A little more than a year ago, I made a controversial statement on this blog: that institutional funders do not have to defend or explain why multiyear general operating support (MYGOS) is not their primary form of funding. In that CEP blog post last year, I argued that project grants need not be the enemy. If funders adequately and fairly account for overhead costs within project grants, they can be an important tool to combatting the nonprofit starvation cycle, especially when they are multi-year.
I also shared that BDO FMA, where I work, was involved with an exciting undertaking to improve project grants alongside peer consultants and several major funders. As promised, here is an update on that work.
Funders for Real Cost, Real Change (FRC), a community of practice among 12 funders that my colleagues and I have been privileged to facilitate and develop content for over the past three years, sought to tackle a question that has long plagued our sector: Can project grants be structured in ways that do a better job of supporting the financial and organizational health of grantees?
Through research and exploration FRC affirmed that it is possible for project grants to do a better job of minimizing financial harm to their recipients. It will require senior leadership and boards of institutional funders to acknowledge there is a problem, to choose to change policies and practices, and to support staff and grantees in implementing those changes. Funder options range from conducting analysis to ensure each project grant covers a fair share of indirect costs to adding modest general operating support to many project grants. BDO FMA’s favorite, which is not yet common, is to structure project grants so that they allow for surpluses and do not require budgets delineating direct and indirect costs, thus focusing funders and grantees on scope and impact rather than on details of spending plans.
An especially important FRC finding is that the nonprofit starvation cycle is an equity issue. As described in the first Chronicle of Philanthropy piece linked below, low indirect cost rates on project grants — which are the norm — will generally be more harmful to smaller nonprofits than larger ones due to economies of scale. BIPOC-led organizations, as well as those in rural areas and smaller cities, tend to fall into the “smaller” category — as such they are hit twice. Their actual indirect costs exceed what project grants allow and they often have less access to flexible, multi-year general operating dollars that can fill the gaps left by overly restrictive project grants.
In keeping with my willingness to be a little controversial, I will invite readers to consider this: a key reason the starvation cycle has not been resolved is that it does not affect all nonprofits equally. Foundation board members and executives, as well as highly-resourced individuals who donate their money — those who have significant influence over the rules of how money is given — tend to be directly affiliated with larger nonprofit organizations. Because big nonprofits have low indirect cost rates and often raise significant unrestricted revenue, in privileged circles the pain of the starvation cycle can feel like a problem that isn’t real.
So, how might we finally break the cycle?
If you will continue to make project grants, I invite you to borrow from the homework of peers who have shared their paths to revising their indirect cost policies on project grants. In this blog post, the MacArthur Foundation shares how they informed their policy with research on the link between indirect costs and financial health. It includes a link to a longer paper BDO FMA wrote chronicling the work we did with MacArthur and progress thus far. And, in this blog post, the Annie E. Casey Foundation shares the journey they took to imbue equity considerations into their new tiered indirect cost policy matched to grantee budget size.
Further, I encourage you to dive into the content that FRC has developed, including a series of three articles in The Chronicle of Philanthropy, under the title inspired by that original CEP blog post: Project Grants Need Not Be the Enemy. The series begins with an overview of the work of this collaborative, explores the impact of funder cost recovery policies on grantees in a global context, and concludes with a discussion of four options for project grantmaking that could better support the financial health of grantees. Notably, both the first and last articles touch on how equity considerations can show up in project grantmaking. If your reading list is heavy, start with the four-options piece.
In addition to the article series linked above, material commissioned by the collaborative includes:
- A set of guidelines and a tool that help nonprofit leaders determine their organizations’ indirect cost rate in a transparent way which can help them negotiate with funders for better coverage. These were developed jointly by BDO FMA and BDO Nonprofit Advisory, practices of BDO USA.
- A research report from Humentum, Breaking the Starvation Cycle, which reveals unsettling findings from surveys, interviews, and financial reviews with more than 80 national NGOs in ten countries in Africa, Asia, Latin America, and Europe. In my opinion, its recommendations for improving indirect cost recovery practices on grants to NGOs worldwide are also relevant for grants to many nonprofits in the U.S.
Finally, the members of FRC have resourced a partnership of philanthropy-serving organizations (PSOs) to further engage the funding, nonprofit, and NGO communities globally on the work developed by FRC. Those PSOs are Ariadne, a European network of funders, and EDGE Funders Alliance, a global philanthropy network. I’m excited to share that in mid-June they launched a remarkable website combining the content from FRC with material developed by MilwayPLUS (commissioned by the Ford Foundation) that aims to support funders wishing to make more multi-year flexible funding. In effect, the new site offers all funders a range of options to do a better job at structuring any grant so that it is supportive of, rather than harmful to, the organizations whose work they care about.
Our friends here at CEP and elsewhere in the field make a very strong case for the expansion of multi-year general operating support, one which I and my colleagues at BDO FMA fully support. And yet, project grants do not have to be incompatible with building strong, healthy organizations. We encourage funders to give this body of work due consideration and to engage with their grantee partners in ways that allow them to deliver on the long-term impact we collectively seek. The nonprofit starvation cycle is the result of human choices. Ending it will be, too.
 I salute the 12 institutional funders who offered money and the time of 40+ staff to explore and address this nerdy, vexing topic with enthusiasm and care. They are Arnold Ventures, Conrad N. Hilton Foundation, David and Lucile Packard Foundation, Ford Foundation, James Irvine Foundation, John D. and Catherine T. MacArthur Foundation, Oak Foundation, Open Society Foundations, Robert Wood Johnson Foundation, Rockefeller Foundation, W.K. Kellogg Foundation, and William and Flora Hewlett Foundation.
Rodney Christopher is managing director of philanthropic services at BDO FMA, where he provides training, consulting, and coaching to build the capacity of funders to engage with grantees about their financial needs. Over the past three decades, he has worked with nonprofits and funders across the U.S. as a capacity builder, lender, and funder. Follow him on Twitter at @rodneywrites.