Giving Compass' Take:

• The MacArthur Foundation is increasing its indirect cost recovery to cover operating costs for nonprofit organizations in order to support the financial health of organizations. 

• How can individual donors think about nonprofit organizations' financial health when contributing? 

• Read about poorly managed indirect cost recovery and the toll it takes on nonprofits. 


Nearly two years ago, MacArthur set out with four peer foundations to determine whether we were doing enough to help our grantees cover indirect costs when we award grants for specific projects. Through this work, we learned that our Indirect Cost Policy fell short. The essential costs necessary to operate and run the projects we supported were not being covered.

We believe financial health is an essential element of a nonprofit’s ability to produce the impact we all seek. That is why, effective January 1, 2020, it will be the policy of the MacArthur Foundation to provide an indirect cost recovery of 29 percent of project costs on all new project grants, nearly double our current rate.

The policy is based on a research study the Foundation commissioned using IRS Form 990 data from more than 130,000 U.S.-based nonprofit organizations. The study sought to establish a benchmark for the Foundation’s grantmaking by understanding the indirect cost rates of financially healthy organizations. The study found that the minimum indirect cost rate associated with financially healthy organizations in the dataset is 29 percent.

By adopting this policy, the Foundation aims to be explicit, transparent, and equitable across fields and organizations. More learning and iteration are anticipated to improve this policy over time.

Over time, the funder collaborative we are a part of will seek to engage more funders, grantees, and intermediaries. Our hope is that the collective efforts of several funders committed to examining the true cost of project grants and working to destigmatize and correct misconceptions regarding overhead expenses will lead to more funders adopting similar approaches. Afterall, these basic expenses are not only necessary to carry out the work but to grow and increase the impact of that work.

Read the full article about indirect costs by John Palfrey at MacArthur Foundation.