Indirect Cost Policy FAQs
What change did the Foundation make to its Indirect Cost Policy in 2020?
The Foundation adopted a policy of providing an indirect cost rate of 29 percent of project costs on all project grants to nonprofit organizations beginning in calendar year 2020. Our intent is to pay a greater proportion of indirect costs for project grants. This change reflects our commitment to structure our awards to grantees in ways that support organizations’ financial needs and their actual costs for programs/projects and contribute to organizational health and resilience. This represents a substantial increase over our prior practice of a 15 percent indirect cost rate. We invite you to review the revised indirect policy in its entirety.
Why are we changing our policy?
The policy shift is informed by a research study that the Foundation commissioned using IRS Form 990 data from over 130,000 US-based nonprofit organizations. The study sought to establish a benchmark for the Foundation’s grantmaking by understanding the indirect cost rates of financially healthy organizations. The study found that the minimum indirect cost rate associated with financially healthy organizations in the dataset is 29 percent.
We have been guided by the following principles in developing the revised policy:
- Supporting grantees to accomplish the purposes of the project;
- Structuring awards according to financial need and costs associated with a project;
- Paying the direct costs of grant projects plus a fair share of associated indirect costs;
- Promoting effective and efficient allocation of resources; and
- Acting with consistency and fairness across grantees.
When would the change go into effect?
This policy went into effect January 1, 2020.
Which grants and grantees are impacted?
This indirect cost policy applies only to project grants to nonprofit organizations. Grants made to US-based organizations that do not function as nonprofits (e.g., government entities, for-profits) are ineligible for this indirect cost rate.
Grant types not eligible for indirect cost recovery include:
- General operating support;
- Endowment grants; and
- Flexible support project grants, such as grants made to large, well-established organizations for the purposes of supporting the general operations of a separately managed center.
The policy also does not apply to grants made under the Foundation’s expedited small grants program.
How will specific types of grantees (e.g. fiscal sponsors, universities, pooled funds) be impacted?
There are a variety of complex or specific grantees that may require additional guidance. We expect these types of grantees to be impacted in the following way:
- Fiscal sponsors: The fiscally sponsored projects would be eligible for the new indirect cost recovery rate, but the fiscal sponsor itself would not. We expect that the fiscal sponsor would continue to provide its services to the fiscally sponsored project for a fee. That fee would be included in the indirect cost rate.
- Universities: The new indirect cost recovery rate will apply when a grant is made to a university for the purpose of a specific research project or other scope of work. The indirect cost recovery rate will not apply when a grant is made to a university in order to provide flexible or general support to a separately managed center within that university.
- Pooled Funds: The indirect cost policy will not be applied to certain pooled funds and multi-donor collaborations. The characteristics of this type of these types of grants are: (1) the Foundation is one of multiple funders collaborating on shared outcomes, (2) the grantee, for the collaboration at issue, has previously negotiated agreements on grant budget, pricing, and a rate for indirect cost recovery, and (3) there is a single budget presentation by the grantee to all funders.
How will non-US based grantees be impacted?
This policy generally applies to nonprofitorganizations based both inside and outside the United States. The applicability of the policy for non-US grantees that do not have a 501(c)(3) equivalency determination will be considered on a case-by-case basis with the submission of additional documentation.
We recognize that there is less research available on the cost structures of organizations based outside the United States and we will continue, through collaborative efforts with other funders, to conduct additional research. We also have gathered some information from our non-US based grantees and expect to learn more. Our aim is to implement a policy that is both equitable and contextual.
How will Expenditure Responsibility (ER) grants be handled?
Foundation grants to organizations that are not 501(c)(3) public charities or equivalents require that the Foundation exercise expenditure responsibility (ER) in accordance with IRS regulations. Expenditure responsibility consists of a number of additional requirements, including additional reporting and ensuring funds are used only charitable purposes. The indirect cost policy therefore does not apply in the same way to ER grantees as it would for public charities. Consideration of the overhead cost policy to ER grantees will be on a case by case basis with the requirement that all funds for any indirect costs are applied toward charitable purposes identified by the organization. This will require the submission of additional documentation to support the requirements. Grants made to organizations that are for-profit organizations are ineligible for this indirect cost rate.
What training will be provided to grantees to help them budget differently, and to Foundation staff to help them review budgets differently?
We worked with BDO FMA to develop and deliver webinars in 2020 and 2021 to provide guidance and training to grantees on the policy, definitions/terminology, and expectations for budgeting. A recording of the training is available to grantees in our grant portal. BDO FMA also provided customized, role-appropriate training and training materials for MacArthur staff.
What will an organization need to submit?
We do not have a budget template at this time but ask that you submit both a project budget (similar to the example in Attachment 2 of the Foundation’s Indirect Cost Policy document) and an accompanying budget narrative that explains the project’s specific, shared, and indirect costs. For any shared costs, please provide an explanation of how those costs are allocated and what portion has been included in your MacArthur budget proposal. Please describe what is included in your organization’s indirect costs, but they do not need to be itemized.
What if an organization’s indirect cost rate is less than 29 percent?
In the case of non-ER grants, if an organization’s documented indirect cost rate is less than the rate offered under the Foundation’s policy (29 percent), the organization may use any difference between the two amounts for general operating support.
Will there be an increase in program budgets to accompany this change in policy?
No. We do not anticipate that overall program grant budgets will be increased with this policy change.
Will this change be retroactive?
No. The new indirect cost rate will be applied to new grants awarded in 2020 and beyond. Grantees that have already been awarded multi-year grants that are in force through 2020 and beyond will continue to receive the previous indirect cost rate for the life of the existing grant.
What is the extensive research that MacArthur conducted?
BDO FMA and BCT partners, external consulting firms with expertise in nonprofit finances, examined a large data set that recently become publicly available—IRS Form 990 filings for U.S.-based 501(c)(3) organizations. BDO FMA/BCT analyzed three years of data on roughly 136,000 organizations. The analysis involved “matching” all Form 990 filers into 31 clusters, based on organizational and community demographics to help achieve “apples-to-apples” comparisons. The analysis also involved establishing a financial health threshold of the top quartile (75-99 percentile) of all organizations in a cluster (measured by months of liquid unrestricted net assets or LUNA); and calculating the ideal indirect cost rate range for organizations meeting the financial health threshold.
The important innovation in this analysis is the intent to determine the indirect cost rates of financially healthy organizations, rather than benchmarking against the practices of all organizations, whether financially healthy or not. From a grantmaking perspective, this allows the Foundation to establish an indirect cost policy based on rates that are shown to be associated with financial health. (The analysis also recognizes that increasing indirect cost rates is not necessarily the only way to increase LUNA and that LUNA is but one proxy for an organization’s financial health.)
BDO FMA applied its analysis to all organizations in the dataset and then to all of MacArthur’s U.S.-based grantees. In looking at our grantees, BDO FMA found that a majority of current MacArthur grantees have indirect cost rates higher than our 15 percent cap. The analysis of the full dataset provides insight into the indirect cost associated with financially healthy organizations across all U.S. geographies and nonprofit sub-sectors.
How will you get feedback on this change?
MacArthur continues to gather feedback about how changing our indirect cost policy affects the Foundation’s grantmaking strategy and, importantly, how it may be affecting grantees’ grant-funded projects or potential for longer-term financial health. In the first year of policy implementation, we engaged in wide range of grantee and staff interviews and will continue to do so over time. We will continue to engage in data analyses to explore if/how our changes in policy are affecting grantees budgets, projects, and potential for longer-term health.
We welcome your comments/questions.