CalNonprofits Articles

Nonprofits must receive 10% or more in overhead costs in government contracts that involve federal money, according to a new uniform guidance from the Office of Management and Budget. This new guidance has the potential to make hundreds of millions of dollars more flexible for use by nonprofit human services, health, education, and conservation organizations. Of course, there is a "but”: we need to make sure this new rule is fully implemented and applied to every contract with every nonprofit in California.

The new CalNonprofits initiative on overhead launches later this month, but if your nonprofit has government funding, here are six things you should do NOW:

1. Determine whether the source of some or all of your government funding is federal (rather than state or local). In many cases federal funds are granted through state, county, and city departments. If you aren't sure, ask your contract officer in government. You have a right to know. If some of your funding has federal origins, the new Office of Management and Budget Uniform Guidance (OMB UG) probably applies to you. 

2. Check on the expiration dates of your contracts that involve federal money. The OMB UG applies to new contracts signed after December 26, 2014. The OMB UG does not require contract renewals to use the new standards for overhead if nothing substantial has been changed in the new contract. We hear from some nonprofits that their government funders are trying to characterize all new contracts as basic renewals so that the higher overhead rules don't apply.

3. Review the overhead rate in your government contract. If the rate is less than 10%, or if you have a fee-for-service contract based on costs that assumes less than 10% overhead, the new OMB Guidance is crucial for you to understand and act on.

4. Review your current overhead assumptions – under the new guidance, some items you may have assumed as part of your overhead rate will actually be treated as direct costs.

5. Develop your strategy now for getting better overhead rates in your new contracts: talk to other nonprofits with similar contracts and consider a joint educational approach with your funder. Talk with your auditor and enlist his or her help in making the case to the government agency. Document your discussions with your government contract officer so that even if you are pressured into a contract with less than 10% overhead, you'll have material for making the case retroactively.

6. Let us know this is an issue for your organization. As we work with legislators, state administrators and county officials, bringing together as many nonprofits as possible on this issue empowers all of us.

California ranks fourth worst in the nation when it comes to government paying the real costs of programs delivered by nonprofits. Although 10% overhead is almost certainly below the costs of supporting programmatic work, it's a step forward. The new OMB Uniform Guidance represents a window of opportunity for changing government practices in contracting with nonprofits. With nearly $11 billion per year in government funds going to California nonprofits each year, if we can even move the needle a little bit we can make a big difference for the nonprofit sector.

For more information, go to 

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Stay tuned -- we’ll be bringing you more information as it develops! And if you’re a board member, forward this information to your Executive Director or CFO. Also see A Board Member's Guide to Nonprofit Overhead here.

Special thanks to Sarah Stegemoeller of Public Counsel and Beth Bowsky of the National Council of Nonprofits for assistance with this article.

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