Covering core costs

What's the problem?

In order to run projects and programs (both of which grantmakers are generally more happy to fund), community groups need to cover their core costs. In fact, they need to cover their core costs in order to exist in the first place. Grantmakers, however, are often reluctant to fund core costs. Many grantmakers explicitly rule out doing so.

This is perhaps because covering core costs is less exciting than covering innovative projects, and because the funding outcomes are harder to measure to meet accountability requirements. Grantmakers can feel that they have less control when they fund core costs, and also perhaps do not understand the challenges not-for-profit organisations face in trying to cover staff salaries and other overheads.

Core costs include paying for staff, telecommunications, equipment (including IT), rent, travel, governance costs, consultation, networking, monitoring, evaluation, staff training, staff development, research, innovation and invention.

Two US grantmaking experts - Ann Goggins Gregory and Don Howard - have written of a vicious cycle that fuels the persistent underfunding of core costs:

• Grantmakers have unrealistic expectations about how much it costs to run a not-for-profit organisation.
• Not-for-profit organisations feel pressure to conform to those unrealistic expectations.
• Consequently, NFPs spend too little on overheads, or they under-report their expenditures.
• The under-spending and under-reporting perpetuates the grantmakers' unrealistic expectations. "Over time, funders expect grantees to do more and more with less and less - a cycle that slowly starves nonprofits."

Why should we fund core costs?

The most basic justification of why grantmakers should cover core costs is that funders rely on the existence of strong not-for-profit organisations in order to fulfill their own objectives. Covering core costs contributes to organisational sustainability. It allows not-for-profit organisations to concentrate on what they do best, rather than having to divert energy and resources to chasing unrestricted funds.

The Lloyds Bank Foundation for England and Wales compared its core cost grants and project funding, and found that grants towards core costs had a slightly higher impact than grants towards project funding. It also found that some of the outcomes of core funding were assessable (which is contrary to much popular thinking).

The UK Association of Chief Executives of Voluntary Organisations (AVECO) has identified other reasons why grantmakers should fund core costs, and the circumstances in which they should do so, including:

• when there is a clear synergy between the grantmaker's mission and the grantseeker's goals
• when the existence of the community organisation is in the long-term interests of the grantmaker's own agenda
• when funding core costs will strengthen an organisation to take on new challenges and innovative tasks
• that some organisations will find it harder than others to attract public support.

How do we go about funding core costs?

• Core costs can be contributed to through one-off grants.
• Annual grants can also contribute to core costs, but they carry the risk of encouraging an organisation to become dependent on grants funds rather than sustainable.
• In Search of Impact, a report by the US-based Center for Effective Philanthropy, recommends that foundations provide operating support grants that are larger and longer term than the vast majority of foundation grants.
• Developmental funding is another option - meeting core costs for an agreed period, to give an organisation time to build up other sources of income. (You might ask the organisation to show clear evidence of unmet need as well as a good management track record and plans for longer-term income generation before you agree to fund it).
• You can build "full cost recovery" into existing grants, allowing grantseekers to build relevant overhead costs into overall estimates of project/program costs.

Some other tips

• Ensure a clear discussion is had at the outset to set expectations of for how long core costs are likely to be supported, and under what circumstances that support is likely to stop.
• Develop a core funding policy.
• Be prepared to listen to proposals for innovation, growth and development.
• Beware of groups that will do anything if they can get funding for it (they may be repackaging their core costs in order to secure funding to cover them).
• Ensure that overhead costs are allocated for all funded projects.
• Check project budgets for padding (allowing the inclusion of full cost recovery will help to avoid the padding of budgets to cover core costs).
• Encourage self-generated income from day one (refer grantseekers to GiveNow.com.au and refer to the Capacity Building help sheet).
• Work with your grantees to open up new avenues of funding.
• Encourage income diversification, partnerships and collaborations.
• Consider implementing formative evaluation.