Etzel continued, “This variance in indirect cost rate mirrors the industry segmentation long recognized in the private sector, which if adapted could be a great learning benefit in the nonprofit sector.” Among companies in the S&P, for example, consumer staple companies have a median indirect cost rate of 34 percent, while information technology companies reach 78 percent. The paper’s third co-author, Bridgespan Consultant Sridhar Prasad said, “These costs drive value and impact in both the private and nonprofit sectors. Flat indirect cost or overhead rates are wrong and 15 percent is too low.”
Change is underway: Some foundations are beginning to change this practice. Ford Foundation President Darren Walker is among funders most outspoken in calling for a new grantmaking approach. Beginning in January 2016, Ford doubled its overhead rate to 20 percent. In doing so, Walker said he “hoped to encourage more honest dialogue about the actual operating costs of nonprofit organizations.”
Added Etzel, “If nonprofits would commit to understanding their true cost of operations and if funders would shift to paying grantees what it takes to get the job done, the starvation cycle would end. The grantmaking conversation would shift from an emphasis on what it takes to fund a program to what it takes to build strong organizations and achieve impact.”
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