In 2004, the Independent Sector Building Value Together initiative examined
and made recommendations about ways that foundations and nonprofit
organizations can work together to improve their practices to achieve
successful outcomes. Paul Brest, president and CEO of the Hewlett Foundation,
and Hilary Pennington, director of special initiatives at the Bill &
Melinda Gates Foundation and then a member of the IS board of directors, were
the co-chairs of the Building Value Together Steering Committee.
Guidelines for the Funding of Nonprofit Organizations
about the health and vitality of the nonprofit sector and about the
state of foundation-nonprofit relationships, the Independent Sector
Board of Directors has unanimously endorsed a statement calling on
funders and nonprofit organizations to adopt a reciprocal commitment to
working together constructively, to enhanced performance and to
on funders to opt for general operating support over project support
when feasible and when the goals of the two organizations are
- Encourages funders,
when providing project support, to pay “the fair proportion of
administrative and fundraising costs necessary to manage and sustain
whatever is required by the organization to run that particular
- Calls on nonprofit organizations to
engage in “top-notch performance... in strategic planning, financial
management, evaluation, development, and ultimate impact.”
statement was drafted by Paul Brest, president and CEO of the William
and Flora Hewlett Foundation, along with a working group of foundations
and nonprofit organizations in the fall of 2003. The full text of the
statement is below.
IS's endorsement of the statement is part of the Building Value Together
initiative that is designed to promote practices by both foundations
and nonprofit organizations that lead to enhanced results. A preference
for general operating support, where the organizational missions of the
foundation and the nonprofit organization are strongly aligned, and a
willingness to pay appropriate overhead costs when funding projects
will lead, in IS's view, to enhanced results for both parties.
Statement on Guidelines for the Funding of Nonprofit Organizations
can often achieve their strategic goals through core support for
organizations whose goals are substantially aligned with their own.
Where appropriate and feasible, funders should prefer multi-year,
reliable core support to project support.
Core support, or general operating support, is funding directed to an organization's operations as a whole rather than to particular projects (project support).
If an organization has separate programs, departments, or divisions
(for example, schools within a university), support for a particular
program, or program support, is tantamount to core support.
Core support may be used not only for the delivery of services or other
activities directly in pursuit of the organization's mission, but also
for administrative and fundraising expenses (overhead).
predictable, and flexible support is the lifeblood of nonprofit
organizations. It provides the working capital that every organization
needs to carry out its mission and respond to new challenges and
opportunities. Core support is essential for the individual
organization's sustainability and for a vibrant, and pluralist
- The value of
reliable core support to high-performing organizations should not
prevent a funder from supporting new organizations entering the field.
Indeed, it is often in the funder's and the field's interests for
established organizations to compete for funding with newer ones.
should be responsive to the capitalization needs of organizations, and
to the forms of funding necessary to sustain them. Funders should not
assume that an organization will become self-sustaining or that others
will fund it after they have ceased supporting it. An “exit strategy”
with respect to organizations pursuing social change tends to make the
most sense when the social objective has been achieved, when other
funders or government agencies are prepared to carry on the work, when
the organization is performing poorly or the anticipated social return
on investment is low or declining. Where possible, a funder planning to
exit a high-performing organization should assist the organization in
obtaining funding following its exit.
funder can often achieve its strategic goals by providing core support
to nonprofit organizations. A funder can evaluate an organization much
as the organization evaluates its own success, and can evaluate the
organization's contribution to the funder's strategy.
funder interested in particular activities or programs of a
multi-program organization can generally achieve its aims through
general support for the organization as a whole or the program, coupled
with expectations and evaluation focused on those activities or
- In return for long-term,
multi-year support, funders can appropriately expect top-notch
performance from non-profit organizations in strategic planning,
financial management, evaluation, development, and ultimate impact.
requirements for proposal and reporting formats may subject an
organization to responding to inconsistent demands by multiple funders.
