Federal Grantees to Get Help With Overhead Costs

The government will now help pay for that extra computer or for the salary of a new administrative assistant for nonprofits that receive federal grants.

Under a new rule laid out by the Office of Management and Budget in December, nonprofits will be able to carve out up to 10 percent out of their federal grants and contracts to pay for overhead, or “indirect” costs. The office directed federal agencies to develop guidelines to put the rule into effect by the end of this year.

The rate is a floor, not a cap. Nonprofits can chose 10 percent as a default rate for overhead costs, or negotiate for a higher rate.

In addition to setting the 10-percent overhead rate, the budget office raised the threshold for nonprofits that must undergo special audits, from $500,000 in annual federal support to $750,000.

Partial Solution

The federal reimbursement rate for overhead varies from agency to agency and is different in each state when the funds are funneled through local governments. Nonprofit leaders welcomed the rule, because it set a minimum reimbursement level that guarantees at least some payment for overhead costs.

“The rule recognizes that this sector has been underpaid, basically, for decades,” said Kristin Giantris, managing director at the Nonprofit Finance Fund, an organization that helps nonprofits with money matters.

Even so, Ms. Giantris and other experts said the 10-percent rate will not fully cover charities’ administrative costs when doing government work.

Elizabeth Boris, director of the Center for Nonprofits and Philanthropy at the Urban Institute, said the new rules are a “step in the right direction.” In a December survey, the center found that many nonprofits were frustrated with the lack of government aid to cover overhead costs.

Roughly a quarter of nonprofits that responded to the Urban Institute survey reported that the government would not pay for any administrative expenses. Nearly three-quarters of those surveyed said the government limited reimbursements for administrative costs to 10 percent of the total grant.

The Office of Management and Budget said it considered higher rates, but that it picked a “conservative” amount “to protect the federal government from excessive over reimbursement.”

Before the new budget office rule, charities were “getting bupkis” for their overhead costs from the government, said David Thompson, vice president of public policy at the National Council of Nonprofits, an umbrella group for charities.

Mr. Thompson said that while he thinks the change is needed, the 10-percent rate is still well below the overhead rate at many nonprofits. A more “rational” level, he said, would be between 20 and 40 percent.

Negotiating Rates

Mr. Thompson said his organization plans to provide training, through its state associations, for nonprofits that want to negotiate higher reimbursement rates. Colleges now often bargain for higher rates, but most other organizations don’t. Many small charities, he said, have trouble navigating the byzantine federal grants process.

“Most nonprofits don’t have a clue,” he said. “They don’t know how to negotiate a rate.”

Michele Hughes, head of the Life Crisis Center, in Salisbury, Md., would welcome such training.

The center gets about $250,000 a year—roughly 5 percent of its budget—in federal Office for Victims of Crime grants to pay the costs of shelter and of advocating for victims of abuse and sexual assault. Ms. Hughes said she has never tried to negotiate with the government for reimbursement of her charity’s overhead costs. She finds the process intimidating.

“I speak English, not government,” she said. “It’s really a different language.”

To trim costs, Ms. Hughes has cut her administrative staff from five employees to three over the past two years.

She said she’s also been squeezed by a reduction in federal support for the program’s actual costs. When the head of the group’s shelter for domestic-violence victims left, she wasn’t replaced. To keep the shelter open, Ms. Hughes gave the former director’s deputy a slight raise and more responsibility.

“I have a shelter of abused women who need to be protected,” she said. “I just can’t eliminate the third shift. I need to have someone in there 24 hours a day.”

Ms. Hughes is in what Delia Coleman called a “double vise,” struggling to serve the needy with fewer federal dollars while facing debilitating “overhead constraints.” But Ms. Coleman, director of public policy at Donors Forum, an Illinois nonprofit advocacy group, added that the new rule “eases the strain somewhat” on nonprofits.

More information on the new rule is available online at the Federal Register, federalregister.gov; it is called the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards.