Nearly two years ago, MacArthur set out with four peer foundations to determine whether we were doing enough to help our grantees cover indirect costs when we award grants for specific projects.
Through this work, we learned that our Indirect Cost Policy fell short. The essential costs necessary to operate and run the projects we supported were not being covered.
We believe financial health is an essential element of a nonprofit’s ability to produce the impact we all seek. That is why, effective January 1, 2020, it will be the policy of the MacArthur Foundation to provide an indirect cost recovery of 29 percent of project costs on all new project grants, nearly double our current rate.
The policy is based on a research study the Foundation commissioned using IRS Form 990 data from more than 130,000 U.S.-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.
By adopting this policy, the Foundation aims to be explicit, transparent, and equitable across fields and organizations. More learning and iteration are anticipated to improve this policy over time. Our goals include:
- 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
- Acting with consistency and fairness across grantees
This Indirect Cost Policy applies only to project grants awarded to nonprofit organizations. Grants not eligible for indirect cost recovery include: 1) general operating support grants; 2) endowment grants; and 3) grants made to large, well-established organizations for the purposes of supporting the general operations of a separately managed center.
We want to thank MacArthur grantees who participated in the research and provided feedback as we developed this policy. We encourage those affected by this change to read the new policy and visit an FAQ we have developed to answer common questions.
Over time, the funder collaborative we are a part of will seek to engage more funders, grantees, and intermediaries. Our hope is that the collective efforts of several funders committed to examining the true cost of project grants and working to destigmatize and correct misconceptions regarding overhead expenses will lead to more funders adopting similar approaches. Afterall, these basic expenses are not only necessary to carry out the work but to grow and increase the impact of that work. We hope to partner with our peers to help the sector clarify an indirect cost calculation—so grantees are better positioned to tell their financial story to funders and foundation staff are well-equipped to support grantees’ work.