Progress on Cost Reimbursement: The Early Reviews on the OMB Uniform Guidance

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Since new rules for government grants and contracts became effective in late December, traditional publications and the blogosphere have come alive with the news that nonprofits have earned both the respect of the federal government and the important right to recover more of the costs they incur when performing services on behalf of governments at all levels – local, state, and federal.

On December 26, 2014, the federal Office of Management and Budget formally launched its Uniform Guidance – new binding rules that, among many other things, require governments and larger nonprofits that use federal funds when issuing grants to or contracting with nonprofits to pay the service providers for their indirect costs (sometimes called “administrative” or “overhead” costs). If these early commentators are any indication, the new rules can change not only the relationships between nonprofits and governments, but also with private philanthropy.

Writing about the Uniform Guidance, the Controller of OMB declared that “this historic reform will transform the landscape … for generations to come." Controller Mader noted that the Uniform Guidance will, among other things, “reduce the total volume of financial management regulations for Federal grants and other assistance by 75%” and relax “overly prescriptive and obsolete procedural requirements.” In particular, he stressed the importance of the policy reform of reimbursing nonprofits for their indirect costs, a necessary expense that “supports the fundamental operations of the organization.”

Rick Cohen of Nonprofit Quarterly explained the significance of new grantmaking rules in The Word for Today is “Overhead”: OMB Uniform Guidance Takes Effect.” Cohen predicted that governments receiving federal money are likely to avoid following the new requirement to pay nonprofits for their indirect costs unless there is ongoing training and advocacy. He highlighted the need for “sector-wide advocacy that keeps a close eye on federal moneys handled by pass-through governmental entities and nonprofit intermediaries.”

In an opinion article in the Chronicle of Philanthropy, Tim Delaney, President and CEO of the National Council of Nonprofits, noted that the new rules “promise benefits for everyone: governments, nonprofits, grant makers, and the public,” yet warned that “the real work has only just begun” because the benefits will not be realized without additional advocacy. In particular, he observed that states and localities must now update their statutes, regulations, and practices to comply with the new federal requirements and eliminate inconsistent application of new and old laws. They must also alert the multiple levels and layers of governments about the new rules and provide consistent training programs to the “tens of thousands of individuals in fragmented departments, agencies, and offices at ‘pass through’ entities (usually state and local governments and large nonprofits) that use federal funds to hire nonprofits to provide services in their communities” to ensure that the new regulations are “interpreted and applied consistently.” (Nonprofits Win Key Victory in Overhead Battles With Government.”)

Precedent for Philanthropy

In “The Truthiness About Overhead,” Heather Peeler of Grantmakers for Effective Organizations, published an article in GMNsights laying out the significance of the new rules to grantmakers, and providing a brief true/false quiz designed to help grants managers get to the true understanding about nonprofit costs.

Henry Berman, CEO of Exponent Philanthropy (formerly known as Association of Small Foundations), also laid out the significance of the federal rules for nonprofits and grantmakers. He posted a blog piece, “New Regulations Spotlight Nonprofit Overhead,” urging grantmakers to go a step further by using “the new rules as a catalyst for embracing overhead funding,” ”incorporate overhead funding into our grantmaking,” and accept the “reality of overhead: Recognize it. Understand it. Fund it.”

Donna Murray-Brown, President and CEO, Michigan Nonprofit Association, continued this theme on the state association’s blog, stressing that the new rules “are setting a precedent for the way that foundations and other funding sources view the indirect expenses that nonprofits incur.” She observed inNew Rules Can Help You Increase Your Government Overhead Reimbursement,” that by “instituting these new rules and paying their fair share of the costs that we incur in providing services and supports, the federal government is setting an example.”

Going from Promise to Reality

The OMB Uniform Guidance only provides a promise of better treatment of nonprofits providing services under programs funded in whole or in part by the federal government. Turning that promise into reality requires actions on the part of every nonprofit earning federal funds, either directly or from pass-through entities. By understanding what the new cost allocation rules allow, and managing costs accordingly, nonprofits can secure reimbursement for more of their costs than formerly allowed. Likewise, nonprofits that understand the new rules and accurately allocate costs will be in a better position to negotiate an indirect cost rate higher than the 10 percent minimum.

Tools

To help nonprofits get started, the National Council of Nonprofits has developed important tools:

  • Know Your Rights … and How to Protect Them, an overview of the rights nonprofits now enjoy (when governments fully comply) and answers/solutions to anticipated challenges that state and local governments may raise.
  • Uniform Guidance Implementation Report Form, designed to generate information from nonprofits in the field about government compliance with the Uniform Guidance that will help us monitor compliance, compile data and observe 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.

For more information and actions nonprofits can take, see the Council of Nonprofits webpage on the OMB Uniform Guidance.

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