No policy is ever really neutral. All involve value judgments (such as whether a nonprofit’s administrative costs are “legitimate” expenses) and all can and should be evaluated in terms of their distributional impact. In the case of funders’ policies regarding coverage of grantee indirect costs, there is a strong case that low indirect cost rate caps are particularly unfair to smaller organizations—a category that tends to include many grantees led by and serving people of color as well as those in rural communities.

The “nonprofit starvation cycle” caused by unrealistic donor expectations of grantees’ administrative and operating costs has been a known problem in the grantmaking world for years, but it hasn’t generally been evaluated through an equity lens. Recently, we and our colleagues at BDO FMA analyzed data from IRS Form 990 filings of nearly 150,000 501(c)(3) organizations and found that the indirect cost rate reported by those organizations has an inverse relationship to their budget size. In other words, smaller organizations tend to have higher indirect cost rates than larger organizations.

The table below lists median indirect cost rates by organizations’ total expense budgets. For purposes of this analysis, indirect cost rate was calculated as an organization’s total management and general expenses plus total fundraising expenses as a percentage of total program expenses. Also note that while these ”reported” indirect cost rates are based on calculations from IRS Form 990 filings, nonprofits often face pressure to under-report indirect costs in such public-facing documents.

Read the full article about indirect cost coverage by John Summers and Rodney Christopher at PEAK Grantmaking.