Therefore, a funder should take into account the size of its grant
vis-à-vis those of other funders when considering what demands to place
on a grantee, and should consider collaborating with others on common
due diligence, evaluation, and reporting processes, with one funder
taking the lead.
reliable core support is so important to nonprofit organizations and
can often achieve a funder's goals, why is core support such a small
percentage of grants and why are so many grants made for short periods
or not renewed?
- Funders may not
appreciate that they can often achieve their strategic goals and
evaluate their achievement through core support grants.
or their program officers may not endorse, support, or even like
everything a grantee does, or they may be enthusiastic in deepening,
expanding, or highlighting particular activities of the grantee . The
result is increased tentativeness about general support and more
affinity towards project grants. (Program support may often provide a
way to accommodate everyone's interests.)
or their program officers may be prone to “donor fatigue,” getting
bored with regularly supporting strong organizations, and preferring to
explore new ventures. They may not realize that few other sources of
funding are available to the organization.
funder may desire more individual credit for an organization's success
than is possible when it is one of a number of funders contributing
- Funders may not trust grantee organizations to make good decisions about how to use core operating support.
project grants, which are often favored by funders, usually have a
completion date, it is not surprising that there may not be many
renewals. The focus on project grants encourages grantees to
continually propose new ideas to funders that possibly might fit narrow
grant guidelines instead of focusing on building institutional capacity.
on an organization's overall financial situation, endowment and capital
funding may be of great value to an organization in achieving its
mission. Grants aimed at strengthening an organization's capacity
(e.g., for strategic planning or fundraising) can also be of
value—though funders should be careful to ascertain that the
organization's leadership views such capacity building as a priority.
funding specific projects, funders should presumptively pay the full,
actual costs incurred by the organization, including the fair
proportion of administrative and fundraising costs necessary to manage
and sustain whatever is required by the organization to run that
Definitions. Administrative expenses, also known as management & general expenses, are costs associated with sustaining the operations of a nonprofit organization. Fundraising expenses are costs incurred in raising contributions. Administrative and fundraising expenses constitute an organization's overhead.
the presumption of general support, a funder's and organization's
interests may sometimes only coalesce around particular projects.
Funders of projects typically pay for salaries, travel, and other costs
directly related to carrying out the project, but often do not pay for
the additional burden the project imposes on the organization's
administrative and fundraising costs.
costs, including the costs of fundraising, are as real to an
organization as the costs of activities directly associated with a
project, and must come from somewhere. Thus, project support that does
not pay its full proportion of overhead takes a “free ride” on other
funders' support, and ultimately decreases the overall effectiveness of
- Although there are
generally accepted practices for accounting for overhead costs, they
are not pervasively understood in the nonprofit sector; funders as well
as grantee organizations often define these costs in nonstandard or
idiosyncratic ways. Where a grantee organization does not employ
generally accepted practices, or where the nature of the organization,
grant, or other factors do not justify detailed cost accounting,
funders should base overhead on the average costs for organizations of
a similar sort, based on sector and size.
funder may appropriately pay less than the organization's average
overhead costs if some of its departments or activities have
significantly higher management & general or fundraising expenses
than are reasonably attributed to a project, or if the project provides
non-trivial external benefits to the organization's core
mission—benefits that are appropriately paid for by general support.
funders are not aware of the overhead costs incurred by organizations,
or believe that they need only pay for the costs directly incurred by a
project, not realizing that the organization could not function if
every funder only paid only its marginal costs.
- Many funders and grantee organizations are not aware of generally accepted standards for accounting for overhead.
guidelines were drafted by a working group established after a meeting
of funders and nonprofit organizations co-sponsored by the Edna
McConnell Clark Foundation, Open Society Institute, William and Flora
Hewlett Foundation, Rockefeller Brothers Fund, and Surdna Foundation in
New York on June 18, 2003. Paul Brest, president and CEO of the William
and Flora Hewlett Foundation, was the principal drafter. The IS Board
of Directors endorsed the guidelines at its meeting on January 29, 2004.