Funders for years have been aware of the "starvation cycle" that leaves grantees scrambling to cover all of their indirect costs. Mounting evidence of the harm done by underfunding these essential expenditures inspired the presidents of five major foundations to join forces in 2017 to seek a solution. Their collaborative effort led to the development of a menu of approaches to address chronic underfunding of nonprofits' indirect costs. Bridgespan's research and advocacy helped to spark and sustain this multiyear effort.

In our client work a decade ago, we frequently heard concerns about unfunded indirect costs, so we invested in research to understand the issue better. That work led to "The Nonprofit Starvation Cycle," published in Stanford Social Innovation Review in 2009. The article described how funders often had unrealistically low assumptions about grantees' administrative and operational costs, and nonprofits seldom understood or championed full funding of those costs. In the absence of reliable indirect-cost data, funders typically opted to cap those costs at 15 percent or less.

Underfunding is also a familiar issue globally, which we wrote about in our report, "Stop Starving Scale: Unlocking the Potential of Global NGOs." When we interviewed more than two dozen NGO leaders in 2012, they identified tight-fisted reimbursement for indirect costs as the biggest obstacle blocking needed upgrades in staff capacity and critical infrastructure. Without adequate support, they struggled to meet their funders' goals. As one program officer we interviewed for further research on funder collaboratives put it, "This has led to a hollowing out of civil society institutions…at a time when they are critically important."

Bridgespan's ongoing research and writing on this topic contributed to a national dialogue on adequate funding for indirect costs. For its part, the federal government rewrote its contracting rules in 2014 to ensure for the first time that all nonprofits receiving federal grant money—either directly or passed through state or local governments—also receive at least 10 percent reimbursement for their overhead costs.

Additionally, the CEOs of the three leading nonprofit ratings agencies—BBB Wise Giving Alliance, Charity Navigator, and GuideStar—launched the "Overhead Myth" campaign with an open letter that called overhead "a poor measure of a charity's performance" and asked donors to also "pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results."

In 2016, Bridgespan joined with the presidents of five foundations—Ford, Hewlett, MacArthur, Open Society, and Packard—to dig deeper into the impact of underfunding on the financial health of nearly 300 grantees that account for a third of the combined spending of the top 15 US foundations. Given the prominence of these nonprofits, many of which are household names, the results came as a surprise. More than half (53 percent) suffer from frequent or chronic budget deficits—defined as occurring in at least two of the past five years. And 40 percent have fewer than three months of reserves (specifically, liquid unrestricted net assets) in the bank to cushion financial shortfalls. In fact, 30 of the 300 organizations showed no reserves—making them technically insolvent.

Read the full article about ending the chronic underfunding of nonprofits at The Bridgespan Group.