Why Full Cost Matters
What if your employer said you could use your paycheck to cover clothes you wear to work, but not for rent on your apartment? On a lunchbox but not on the pots and pans you use to cook dinner?
Many nonprofits regularly face restrictions like these in their funding. Too often, lines are still drawn between the costs directly attributable to, for example, delivering meals or adding beds in a homeless shelter, versus basic business costs like staff payroll, office rent, and heat – not to mention the need to innovate and adapt to changes in community needs and operating environments.
While many funders of all sizes and sectors are changing their strategies to also cover what’s traditionally been viewed separately as “overhead,” this is still far from universal. In NFF’s 2015 State of the Sector Survey, only 7 percent of nonprofits reported that foundations always cover the full costs of the projects they fund. And in NFF’s 2018 Survey, 57 percent of respondents said raising funding to cover full costs was one of their top challenges.
“We are trapped in a mindset that stigmatizes spending beyond direct program work,” wrote Fred Ali, president and CEO of the Weingart Foundation, and NFF CEO Antony Bugg-Levine in Stanford Social Innovation Review. “This mindset keeps many nonprofit leaders from recognizing and pursuing the investments needed to drive long-term impacts. And too many funders underestimate the unequal power dynamic inherent in their interactions with grantees. Analysis alone cannot overcome this cultural challenge. We must commit to a process that is mutually empowering.”
In 2016, NFF, Weingart, and the California Community Foundation launched a pilot program that gathered 50 representatives of funders and grantees to openly discuss the full costs of doing nonprofit business. Dissecting a selected case study, they peeled away differences in language and mindset and opened critical new lines of communication. Findings and recommendations from this pilot program are summarized in the report, “Elevating Impact of the Full Cost Pilot.”
Funders came away understanding how resources can be responsibly and strategically invested to cover full costs. Nonprofits came away understanding how to ask for what they really need to achieve their missions. The pilot participants were overwhelmingly positive about the experience. “We gained some early skill sets to use in implementing these concepts in our day-to-day development work,” said one nonprofit participant. A funder participant concurred: “Simply having everyone in the same room has been really powerful. It was interesting and helpful to talk to grantees and hear their perspective. It was great that a lot of them were open to speaking about things that are difficult to say when a funder is in the room.”
NFF defines the guiding equation of full costs like this - add together:
- Day-to-day operating expenses
- Unfunded expenses (e.g., underpaid staff)
- Working capital (cash for day-to-day needs)
- Reserves (e.g., savings, rainy day fund)
- Fixed asset/technology additions (money to purchase a building, or new computers)
- Change capital (e.g., resources to adapt, grow, and/or expand)
“NFF is working to help this pilot become standard practice,” said Claire Knowlton, a director in NFF’s Consulting practice. “Nonprofits need to be comfortable asking – without apology – for resources that cover the full costs of doing good. And funders need to recognize and rebalance the power dynamic that inhibits open dialogues.
“Paying nonprofits to cover their full costs is the best way to support resiliency and adaptability in the social sector, prevent crises and community service interruptions, and allow leaders to stay focused on their missions and outcomes.”
Learn more about full cost here and check out Claire Knowlton's article, "Why Funding Overhead is Not the Real Issue: The Case to Cover Full Costs."
The community research firm Harder+Company evaluated the pilot program and explored how it might be scaled and expanded. They concluded: The workshops brought funders and nonprofits together to develop a shared understanding of full cost concepts in a safe space. Funders have to adjust their grantmaking procedures to allow time to discuss full cost concepts with current and future grantees. Overall, more training, information-sharing, and nonprofit/funder conversations will be required to further promote the full cost approach and expand this initiative to others in the sector. Helping nonprofits and funders to understand the full cost of programs and operations is critical to building a stronger and more effective nonprofit sector.