How to Ask for Overhead Funding

Many nonprofits who receive government grants/contracts were thrilled when the U.S. Office of Management and Budgets (OMB) implemented its “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards” as part of the Council on Financial Assistance Reform in December 2014. More commonly known as “Uniform Guidance,” the program mandates that all nonprofit-government contracts that include federal money cover 10% or more of the indirect costs for the related program or service it is subsidizing. Unfortunately, at least 30% of nonprofit-government grants/contracts in California are currently failing to reimburse at the required 10% or more rate.

It’s not just our federal government that is struggling with the concept of overhead costs – private donors and foundations struggle as well. As part of its Nonprofit Overhead Project, CalNonprofits wanted to better understand donor resistance to paying for overhead costs and engaged Lake Research to study the issue. Specifically, Lake Research surveyed California County Supervisors and donors to measure:

• How these audiences perceive nonprofits generally;
• How they perceive nonprofits that are worthy of their contract or donation versus those that are not; and,
• What “overhead” means to them and how comfortable they are funding it.

And, the results were very interesting. Following are some of the highlights:

County Supervisors Results:

• Supervisors know that nonprofit overhead is a reality of doing business, and they are not opposed to funding nonprofit overhead in general. They are more concerned with ineffective management than with dishonesty or malfeasance.
• As politicians, County Supervisors are highly tuned in to messaging, and are resistant to being messaged to. Replacing “overhead” with another term would elicit a strongly negative reaction. Language that comes across as doublespeak—such as replacing “overhead” with another term such as “real costs”—quickly raises red flags
• Supervisors want overhead and language about overhead to be clearly defined. The phrases “real costs” and “foundational costs” both test well, but they still raise questions about definitions. Supervisors want to know what, specifically, they are being asked to fund.

Private Donor Results:

• Donors judge nonprofits on a range of intangible metrics, including their gut feelings – but generally like when they are visible in the community.
• Donors are encouraged to give based on urgent problems that they see in the news or their community, and are highly moved by personal stories.
• Donors are highly trusting of where their money goes. The focus groups indicated that donors may feel this way partially out of a desire to stand by the organizations that they have decided to support.
• Donors are not convinced by lofty or corporate sounding messages. For many, donating to a nonprofit is not comparable to investing in a company. Donations to nonprofits aren’t seen as investments. These actions are need- and value-driven.
• Donors prefer to receive email updates from nonprofits they donate to.

So, what can we learn from these findings? Here are a few tips for your next grant proposal or donor conversation about overhead:

1. First, use the term “operating costs” rather than “overhead costs,” “real costs,” “full costs” or “basic costs.”
2. Don’t use words like “top-notch” and “high-quality,” which imply a costly operation.
3. Emphasize results. Make performance central to donation messaging. Integrate “overhead” into the value of performance, explaining that outcomes matter most, and overhead is necessary to achieve them.
4. Specify the types of investments included within “overhead,” e.g. training, planning, evaluation, and internal systems.
5. Talk about how overhead allows your organization to meet emerging needs (rising rents, etc.), a reality donors know a nonprofit – and everyone else – faces.

Additionally, for private donors, include these tactics:

• Treat giving as a values-driven action.
• Focus on immediate needs that the organization is meeting.
• Use words like “effective,” “responsible,” and “viable” when developing persuasive messaging.
• Demonstrate that you can stretch a budget.
• Follow through on what you say you will do and demonstrate this to donors.
• Share with donors the importance of operating costs in your ability to meet your organizational goals.
• Talk about the community you serve and how your organization’s dollars are reinvested in the community.

And, for County Supervisors, try these:

• Build on your Supervisor’s existing recognition of the importance of overhead funding.
• Don’t be afraid to specifically discuss and inquire about the OMB requirements and the problem with counties not implementing that guidance.
• Reach out to Supervisors with personal backgrounds in the nonprofit world.
• Reach out to County staffers – Supervisors rely on them to inform their funding decisions.

We nonprofits can’t hope to grow our donors’ understanding of our overhead costs if we don’t adequately and thoroughly explain our needs. Use these tips to start more direct and honest overhead conversations with your public and private donors today.