The Challenges of Accepting Non-Full Cost Funding [SUBSCRIBERS-ONLY]

Most nonprofit organizations are confronted with an unfair choice each year: accept or not accept critical funding that is inherently designed to not cover the full cost of the programs and activities for which the funding is provided. This reality has been around for a long time. Looking to the future, we must actively push funders to recognize that sustainability will be damaged if nonprofits continue to be forced to compete for, and pressed to accept, non-full cost funding.

A recent article by the Stanford Social Innovation Review highlighted this problem. In discussing how foundations have “stepped up with new commitments of support” during the pandemic, the article mentioned an encouraging new development:

“The Council [on Foundations] worked with partners on a pledge of action signed by nearly 800 foundations to support nonprofits in a deeper way because of the COVID-19 crisis. As stated in the pledge, this can mean converting project-based funding to unrestricted support and making new grants as unrestricted as possible, among many other steps.”

While these efforts are praiseworthy, the old funding practices persist and continue to cause problems for nonprofits. Non-full cost funding practices have become a leading cause of operating reserve depletion for nonprofits and also impedes some organizations from building adequate operating reserves in the first place. Operating reserves are critical to supporting a financially healthy and sustainable organization, and funding practices that deplete or hinder operating reserves directly contribute to future instability and risk exposure.