Knowledgebase

Description:From 1999 to 2004, researchers at the Urban Institute's National Center for Charitable Statistics (NCCS)/Center on Nonprofits and Philanthropy and the Center on Philanthropy at Indiana University explored issues of nonprofit fundraising and administrative cost reporting. The goal of the project is to increase understanding of cost reporting, and to work with practitioners, policymakers, and the accounting profession to improve measurement and reporting. The project has come to be known as the "Nonprofit Overhead Cost Study."

For better or worse, the percentage of total expenses going to program costs is the most common measure of nonprofit organizational efficiency. Focus group research has found that donors expect worthy organizations to have low fundraising and administrative costs. Consequently, nonprofits frequently tout their low overhead ratios in their mailings to the donors. Most striking, the federal government�s Combined Federal Campaign, which raised nearly $250 million for nonprofits in 2003, requires that participating organizations certify that their combined fundraising and administrative costs constitute no more than 25 percent of the organizations� total revenues.

As data from the IRS Forms 990 become widely available -- as mandated by law -- in paper form and on the Internet, we expect interest in these types of ratios to burgeon. Like the ubiquitous price-to-earnings (PE) ratio in the financial world, measures such as the proportions of expenses allocated among program services, fund-raising, and administration are becoming commonplace.

How well do organizations do in tracking and reporting the expenses that these ratios are based on? What are the consequences for nonprofits that seek to keep their administrative and fundraising costs to a minimum? These are the kinds of questions that the Overhead Cost Project sought to examine, and some of our main findings are contained in our research briefs and guides. Based on surveys, case studies, and analysis of Form 990 data, we learned that accurate cost reporting is a challenge for many organizations, and that these challenges cause a range of problems for nonprofit managers, watchdog organizations, donors, government regulators, foundations and other institutional funders, and researchers. Accurate cost reporting should be a priority for all of these groups.

The Atlantic Philanthropies, the Ford Foundation, the Charles Stewart Mott Foundation, the David and Lucile Packard Foundation, and the Rockefeller Brothers Foundation provided financial support for the project.