Authors:
Valerie Chang, Managing Director, Programs
Chantel Johnson, Managing Director, Evaluation
Stephanie Platz, Managing Director, Programs
Elizabeth Powley, Director of Grants Management
MacArthur’s indirect cost policy on project grants aims to support financially healthy nonprofits and share resources and research for both grantees and other funders.
All too often, funders, including MacArthur, limit what they pay for administrative costs to nonprofits. It is part of a “starvation cycle” where nonprofits cannot allocate enough funding to the work that keeps their organizations healthy, sustainable, and afloat—things like investing in staff, building up reserves, and supporting human resources, finance, and fundraising operations.
We are committed to helping end the nonprofit starvation cycle. Our journey started in 2016 when, working collaboratively with the Ford, Hewlett, Packard, and Open Society foundations as part of the True Cost Project, we wanted to understand how we could contribute more toward the financial health of our grantee partners.
Healthy Indirect Costs on Project Grants
In 2020, we rolled out a new indirect cost policy that enables grantees to spend more on these essential costs. We increased our indirect cost rate to 29 percent on project grants, up from our previous rate of 15 percent. This figure was based on research we commissioned that examined the indirect costs of more than 130,000 nonprofits in the United States. The analysis showed that 29 percent was the minimum indirect cost rate associated with financially healthy organizations.
Our explicit goal is to better support grantees. As we introduced this policy, we hosted informational sessions with grantees throughout the first two years of implementation and shared an FAQ about why and how we changed our approach.
A Policy of Transparency and Improving
With this policy, we aim to be transparent and equitable across fields and organizations and to support the vitality of the essential organizations we work with. We are also committed to learning and improving on this policy as we go.
We know that by increasing our indirect cost rates but not increasing overall grant budgets, we cannot expect the same amount of programmatic work. We recognize that the research should be refreshed periodically to ensure that our rate is informed by evidence. We need to understand the appropriate indirect cost rates for grantees outside the United States. We actively consider when project grants are the best approach compared with general operating support.
We hope that by sharing our work and intention to learn we can be accountable and share resources for other funders to do the same.
Sharing Research and Resources
Our consultant BDO FMA has shared a paper about our approach to this policy and its progress thus far. It documents the impetus for our research, how we researched, developed, and implemented the policy, and our approach to evaluating its effectiveness. And BDO FMA provides resources like the Indirect Cost Rate Calculation Guidelines and Rate Template to help organizations determine their indirect cost rates.
The group of funders we work with has expanded. A new collaborative, The Funders for Real Cost, Real Change (FRC), is building on the work of the True Cost Project to ensure that funders change their ways and truly support nonprofits. FRC is sharing information widely and inviting more funders to join the growing collaborative. More information about this work in featured in a three-part series in the Chronicle of Philanthropy. With a broad coalition, together, we can support the health and sustainability of essential organizations.