Nonprofit Sector

Survey, Reform, Repeat

February 5, 2015

Guest Blog by Beth Bowsky, Policy Specialist for Government-Nonprofit Contracting at the National Council of Nonprofits.

As someone who regularly uses data from Nonprofit Finance Fund's (NFF) annual State of the Sector Survey, it occurs to me that those who are asked to complete it may not realize how truly important the information they provide is or why it is more significant than ever this year.

At the end of December, new regulations from the federal Office of Management and Budget (OMB) went into effect. Most notably, the OMB Uniform Guidance mandates that the vast majority of nonprofits with government grants and or contracts that include federal money must be reimbursed for at least a certain minimum amount of their indirect costs. Except in cases where indirect costs are limited by federal statute, if a nonprofit has a federally approved negotiated indirect cost rate (NICRA), all government agencies — federal, state, or local — are required to honor that rate. Nonprofits that have never had a NICRA may elect to be reimbursed 10% of their modified total direct costs or negotiate a rate based on the federal cost principles. This new policy is a significant improvement in the recognition of indirect costs and will impact the vast majority of nonprofits that have grants and contracts from federal, state, and local governments.

Data collected by NFF and others was instrumental in bringing about this change in policy. As a result of the NFF Survey, we were able to show OMB that 41% of nonprofits reported “achieving financial stability” as their biggest challenge with another 16% of respondents noting that “raising funding that covers full costs” was the top challenge for their nonprofit. Meanwhile, approximately 60% of respondents with government grants / contracts say those sources never or rarely cover the full costs of the projects they fund. These findings caught OMB's attention for very pragmatic reasons. It provided the data needed to support a 2010 report from the Government Accountability Office, which concluded that the inconsistencies in how nonprofits are reimbursed for indirect costs “place stress on the nonprofit sector, diminishing its ability to continue to effectively partner with the federal government to provide services to vulnerable populations.”

The Survey also found that even when governments do provide some reimbursement for indirect costs, it is woefully inadequate. Among those with government contracts, between 44 and 51% of respondents (depending on which level of government they contracted with) reported average indirect cost rate reimbursements of 9% or less. What's worse is that over one-quarter of nonprofits reported the amount they are reimbursed for indirect costs has declined over the past 5 years.

These findings are reinforced in a separate survey by the Urban Institute, in which 53% of nonprofits reported that governments capped reimbursement for indirect costs. 76% of these nonprofits with rate limits reported caps of 10% and below - and 24% reported zero reimbursement for indirect costs. To put these numbers into perspective, Bridgespan and others have estimated that typically nonprofit administrative costs are (or should be for efficient operations) in the range of range of 25 percent to 34 percent. However, every nonprofit is different and administrative costs can legitimately be either higher or lower than this range.

The ability to tell the nonprofit story using real data is what convinced OMB of the need to require reimbursement of indirect costs in the new Uniform Guidance. This year's Survey data is no less essential. It will establish a baseline against which we will be able to see how well the changes are working and suggest ongoing advocacy efforts needed for further improvements.

Looking Ahead

This tangible recognition by the federal government about the importance of indirect costs is a major step forward. But, our work is not finished. The development and implementation of the OMB Uniform Guidance holds only the promise of better treatment for nonprofits. To make it a reality, it is vital that each nonprofit organization learn the cost allocation rules, revise its accounting procedures accordingly, and report its costs accurately. And, since the Uniform Guidance must still be interpreted and applied consistently by tens of thousands of individuals throughout multiple layers of government, nonprofits must also Know Your Rights...and How to Protect Them. This means doing so as individual nonprofits for each new grant and contract, as well as engaging in efforts with other nonprofits to sector-wide advocacy efforts for consistent and systemic compliance at the state and local levels.

The National Council of Nonprofits and its network of state associations of nonprofits have been working with OMB and other stakeholders to identify and troubleshoot anticipated barriers to implementing the new rules. See our recently published special edition of Nonprofit Advocacy Matters to learn more about how the Uniform Guidance applies to your nonprofit. If you have grants or contracts with government at any level, we encourage you to share those experiences - whether positive or negative - via a form on our website to help our network identify trends quickly and build the evidence for better practices and additional reforms.

Together, we can realize the promise of the Uniform Guidance, see a big change in the 2016 State of the Sector results, and make an even bigger impact in our communities.