Life ain't fair. Foundations pay full value to the for-profit consultants who advise them, but often fail to cover the true costs of the same services when offered by nonprofits. How often have nonprofit leaders been tapped to provide advisory services to a foundation's grantees or skills training for the foundation's program officers, without thought of compensating the leader's host organization for his or her time? How many grants cover direct expenses but do not cover the true costs of a program or project by including indirect expenses? The Ford Foundation will pay 10 percent overhead. The Knight Foundation will pay none. Thus, each borrows from the grantee's other sources of revenue, such as membership dues, registration fees or those increasingly rare general operating grants from other foundations or donors.
It turns out that governments do the same. The Government Accountability Office (GAO) surveyed nonprofits that receive federal grants and contracts and found that 88 percent are not reimbursed for their full costs. Some receive nothing at all for their indirect costs. Further, many of the federal grants managed by states are inconsistent in their treatment of indirect costs.
Federal agencies permit nonprofits to retain a share of contract funds for indirect costs, but when state and local governments administer the grants, each follows its own practices. The GAO offered the example of a U.S. Department of Health and Human Services grant program, for which Wisconsin allows a reimbursement to nonprofits of up to 14 percent for indirect expenses, while Maryland provides no overhead at all.
In the meantime, for-profit contractors are usually able to recover true costs, while their nonprofit colleagues may get as much as 20 percent less as a result of a government's policy with respect to reimbursement of nonprofits.
Something is very wrong, especially given that many nonprofits are often far leaner and more cost-conscious than their for-profit counterparts. Let us hope that the GAO report inspires a rethink at a time when governments are increasingly shifting their responsibilities to the social sector without the resources required to meet them.