One Small Step for Government, One Giant Leap for Nonprofits

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This article originally appeared in the February 2015 GuideStar Newsletter.

When Neil Armstrong set foot on the moon 45 years ago, his first words captured how the simple act of taking a small step opened a new era in the history of mankind. Another seemingly small step taken by the federal Office of Management and Budget (OMB) recently opened a new era in the government-nonprofit contracting relationship and provided the first tangible evidence that focused advocacy can overcome the "Overhead Myth." The changes contained in OMB's new rules, known as the Uniform Guidance, may not be the same as "one giant leap for all mankind," but OMB controller Dave Mader wasn't overstating it when he observed that "this historic reform will transform the landscape ... for generations to come."

What the Uniform Guidance Does

The new Uniform Guidance mandates that any "pass-through entity" (typically states and local governments, as well as some larger nonprofits) using federal funds to hire a nonprofit to perform services must now reimburse that nonprofit for the indirect costs it incurs on behalf of government. That logical and fair action may appear to be a small step, but it's a giant leap for nonprofits and private grantmakers that have been harmed by governments' routine underpayments and inconsistent practices when dealing with nonprofits.

For fundraising and development professionals, this reform will mean less stress and urgency chasing down private donations and grants to fill in the large gaps left unfunded by governments. With continually increasing competition for limited funds, this is a game-changer. Not only that, but with this new acknowledgement from government that indirect/overhead costs are essential to service delivery, some private funders are also coming to a similar logical realization.

Recent research by the Urban Institute found that more than half (54 percent) of nonprofits with government contracts responding to a nationwide survey reported that governments failing to pay the full cost of services created a problem for their organizations. Of those groups, 76 percent reported limits on indirect costs of 10 percent or less, with nearly a quarter (24 percent) receiving no reimbursement for their indirect costs.

Further, the Government Accountability Office found great inconsistencies between what states paid nonprofits, even when the funding came from the federal government for the states to operate the same federal program: Wisconsin paid 14 percent for indirect costs, Louisiana imposed a limit of 9.4 percent, and Maryland refused to pay anything. The GAO warned that this practice threatens the financial sustainability of nonprofits upon which governments rely to provide needed services.

The new OMB Uniform Guidance replaces arbitrary levels of reimbursement with payments based on real costs. Now a pass-through entity using federal funds must pay using the nonprofit's already-negotiated federal indirect cost rate, which is based on real costs. Nonprofits that have never had such a rate can either negotiate a rate in accordance with federal cost principles or elect to receive the de minimis rate of 10 percent of the organization's modified total direct costs. For the 76 percent moving from zero or more up to 10 percent, that's significant. And for those able to document higher costs, there are no more artificial limits.

Next Steps to Transform the Potential into Reality

Just as thousands of people took countless small steps over several years to make Neil Armstrong's step possible, the same goes for the Uniform Guidance. State associations of nonprofits and others invested countless hours of advocacy over three years to secure these reforms. Yet the journey still is not complete. Although the Uniform Guidance is now law of the land, it will take further action to realize its promise. Here are the steps your nonprofit needs to take:

  • #OwnYourOwnCosts: It is essential for your nonprofit to have financial management systems in place that track your indirect costs so you can negotiate your federal indirect cost rate and receive more than the 10 percent minimum.
  • Protect your rights: If a state or local government tries to deny your nonprofit the reimbursement rates guaranteed by the Uniform Guidance, stand up for your nonprofit's rights. Among the many safeguards put in place by OMB, pass-through entities may not ask your nonprofit to sign a waiver of its right to this reimbursement. Our quick guide, Know Your Rights ... and How to Protect Them, details your nonprofit's rights, highlights potential compliance challenges, and explains how the Uniform Guidance should be properly interpreted.
  • Stay informed: The laws in many states and localities will need to be adjusted to comply with the Uniform Guidance. Join your state association of nonprofitsfor information on how to help make these needed changes, and sign up for the National Council of Nonprofits' free e-newsletters to stay up to date on the latest developments.
  • Report back: As you enter into new grants and contracts, share your experiences—positive and negative—using the confidential Uniform Guidance Implementation Report Form on the National Council of Nonprofits website. The information that nonprofits share will help the network of engaged state associations of nonprofits monitor compliance, compile data and patterns that can be addressed at a government-wide level, and identify good processes and solutions that can be replicated to help nonprofits across the country meet their missions.

The first firm step to leap beyond the Overhead Myth has been taken. Please join the efforts in your state to work, individually and collectively, to complete the journey to sustainability for those we all serve.


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