Nonprofit leaders are challenged daily by the unique funding dynamics of the social sector, often relying on grants from funders that do not support the full program costs. A 2015 survey found that only 7% of organizations reported having foundation grants covering the entire project expenses. The systemic issue of underfunding is sustained by misconceptions about operating costs that lead to restrictions on grant expenditures. Arbitrary overhead limits can unintentionally jeopardize the long-term sustainability of an organization and need to be opposed by grantees.

Operating capacity

Nonprofits are burdened by infrastructure and capacity needs that funders neglect to support. Studies demonstrate that organizations are most heavily pressured by their funders to maintain and report low overhead costs. Grantees must continually reduce operational spending, resulting in fragmented administrative support across the organization, neglected infrastructure needs, and a lack of investment and therefore capacity in critical human resources functions such as training that impact program execution. 

The realistic overhead rate for nonprofits falls between 25-35%. However, 75% of nonprofits reported in a study that the indirect cost rates of their current government grants or contracts were limited to 10% or less, if funding was provided at all. Organizations under the constraints of unrealistic funding expectations from grantors cannot properly support their core operational functions, invest in necessary improvements to technology systems, or pursue innovative growth due to the associated risk. These conditions may limit the efficiency and effectiveness of the program operations and therefore impact of the entire organization. 

Financial pitfalls

Nonprofit leaders consistently strive to enhance their competitiveness when seeking grant funding. Current dynamics incentivize organizations to severely limit or omit operational expenses in grant budgets, increasing the amount of unfunded costs and creating budgetary deficits for the grantee. The resulting funding gaps directly limit an organization’s scale and impact to the functional level that the leadership can offset unfunded expenses through fundraising or alternative revenue-generating activities. 

A lack of standards and oversight in the social sector regarding expense allocations amplifies financial misconceptions. Some executives take advantage of ambiguous categorical definitions to provide an illusion of low overhead expenses in financial reports. By analyzing nonprofit overhead spending compared to publically reported financials, researchers discovered that 75-85% of participating organizations incorrectly reported grant expenses. The practice of underreporting perpetuates the misconception that overhead ratios are lower than reality and are a valid measurement of a program’s effectiveness or efficiency. Yet, these rates do not determine or measure programmatic outcomes directly. 

Despite historic power dynamics that limited grantees’ ability to shape the funding standards in the social sector, collective efforts can generate positive change for the future. 

Advocate

Individually and collaboratively speak with stakeholders to influence funders’ processes, policies and regulations, and misconceptions. Educate grantors about futile practices that strain administrative capacity such as extensive processes, redundant reporting or audits, and post-award alterations to contracts. Advocate for funders to develop fair and consistent systems, allocation categories, and financial calculations. Share individual experiences, positive and negative. Seek allies to challenge the overhead myth and promote appropriate alternatives to measuring programmatic success. 

Strategize financially 

Prioritize the financial health of programs and capacity needs by developing internal strategies to mitigate financial risk and increase transparency. Budget intentionally to invest in standardized systems for tracking, reporting, and auditing across grants that could reduce financial and capacity challenges long term. Maintain records of, report on, and discuss the complete and accurate direct and indirect program costs, even if not supported by the funder. Be transparent with reporting on the categories of fundraising or management & general, despite pressures to minimize these expenditures. 

Develop internal policies & procedures

Standardize processes of accepting grant funding to ensure consistency, sustainability, and alignment with the mission. Although controversial, consider adopting policies that mandate grant programs to be self-sustaining, either generating a profit or breaking even budgetarily, to eliminate funding gaps. Nonprofits may also establish strict parameters that limit the organization’s programmatic scope to ensure exceptional mission alignment, impact potential, and reduce administrative complexities. 

Complacency to the status quo of starving nonprofit operational needs in an effort to direct the maximum funding to program operations is not sustainable. Leaders can promote an innovative, solutions-oriented future where funders recognize that a financially stable and robust infrastructure is a critical component of generating impact. 

Promoting change can progress the sector toward a mutual understanding of nonprofit operating needs and creating an industry standard to fully fund grant programs. 

Emily Shorkey is a 2024 graduate of the Masters of Nonprofit Leadership and Management program at Arizona State University. She obtained
her undergraduate degree from Central Michigan University where she dual majored in Public &
Nonprofit Administration and Community Development and earned her Certified Nonprofit
Professional (CNP) Credential. Emily previously served on the leadership team at Volunteers of
America Michigan (VOAMI) as the Director of Operations and plans to continue her work with
nonprofit organizations post-graduation.

Image by Lillian Finley

Write your best grant proposals with our Grant Development and Proposal Writing Certificates

Securing funding for nonprofit organizations can be extremely competitive. Nonprofits need compelling proposals to receive the grants they need to achieve their missions. Whether you are a student or working professional, you will benefit from instruction by an experienced grant writer with real-world experience as they guide you through the step-by-step processes for a state and federal proposal during the Grant Development and Proposal Writing Certificates.

• Volunteering in the digital age