or "overhead" is a permissible line item.
• If you feel comfortable doing so, in an in-person meeting with your program officer about the grant proposal, ask: "Does the foundation have a rule of thumb about including a percentage of overhead costs in the proposal?"
• Ask other nonprofits funded by this foundation how they handle overhead in their proposal budgets.
• Wing it. "I don't put in any indirect costs unless they've told me to do it," one executive director told us. But others take a different tack: "I put in 15% and see what happens," one development director said. "Sometimes they pay it; sometimes they take it out."

I'm a foundation program officer. What could I be asking my grantees in terms of their overhead?

We suggest:
• Let prospective grantees know if your foundation has a policy or an informal rules of thumb about funding overhead, and how you define overhead.
• When discussing a budget in a grant proposal, consider asking the prospective grantee whether the budget includes a portion of costs such as rent, staff training, accounting, technology, and so forth. If it does, ask how they determined what portion of which costs to include. If it doesn't, ask how they pay for those costs -- perhaps from other funders, or from unrestricted donations, for instance.
• Talk to others in your foundation: this may be a good time to raise the issue by telling them about the Real Cost Project,a collaborative effort on overhead co-sponsored by Northern California Grantmakers, San Diego Grantmakers, and Southern California Grantmakers.

Where can I get more information on foundation grants and indirect costs?

Real Cost Project, a joint initiative of Northern California Grantmakers, San Diego Grantmakers, and Southern California Grantmakers
Donors' Forum's Commitment to Full-Cost Funding
Must-Reads from the Nonprofit Overhead Project

In April 2016 a joint effort of the California Community Foundation and the Weingart Foundation will be bringing together nonprofit grantees and foundation program officers from their two foundations to discuss indirect costs. Stay tuned!
Resources

A Funder’s Message to Other Funders About Overhead, by Unmi Song, President of the Lloyd A. Fry Foundation

Real Talk About Real Costs, from the Donors Forum of Illinois

If We Want Our Funding to Change the World, a short video from the Donors Forum of Illinois addressed to foundations and donors on the subject of overhead

The Truthiness about Overhead, from GMNInsight

The Overhead Myth: What Impact Really Costs, from Greater Public

Paying for Overhead: A Study of the Impact of Foundations’ Overhead Payment Policies on Educational and Human Service Organizations

The Real Cost Project

Increase Funding for Real Costs

Money Matters: The True Cost of Running Nonprofits (video)

NONPROFIT OVERHEAD UPCOMING EVENTS
OVERHEAD WEBINAR SERIES
Missed these webinars? Register here for recordings


May 11 - Thursday, Session 1
Real Costs – Realistic Strategies: Understanding, Communicating, and Funding the Full Cost of Your Services

June 1 - Thursday, Session 2
Recovering Overhead Costs in Government Contracts: New Opportunities

June 15 - Thursday, Session 3
Negotiating a Federal Indirect Cost Rate: Step by Step Guide to Preparing Your Indirect Cost Rate Proposal
Also now available:
"Getting Your Full Costs Funded"
3 Webinar series
Order your recordings here.
"Don't Say That, Say This: New Research on Talking to Funders about Overhead" Webinar
Order your recording here.