Mandatory 10% Overhead Minimum in Government Contracts Takes Effect

New OMB Guidelines that take effect December 26, 2021 say that contracts with nonprofits involving federal money must include a minimum of 10% overhead. This isn't enough, but it's an important victory for nonprofit policy advocates. California currently ranks 4th worst in the nation in nonprofits that suffer under government contracts that do not pay the full costs of the work, and 60% of these nonprofits are in human services -- working with the vulnerable in our society.

Specifically, the OMB Uniform Guidance requires state and local governments that use federal funding in nonprofit contracts to apply either the nonprofit’s federally negotiated indirect cost rate, or, if the nonprofit does not have such a rate, a default rate of 10% of their modified total direct costs. States and local governments must put this new ruling into place by December 26, 2014. 

A nationwide study published December, 2013 by the Urban Institute found that governments arbitrarily limit indirect costs for necessary program and organizational expenses; among nonprofits reporting caps on indirect costs, one in four (24%) said that governments refuse to pay any indirect costs of the organization, and half (49%) responded that they were limited to 7% or less. This will no longer be tolerated when federal funds are involved.

CalNonprofits is currently finalizing a multi-component initiative on nonprofit overhead; one key component is working with administrators and legislators at state and county levels for full implementation of this new guidance. Stay tuned for upcoming webinars, forums, and more.

For more information, please see our Board Member’s Guide to Nonprofit Overhead and the National Council’s useful page on this subject. 

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