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New Federal Guidelines on Overhead Take Effect

New Office of Management and Budget (OMB) guidelines took effect December 26, 2014 requiring that grants and contracts from all federal agencies and pass-through entities (typically state and local governments receiving federal funding) reimburse a nonprofit’s indirect costs by applying that nonprofit’s federally negotiated indirect cost rate, if one already exists. If a negotiated rate does not yet exist, nonprofits are empowered to either request the option of negotiating a rate or elect to accept the default rate of 10% of total costs. State and local governments were required to put this new ruling in place by December 26, 2014.

While Weingart Foundation believes that the reform does not go far enough, it is an important victory for nonprofits and those they serve. California currently ranks fourth in the nation in terms of nonprofits that are burdened by government contracts that do not pay the full costs of their work, and 60% of these nonprofits are in human services—working with many of the most vulnerable in our society.

A nationwide study published December, 2013 by the Urban Institute found that governments arbitrarily limit indirect costs for necessary program and organizational expenses. Among nonprofits reporting caps on indirect costs, one in four (24%) said that governments refused to pay any indirect costs of the organization, and half (49%) responded that they were limited to 7% or less. This practice will now change when federal funds are involved.

In order to take full advantage of this significant change, nonprofits will need to position themselves to be able to negotiate for the full indirect costs by maintaining financial records that properly allocate costs. It is also important that they be well-informed about the new regulations, as full compliance on the part of various government agencies may be inconsistent.

CalNonprofits, the state’s nonprofit membership organization, is currently finalizing a multi-faceted initiative on nonprofit overhead. One key component involves CalNonprofits working with administrators and legislators at state and county levels for full implementation of these new guidelines. Concurrently, Weingart Foundation is also working in conjunction with other foundations on a strategy to inform and educate funders about this important issue. We look forward to sharing information about these efforts in the coming months.

For more information, see CalNonprofit’s Board Member’s Guide to Nonprofit Overhead and the National Council of Nonprofits.