Why "Overhead" is Not a Myth

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It’s an undeniable fact: Spending on overhead is needed to accomplish your work. Nonprofits may have stuck their heads in the ground to avoid talking about this truth for years - often because so-called “watchdog groups” doled out demerits when a nonprofit was honest about actual costs. Unfortunately, the donating public has become accustomed to claims that nonprofits that spend resources on overhead are less effective.

Fortunately, today an increasing number of nonprofits are talking about their overhead costs differently, and we encourage you to do the same. Why? Because you can’t wiggle your nose and solve the world’s problems: it takes resources. For our nonprofits to be financially sustainable, we all need to get in the habit of owning our own costs. Our communities and  donors expect and deserve transparency, and need to know that providing important services in communities costs something. It’s up to us to demonstrate that administrative costs are essential to nonprofit operations. (Our report, Investing for Impact: Indirect Costs are Essential for Success, will give you lots of ideas and proven research to explain why such costs are essential to advancing your mission.) 

Just in time, the federal government is dangling a proverbial carrot in front of the charitable nonprofit community, to help us overcome the false notion that overhead is badNew federal rules that go into effect late in 2014 offer an incentive for nonprofits to know exactly how much “indirect” costs go into their program and service delivery. Nonprofits with grants or contracts with the federal government, or that receive dollars from any downstream government agency or nonprofit partner providing federal flow-through dollars, will be able to negotiate for recovery of the nonprofit’s indirect costs. (This is quite a change from the past and current system, when most frequently nonprofits are not reimbursed the full costs incurred when they provide services for governments.)

But first, your nonprofit will need to get in the habit of properly allocating administrative/overhead/indirect costs.

What’s the key to changing habits? It’s no surprise that positive and negative reinforcement play a huge role in both establishing and changing habits. So we invite you to identify something that motivates you and your colleagues at your nonprofit, and every time you have the opportunity to explain to a donor, a grantmaker, or a government partner how essential administrative costs are to your nonprofit’s ability to deliver services, pass around the chocolate!  And stay on the lookout for special programs offered by your state association of nonprofits to help you learn about cost allocation, accounting for overhead, and how to prepare for the new OMB Uniform Guidance, that goes into effect at the end of 2014.

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