A guest post by Diane H. Leonard, GPC, STSI

The Ted Talk Dan Pallotta presented in March 2013, “The way we think about charity is dead wrong” has been viewed more than 5 million times. Yet I don’t want to assume you’ve seen it. So a quick summary: Dan’s point was simple. It takes overhead to run nonprofit organizations/charities. So why are these organizations being rewarded and encouraged to race to the bottom with how low they can list their administrative overhead in the functional expense portion of their annual IRS 990 filing?

In the years since (wow, how was that 8 years, ago?!), that single Ted Talk has been talked about and debated in various circles of nonprofit professionals, some who agree with his point, others who disagree. One group that usually wholeheartedly agrees with Dan’s message when the topic comes up, is grant professionals. Grant writers see how the administrative overhead “game” plays out in philanthropy daily with grantmakers who limit overhead funding or outright refuse to support it.

One might argue- and in fact, I will- that if grantmakers are limiting overhead support or refusing to support it, they are indicating that those types of expenses aren’t worthy of their funds, but that perhaps other types of supporters – individual donors, corporate event sponsors- should consider those types of costs as worthy of *their* support instead. Yet the overhead issue is one that individual donors are often sensitive to as well, leaving nonprofit organizations in between a rock and a hard place. This conundrum is what leads nonprofit organizations to almost always answer my question “what is your top priority for grant dollars?” with “OPERATING SUPPORT!” regardless of their size, mission, or mix of grantmakers in their grant revenue portfolio.

Three Ways To Deal With Funders Who Limit Overhead

So what is a grant professional to do in this situation? First, acknowledge and perhaps feel comforted by the fact that you are not alone. Your colleagues in nonprofits and charities around the world are struggling with similar scenarios. Therefore, it isn’t about knowing a particular trick or finding the silver bullet, but rather having a process for how you proceed.

When you encounter a grantmaker that has a limit on how much of their funding can support overhead costs, consider which of these three approaches may work:

  1. Work with your finance team (before digging into a grant application) to ensure that program/project-specific budgets include ALL the direct costs and not leaving anything out.

Honestly, you should be having this conversation with your colleagues in finance BEFORE you ever look for grants for a project or program, but sometimes it is encountering a grantmaker with limits that bring the conversation to the top of the priority list for an organization.

This can be a shift for organizations in how grants are approached, so I want to outline an ideal scenario for you to find inspiration from and try. When a new program or project is designed, direct costs (the key responsible people and the supplies, etc.) that it takes to implement the project or program are often the first to be clearly identified. Yet, this should only be the first draft of a project/program budget you might use in a grant application. You still need to ensure all the costs unique to the program like the mileage, food, equipment, etc. are documented and ALSO, that the indirect costs are identified that help keep the lights on for the supporting portions of the organization. 

One way I have successfully seen this done is to:

  • have the programmatic staff lay out the initial direct costs they are aware of
  • then meet with the finance team to have them ask questions about other direct costs they may not have considered and finally
  • to let the finance team add the indirect costs that are part of the organization’s operating budget in a way that follows the organization’s approach to allocating overhead.
  1. When doing your usual relationship outreach about a potential application, talk to the grantmaker about their limits on supporting administrative overhead to see if there is any flexibility in their approach.

I love to get on the soapbox about grantmaker relationships (I started my career as a grantmaker, so I get both sides of the equation). When a grantmaker has any capacity or preference to communicate before you apply, having a chance to ask thoughtful questions that would help you confirm this is a good fit as a funding partner and a potentially competitive application for your organization to submit is an important use of your time. One of those thoughtful questions you should investigate in advance should be about their limits on overhead (if any) and to learn more about their philosophy about the limits.

Will asking questions and raising concern over their policy lead to an immediate change? No, that is unlikely. But if more nonprofits start to ask, just like the #FixtheForm movement started by GrantAdvisor is slowly bringing about meaningful change in the online grant application process, so might you start to change the way that grantmakers approach the critical costs of administrative overhead.

  1. Walk away.

No, I’m not joking. Not all grants are created equal and while hard for some organizations to learn, sometimes the decision with the strongest ROI (return on investment) for the organization’s overall sustainability is to walk away from a funding opportunity that would leave them less than whole or struggling to fund elements of their operating budget in an unsustainable way.

Do you have other approaches that are different than the three broad paths I’ve laid out? I’d love to hear!

Diane H. Leonard, GPC, STSI is a Grant Professional Certified (GPC) and Approved Trainer of the Grant Professionals Association. Diane is also a Scrum Trainer, Scrum Master, and Scrum Product Owner by Scrum Inc.

Diane began her career as a Program Officer, a full-time staff member of a state-wide grantmaking organization and she continues to serve as a reviewer for a variety of grantmaking organizations. Since 2006, when she formed DH Leonard Consulting, Diane and her team have secured more than $82 million dollars in competitive grant awards for the clients of DH Leonard Consulting & Grant Writing Services. She is an active member of the Grant Professionals Association.

When not working with her team on grant applications for clients, Diane can be found in the 1000 Islands, out for a run, or drinking a strong cup of coffee.