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 Costs, Real Change (FRC), a community of practice among 12 funders[1] 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.

Read the full article about project grants by Rodney Christopher at The Center for Effective Philanthropy.