The Challenges of Accepting Non-Full Cost Funding

Most nonprofit organizations are confronted with an unfair choice each year: accept or not accept critical funding that is inherently designed to not cover the full cost of the programs and activities for which the funding is provided. This reality has been around for a long time. Looking to the future, we must actively push funders to recognize that sustainability will be damaged if nonprofits continue to be forced to compete for, and pressed to accept, non-full cost funding.

A recent article by the Stanford Social Innovation Review highlighted this problem. In discussing how foundations have “stepped up with new commitments of support” during the pandemic, the article mentioned an encouraging new development:

“The Council [on Foundations] worked with partners on a pledge of action signed by nearly 800 foundations to support nonprofits in a deeper way because of the COVID-19 crisis. As stated in the pledge, this can mean converting project-based funding to unrestricted support and making new grants as unrestricted as possible, among many other steps.”

While these efforts are praiseworthy, the old funding practices persist and continue to cause problems for nonprofits. Non-full cost funding practices have become a leading cause of operating reserve depletion for nonprofits and also impedes some organizations from building adequate operating reserves in the first place. Operating reserves are critical to supporting a financially healthy and sustainable organization, and funding practices that deplete or hinder operating reserves directly contribute to future instability and risk exposure.

Similar challenges exist for government grants and contracts as well. The article references studies that show “government contracts with nonprofit organizations pay only 70 percent of their direct program expenses and less than half of indirect expenses.”

This is all too common for the majority of government and foundation funding, which often includes restrictions that cap indirect overhead expenses at 10% or even less, or to prohibit covering indirect overhead costs altogether. If investors and debt service providers in the for-profit world imposed these practices, entrepreneurial efforts would cease to exist.

The first step to right this wrong is for us in the nonprofit community to step up our efforts to educate, communicate, and advocate for sustainable full-cost funding. We who serve, support, and volunteer for nonprofits must get the word out that for nonprofits need full cost funding to provide sustainable programing and services to their communities of need. The persistence of non-full cost funding is counter-productive and damaging in the long term.

Planning Tip – Until real change occurs, there is another way to tackle the non-full cost funding problem. Communicate the importance of unrestricted gifts, grants, and contributions to your organization’s supporters (especially those members, donors, and other funders who currently provide unrestricted funding). Explain that such funding is needed to cover the funding gap from grants and contracts that do not cover the full cost of projects that must be fulfilled. An effective tactic is to request “fill the gap” or “close the gap” contributions. For example, you might explain that a gift of $10,000 allows your organization to sustainably keep and fully satisfy a $100,000 grant that does not cover the full cost of the associated grant efforts. I really like the optics of this type of gift. This message provides extra incentive and gives donors the added satisfaction that their gift leverages the efforts of other funders and will have a greater impact. 

As a way forward, start by identifying any non-full cost funding received by your organization. Next compute the gap short-fall and identify if the short-fall is related to direct costs, indirect costs, or both. Finally, reach out to these funders and communicate the challenges to long-term sustainability related to this type of funding and explore ways to “close the gap” for future projects. An open and sincere dialogue will be beneficial and appreciated by all parties.