When Is Overhead Not “Overhead”?

when is overhead not overhead 1

Guest Blogger – Gretchen Upholt

In nonprofit budgeting, some things are fairly straightforward. The salary of a member of the program delivery team is a program expense. Travel and lodging for board members coming to the annual meeting are administrative expenses. The costs of the spring gala are fundraising expenses.

What about rent? Utilities? Office supplies? And what if one location houses all of an organization’s programs, as well as its’ administrative offices and fundraising department?

The terminology we commonly use to describe costs such as rent and heat and electricity—we might think of and even refer to such costs as “overhead”—can sometimes be confusing in the nonprofit context, where “overhead” often connotes something spent on organizational administration rather than on delivery of mission-related programs. And following the logic of this terminology, we might be tempted to assign all of our “overhead” costs like rent into the “management and general” category of our budgets along with costs of administrative functions such as finance and HR. ​

But the reality is that costs like rent and utilities are as integral to the functioning of a program as are more obvious costs such as staff salaries or program materials. Anyone who thinks otherwise should try to run a job training program or stage an art exhibition on the sidewalk. That means that programs along with administrative and fundraising functions — should all take on some of the expense associated with organization-wide resources like a building to work out of and lights to see what you’re doing.

Costs of items used by each individual department of an organization are known as “shared” costs. Shared costs shouldn’t automatically be dumped into an administrative budget (where, incidentally, they will be more challenging to raise funds for), but should instead be spread or allocated across the various functions of an organization including programs — in a way that’s proportional to how they are used (based on square footage, for example, or the relative head counts of each department). This provides a more realistic picture of what it costs to run programs and deliver services.

Shared costs, by their nature, don’t fit neatly into one bucket, which is why they are often misunderstood and wrongly categorized in budgets (including grant budgets). Even though we may casually refer to these costs as “overhead,” that doesn’t mean that they aren’t also part of running our programs.

BONUS TOOL

The Program-Based Budget Builder is a helpful tool for building a nonprofit budget, including allocating shared costs to the right places.

Learn more about “Understanding the True Cost of Delivering Your Mission” on April 11th when Gretchen joins us.

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Gretchen Upholt is a Senior Consultant with Fiscal Management Associates. an experienced staff and program manager, she has expertise in training, capacity building, research, and program and volunteer management.