Center on Philanthropy - Overhead Cost Statement

The Center on Philanthropy at Indiana University

Indiana University - Purdue University - Indianapolis

Statement About Nonprofit Overhead Costs

Donors Advised Not To Restrict Relief Giving

Expenses for Management, FACILITIES, and Fundraising Are Vital to Delivering Charities’ Services

Research by scholars at the Center on Philanthropy at Indiana University and the Center on Nonprofits and Philanthropy at the Urban Institute finds that organizations that spend too little on organizational infrastructure and administrative costs are often ineffective at getting services to those who need them.

Whether a given donor pays a portion the organization's operating costs or not, the organizational infrastructure is needed to ensure delivery of a program or service. Some people think a charity’s overhead costs should not be funded by donors’contributions. Yet credible research finds that organizations must invest in

organizational infrastructure and administrative costs to be effective. Donors are advised to consider the importance of basic organizational operations and avoid limiting their contributions.

“Donors should not ask or expect organizations to dedicate 100 percent of their contributions to programs,”

said Gene Tempel, executive director of theCenter on Philanthropy at Indiana University.

“Reasonable expenses formanagement, facilities, and fundraising are vital to charity’s ability to meet clients’ needs.”

When donors restrict their giving to “100 percent for programs” or “ only to purchase gifts for the children ,” they create a situation that can force charities to trim overhead expenses, sometimes beyond what is advisable for effective operations. In a national study of more than 1,500 charities, researchers at the Center on Philanthropy at Indiana University and the Urban Institute’s Center on Nonprofits and Philanthropy found that organizations with an overemphasis on having low or “no” expenditures for organizational operations do not deliver “more” or “better” services.

“Organizations that do not adequately fund so-called overhead costs are likely to reduce their effectiveness or eliminate systems that should be in place for

accounting and for accountability to the public,” Tempel said. “Donors need to know that some expense for overhead is required in order for the organization to

function well and to respond when needed, and that these costs can legitimately vary widely from organization to organization. ”

The Nonprofit Overhead Cost Project, which was conducted by the nonprofit research centers at Indiana University and the Urban Institute, found that

overhead costs can reasonably be 10 percent or 20 percent or sometimes even 35 percent of an organization’s budget, depending on the organization’s work and its size. (The Family Giving Tree has always held non-program costs to under 10 %.) However funding for overhead is needed.

Whether a given donor pays a portion of that or not, there are costs for the organizational infrastructure that supports a program or service. Overhead is the rent, electricity, heat, telephone, postage, printing, and furnishings. It’s the cost of a qualified management team, the cost of communicating with and convening a board of directors, and the cost of recruiting and training qualified staff members and volunteers. It’s accounting, human resources, and information technology. In addition, it’s the cost of tracking gifts and expenses and then communicating to donors about how the organization has used their contributions.

Overhead is the Web site you visit, the annual report you read, and the time that nonprofit organization staff members take to talk with you when you call.

Reasonable spending on overhead is not waste; it is the basis for mission effectiveness and the way you get the information you need and want to evaluate

how the organization performed.

The Nonprofit Overhead Cost Project investigated how nonprofits raise, spend, measure, and report funds for fundraising and administration, and worked with practitioners, policymakers, and the accounting profession to improve standards and practice in these areas. This project is a collaboration between the Center on Philanthropy at Indiana University and the Center on Nonprofits and Philanthropy at the Urban Institute. For more information on the project, see http://www.coststudy.org .

The Nonprofit Overhead Cost Project was supported by The Atlantic Philanthropies, the Ford Foundation, the Charles Stewart Mott Foundation, The David and Lucille Packard Foundation, and the Rockefeller Brothers Fund.

The Center on Philanthropy at Indiana University550 W. North St., Suite 301 | Indianapolis, IN 46202-3272 | 317-274-4200Copyright 2004 The Center on Philanthropy at Indiana University Last Updated: September 14, 2005 Administrator Login