Five of the biggest US foundations have joined forces to find ways of helping grantees with their indirect costs and solving the systematic underfunding of non-profit organisations.
Led by Presidents of the Ford, Hewlett, MacArthur, Open Society, and Packard Foundations, the two-year project has resulted in an agreement between the five foundations to experiment with new practices to alleviate the chronic underfunding of their grantees, as well as a call for other funders to join them in addressing this sector-wide problem.
The Bridgespan Group has released a report on their findings. According to the report, under current sector norms, many project grants underfund non-profits by imposing a limit of 15% or less on coverage of indirect costs.
Jeri Eckhart-Queenan, a partner at Bridgespan and co-author of the report commented:
“Indirect costs include essential capabilities that drive impact, such as executive leadership, information technology, strategic planning, and knowledge management. When you underfund these indirect costs, you limit a non-profit’s ability to do its best work.”
Michael Etzel, also partner at Bridgespan and co-author of the report added:
“In fact, a couple of years ago, Bridgespan examined the financial health of nearly 300 grantees that account for a third of the combined spending of the top 15 US foundations. Unfortunately, what we found was that more than half suffer from frequent or chronic budget deficits; 40% have fewer than three months of reserves in the bank to cushion financial shortfalls; and, 30 of the 300 organizations showed no reserves—making them technically insolvent. That is what makes the Foundations’ current efforts so critical.”
In response to their findings, the five foundations have developed a set of guiding principles to change their grantmaking policies and practices, and to help other foundation leaders in addressing grantee underfunding, as well as to set the stage for embarking on a search for potential solutions. These principles include:
- Do what is right, and do no harm
- Pay a fair share of indirect costs
- Act with consistency and fairness
- Stimulate honest and constructive conversations between funders and grantees
- Promote efficient and effective allocation of resources
Following this, the foundations appointed a steering committee composed of senior-level representatives from each foundation, which collaborated with nonprofit finance advisers including BDO, KPMG, and the Nonprofit Finance Fund, and social sector intermediaries including GuideStar, Independent Sector, and Northern California Grantmakers, to create a menu of six grantmaking approaches, ranging from flexible enterprise-level grants to project grants that offer sufficient coverage for both direct and indirect expenses.
“Through the five foundations’ collaboration and research, a consensus emerged that the solution for insufficient cost recovery must be adaptable to accommodate more than one way for funders and nonprofits to proceed, and it must provide some degree of standardization to increase transparency and facilitate scale.”
Well, it’s about time. This was a shift promised a few years ago. Guess they now have the empirical evidence to actually put the promise into action. Nonprofits have been stuck in an endless starvation cycle because of fears of optics & because of restrictions made by donors. https://t.co/Qu5dx4P6ro
— Barbara O'Reilly (@BOReillyWHC) September 4, 2019
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