Let’s Smash the Overhead Myth

When you’re a grant writer, rejection is nothing new. Like actors, it is a routine part of the job. But last year, I received a rejection phone call from a foundation that left me truly astonished. “We loved your project, and think you’re making a long-term impact in our community,” our representative said, “but we only want to support the cost of the project– not salaries, equipment, or materials.” Huh?!

Why overhead isn’t a dirty word

Here’s the thing: we can’t build strong coalitions or run effective organizations for free, out of our cars. Solving complex social challenges requires people and infrastructure. Despite this, in the nonprofit world, there is an “overhead myth” that low spending on overhead– costs that aren’t directly related to providing a service or program– means that a nonprofit is more effective or has a bigger social impact. This creates a “nonprofit starvation cycle,” in which funders chronically under-fund essential infrastructure in favor of project-based funding, and nonprofits skimp on the basic things they need to be viable. Most of us working in nonprofits are intimately familiar with the results: the broken computer that goes unreplaced for months, never having the budget to increase our skills through training and conferences, or staff wages that barely increase with the cost of living, if at all.

The overhead myth impacts our relationships with funders and donors alike. Funders often explicitly limit the percentage of “indirect costs” that can be covered by their grants: most foundations provide an overhead rate at 15%, despite a recent study of nonprofits demonstrating that indirect costs range anywhere from 21% to 89% of a nonprofit’s overall spending. Many funders eschew core funding all together, prioritizing on-renewable ‘seed funding’ for a program or project. When communicating  with individual donors, organization often  focus on how little of their money goes towards administrative costs, as a stand-in for the impact of a gift.

As a result, I’ve talked to organizations that spend considerable energy rewriting budgets with artificially minimal overhead costs or indirect project costs hidden in vague budget lines. I have also worked in organizations that struggle over the long-term to invest in the people and infrastructure needed to be sustainable, leading to longer term financial waste and inefficiency. When we are forced to run our programs by piecing together funding that doesn’t account for our core, behind-the-scenes costs, it becomes nearly impossible give ourselves the tools we need to work well.

How to change the conversation

In fact, the ratio between direct program costs and the behind-the-scenes, indirect costs is neither an indication of an organization’s efficiency, nor a reflection of its impact.

Stateside, many of our peers have been pushing a different way to think about funding. The “pay-what-it-takes” model moves away from demonizing overhead in favor of finding ways to support the true costs of work. This  model does not see indirect costs as pesky spending that detracts from the ‘real work’, but as essential for building strong and effective movements to address complex social issues.

Funders must take the lead in changing the current landscape, by providing support for projects and programs and for the institutional upkeep that anchors and strengthens them over the long-term. But in order for our supporters to pay-what-it-takes, we have to show them what that means. Those of us who are securing  funding for our organizations can help pave the way by communicating to our supporters the true costs of achieving impact.

Here are some ideas to get you started:

  • Have honest conversations with donors about how indirect costs help you achieving your shared goals. These Issue Sheets from Imagine Canada provide a good place to start with some talking points to break down the issues.
  • Resist the idea that a donation or a grant is a transaction that “buys” something in your organization. The impact of a $10,000 grant is not just the number of medical clinic nights it allows you to provide; a $10,000 grant allows major movement towards your shared vision of accessible healthcare for all.
  • Don’t assume that you and your funders have the same definition of indirect costs. Ask them to explain which costs are eligible for funding and which aren’t– you might be surprised by how much you can include in your application.
  • Humanize your overhead! Help your supporters understand the behind-the-scenes costs are that are essential for the programs they care about. Overhead is not necessarily an overpaid executive on a private jet– it is buying software to keep track of our expenses, sending front-line staff to conferences to learn from their peers, and replacing the broken refrigerator in the community kitchen.
  • Calculate indirect as well as direct costs, and include them both as the full cost of running a program when making budgets. There’s an online tool to help you figure out how. Build in the costs of the fundraisers who are writing the grants, the resources for program evaluation and impact measurement, and the transactional costs of a program, like the time that other staff spend supporting the staff who directly provide the service. And share these budgets across community organizations to multiply these tools!

Victoria Pilger is a grant-writing nerd at Head & Hands and Girls Rock Montreal. You can reach her at funds@headandhands.ca.