Overhead

January 5, 2015; National Council on Nonprofits

The OMB Uniform Guidance, the new rules for nonprofits that work on government contracts which went into effect at the end of 2014, is hugely significant. Prior to this, nonprofits working on government contracts had to study various OMB “circulars,” such as A-110, A-133, A-87, and others, as though they were books of scripture and hope that they all made sense—and that following their directives wouldn’t end up impaling nonprofit operating budgets on a federal regulatory sword. The new Uniform Grant Guidance supersedes all of those circulars and others, streamlining the rules governing administrative requirements, cost principles, and audit requirements on federal awards.

The new rules aren’t a panacea, to be sure. They don’t fix many aspects of government contracting that bedevil nonprofit contractors, particularly the agency behavior of not fully funding nonprofits’ service delivery costs or changing contract terms mid-stream. But they do remove plenty of inconsistencies in the old circulars and, probably most importantly in Uniform Guidance text, require that governments pay their nonprofit contractors reasonable indirect costs—administrative costs, that is, or “overhead.”

Working on practical solutions for nonprofits that contract to deliver government-funded services has long been a priority of the National Council of Nonprofits under CEO Tim Delaney’s leadership. Delaney’s policy focus at the helm of this association of state nonprofit associations appears to be the quotidian challenges nonprofits face. The Council’s extensive involvement in the effort to replace the old circulars and to ensure that government agencies pay for overhead will affect the lives of tens of thousands of nonprofits.

What’s particularly important in the OMB Uniform Guidance for nonprofits?

  • First, as stated, the rules now clearly oblige government to pay for a reasonable share of the indirect costs incurred by nonprofits on government grants and contracts. At a minimum, nonprofits can opt for an indirect cost rate of 10 percent of their total direct contract costs (unless the nonprofit contractor already has had a federally approved indirect cost rate). In trying to stretch funds, however, some government agencies may subtly (or less than subtly) suggest that nonprofits waive their ability to collect an indirect on their grants. The new rules actually prohibit agencies from doing that, but the mechanisms for making a complaint are, of course, political; if your nonprofit gets its proverbial arm twisted by a federal agency to waive its indirect rate, and the fear is that complaining might earn your nonprofit an agency’s enmity, you’ve just discovered the importance of a nonprofit trade association like the National Council on Nonprofits. Industry-wide advocacy is going to be needed so that federal agencies get used to the idea that they must pay indirect costs and cannot pressure grant or contract recipients to do otherwise.
  • Second, that indirect cost requirement applies not just to the federal government agencies as they award grants and contracts to nonprofits, but to the pass-through entities that allocate federal grant dollars, including states, local governments, and even nonprofit intermediaries. Anticipate, however, that some pass-through entities may operate under the belief that the rules for indirect cost recovery somehow don’t apply to the grants and contracts they award—and some really will make that argument, trust us! Regardless, the rules do apply, and the pass-through entities will have to be educated—nicely—to understand the new rules of the grants-and-contracts game. The OMB Guidance requires that pass-through entities acknowledge and notify their nonprofit grant and contract partners that they are using federal funds to make the awards. Again, rather than putting the entire onus of this on individual nonprofits, the importance of sector-wide advocacy that keeps a close eye on federal moneys handled by pass-through governmental entities and nonprofit intermediaries is going to be very important.
  • Third, the rules allow for more of what nonprofits used to classify as program administration (or indirect costs) to be billed to grants and contracts as direct costs.
  • Fourth, even though the new rules took effect in late December, there are still 60 days for nonprofits to propose additional changes. The filing period for comments ends on February 17th, so this is the time to make sure that OMB understands fully what nonprofit contractors really need. In light of the extended comment period, nonprofits would be well advised to inform the National Council of Nonprofits about their grant and contract experiences under the new OMB Guidelines so NCN can present to the federal government an empirically grounded argument for additional modifications in the rules if they are needed.

One more comment is warranted: If the federal government is going to gradually get into the necessary and logical mode of including overhead rates in contracts and grants involving federal money, perhaps the lessons should expand so that state and local governments do the same with their non-federal moneys. Even private foundations, some of which favor grant applicants that profess to have unnaturally low or no overhead costs, might be well advised to listen, learn, and get into a mindset that compensates their nonprofit grantees for their indirect as well as direct costs of service delivery.—Rick Cohen: