A major collaborative effort by five foundations, including the Ford Foundation, a CMF member, is aimed at leveraging new practices to “end the nonprofit starvation cycle.”

The announcement came last week as The Bridgespan Group released a new report to share the findings of collaborative work involving the Ford, Hewlett, MacArthur, Open Society and Packard Foundations.

Bridgespan shared in a press release that “Nearly all government funding globally, as well as over three-quarters of U.S. foundation giving, is allocated through project grants. Under current sector norms, many of these grants underfund nonprofits by imposing a limit of 15 percent or less on coverage of indirect costs.”

The two-year collaborative project has resulted in an agreement among the participating foundations to try new practices that address the chronic underfunding of their grantees and call on other funders to join them in alleviating this sector-wide issue.

“As funders, we have a responsibility to ensure that civil society thrives,” Darren Walker, president of the Ford Foundation tweeted. “Proud to work with other foundation leaders to end the chronic underfunding of organizations and grantees.”

Key findings from the report:

• There’s inconsistency in language for indirect-cost policies across the sector.

• The most common indirect-cost-reimbursement policies for project-restricted grants are flat rate policies with indirect-cost rates of 15 percent or less. However, Bridgespan’s research shows indirect-cost rates almost always exceeded 20 percent, meaning they only cover a portion of the grantees’ actual indirect costs.

• Insufficient cost recovery leads to financial weakness. Bridgespan shared the results of earlier research which showed that more than half of the 274 grantees they studied suffered from frequent or chronic budget deficits and 40 percent had fewer than three months of reserves in the bank.

The report shares that “while project grants are an essential tool in philanthropy, they routinely discount the core administrative and operational costs of delivering programs and services.”

After establishing a shared understanding of how project grants are resulting in insufficient funding for nonprofits’ indirect costs, the five foundations sought to articulate guiding principles to change their grantmaking policies and practices. These include:

• Do what is right and do no harm.

• Pay a fair share of indirect costs.

• Act with consistency and fairness.

• Stimulate honest and constructive conversations between funders and grantees.

• Promote efficient and effective allocation of resources.

These guiding principles then led to the development of a menu of grantmaking approaches (shared by Bridgespan) that offer coverage for both direct and indirect expenses.

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“The difficult work of implementing the (foundations’) presidents’ proposed solutions to chronic nonprofit underfunding is just beginning. Thoughtful, long-term collaboration across the social sector will be crucial to sustaining momentum and ultimately putting an end to the ‘starvation cycle,’” the report states.

Want more?

Read the full report.