Who will pay the electric bill? Calculating and presenting overhead in donor proposals
By Jeff Kaye

[A further article in a series aimed at guiding Israeli nonprofits towards successful resource development.]

Writing a proposal for a potential donor is no mean task. Given that this may be the Israel-based organization’s primary opportunity to impress a donor or foundation, a great deal rests on the shoulders of the person doing the writing, compounded by obvious time-differences, cultural nuances and language. It is typical that the most difficult aspect of the proposal and the issue which leads most often to misunderstandings is how to determine and display the overhead cost appropriate to include in a donor proposal.

Today it is rare for seasoned donors to deny an organization even a single Sheqel of overhead as a condition for funding a program. Similarly few donors will write checks that will cover running the organization devoid of program. Most donors will, however, agree to fund reasonable costs to enable the program to run properly.

The challenge is both in accurately calculating what reasonable costs are, but also in displaying them in a manner which is coherent to the donor. Needless to say that the donor-nonprofit circle of trust will be irreparably damaged should the donor sense anything disingenuous in the manner in which the overhead cost has been concealed or buried in the program budget.

Below are a few tips which should guide the Israeli nonprofit in this process.

If the donor is already contributing to the general funds of the organization, he or she may expect that additional program requests should include minimal overhead costs, whereas the opposite may be true of a new donor. The key here is to have that conversation or negotiation. (This is not always possible in a long-distance relationship, particularly on a first date.)

Regardless, the organization should be able to differentiate between three types of overhead costs:

Indirect Operating Costs

In smaller organizations it may be possible to segregate indirect operating costs by program, such as that program’s proportion of rent, staff-time, communication and travel. However this is cumbersome and will often lead to the exclusion of real costs that are forgotten. An alternative is to include in a proposal an indirect cost rate which is either added to each line item or added on at the end of the budget. In both cases this needs to be clearly stated along with the chosen percentage rate.

Fundraising and Marketing Costs

While not all donors will be willing to pay, all of them do understand the need for organizations to incur fundraising and marketing expenses, provided they are reasonable. They should be calculated and listed separately. Most donors will wish to know where the organization scores on Charity Navigators Fundraising Efficiency Matrix. Then he or she can choose to participate or not.

Program Delivery Costs

While it is easier for a donor to feel good about the need to utilize budget for essential equipment, participant subsidies or scholarships or meals for needy populations, the organization will often incur delivery costs to add staff or other facilities. Donors know that it costs money to manage a program, and will appreciate that an inadequately supervised program will fail, which is in nobody’s interest. It is important to calculate accurately the actual delivery cost per program, and if facilities are intended to be shared by other programs this should be clearly calculated and stated. In this case, percentage rates are not legitimate and should be very specific.

There may be cases where a donor may agree to fund a program but will refuse to cover the organization’s requested overhead cost. This leads to a dilemma which needs careful attention and should be discussed between the lay and professionals in the organization. Even when the organization is able to cover the “lost” costs from other sources, this leads to a precedent which is likely to become known to other donors and cause resentment davka from the organization’s best supporters. This is the time for the organization to examine its Donation Acceptance Policy.

In summary the issue of overhead should be taken very seriously. The more that is known about the donor and his or her attitude to this issue, the better, and if given an opportunity there is no better replacement for communication about expectations. Full transparency is always going to be the best avenue, for it is the key that will gain the confidence of the donor and the trust to give generously.

Jeff Kaye is a Senior Partner at Golan & Kaye – Leading Philanthropy in Israel and founder of The Israel Academy of Philanthropy (TM).