GAO: Inadequate Cost Reimbursement Puts Nonprofits at Risk

Nonprofits rarely receive enough money from federal grants to cover the full cost of providing services, a problem that puts many community-based organizations in financial jeopardy, according to an alarming new report from the Government Accountability Office. The report says that despite federal policies allowing nonprofits to retain a share of contract funds for indirect costs, state, and local governments often choose to keep that money for themselves.

The GAO explores cost reimbursement practices related to several different federal grants in different states. Among the key findings:

  • Nonprofits receiving federal grants and contracts can’t count on getting reimbursed for real expenses they incur to provide services for the government in the form of indirect costs like personnel, rent, and utilities. 88% of the nonprofits the GAO examined said they don’t get reimbursed for the full cost of their overhead expenses. Some nonprofits get nothing at all.
  • Amazingly, even though these are federal programs using federal dollars for federal grants, whether a nonprofit gets to recover any (and how much) of its indirect costs depends on how much the state and local governments want to take off the top for themselves. So a nonprofit in one state can recover its full indirect costs, while another nonprofit that happens to be located in a different state may get zero. Federal agencies permit nonprofits to retain a share of contract funds for indirect costs, but state and local governments usually administer the grants, so they get the final say. As a result, practices vary widely and government agencies don’t have to reimburse nonprofits for indirect costs they incur. For one grant program of the federal Department of Health and Human Services, Wisconsin allows nonprofits to be reimbursed up to 14% for indirect expenses, but Maryland doesn’t allow nonprofits to keep anything.
  • The consequences of inadequate reimbursement are enormous. Nonprofits deprived of funds for overhead expenses may receive as much as 20% less than other organizations performing similar services. The result is often reduced or lower-quality services, staff layoffs, and a desperate scramble for money to fill the gap. The GAO issues a blunt warning: “These challenges potentially limit [nonprofits’] ability to effectively partner with the federal government, can lead to nonprofits providing fewer or lower-quality federal services, and, over the long term, could risk the viability of the sector.”

To read key excerpts from the report, click here.

To read the full report, click here.

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