Federal Government to Improve Payments for Indirect Costs

By the end of this year, new rules will go into effect governing payments to nonprofits for the full costs of delivering their programs. Nonprofits stand to benefit significantly from this comprehensive “once-in-a-generation” overhaul of federal grants policies, issued by the White House Office of Management and Budget (OMB) in December 2013. Notably, OMB states that a nonprofit’s indirect costs (sometimes called overhead or administrative costs) are legitimate expenses that need to be reimbursed for the organization to be sustainable and effective.

The new federal reforms will explicitly require pass-through entities (typically state and local governments receiving federal funding) and all federal agencies to reimburse a nonprofit’s indirect costs by applying that nonprofit’s federally negotiated indirect cost rate, if one already exists. If a negotiated rate does not yet exist, nonprofits are empowered to either request the option of negotiating a rate or elect to accept the default rate of 10% of total costs.

In order to take full advantage of this significant change, nonprofits would need to position themselves to be able to negotiate for the full indirect costs by maintaining financial records that properly allocate costs. It is also important that they be well-informed about the new regulations, as full compliance on the part of various government agencies may be inconsistent.

Weingart Foundation is currently working in conjunction with other organizations in the sector on a strategy to inform and educate funders and nonprofits about this important issue. We look forward to sharing information about this initiative at a later date. In the meantime, for information about the new federal reforms and their impact, see the National Council of Nonprofits website.

We also encourage nonprofits to complete this short survey from the Council of Nonprofits, which will support efforts to ensure that the reforms are implemented fully and effectively.