The True Cost of Running a Program

Full cost recovery means a funder pays the total cost of delivering funded work: direct program costs, a fair share of the shared infrastructure that makes the program possible, and a contribution toward reserves and capital needs. Most grant budgets cover the first item and part of the second.

Current figures — verified 2026-08-11

Item	Value	Source
De minimis indirect cost rate	Up to 15 percent of modified total direct costs	2 CFR 200.414(f)
Subaward amount included in the MTDC base	The first $50,000 of each subaward	2 CFR 200.1
Equipment definition threshold (equipment is excluded from MTDC)	Per-unit cost at or above the lesser of the entity’s capitalization level or $10,000	2 CFR 200.1
Effective date of the OMB revision to the Uniform Guidance	October 1, 2024	89 FR 30046

These figures change. Verify against the linked source before relying on them. Report an outdated figure

Key takeaways

• Full cost is direct costs plus shared infrastructure plus reserves.
• The overhead ratio measures accounting classification, not efficiency.
• Research finds an inverted-U link between overhead and outcomes.
• Chronic under-recovery is a slow organizational failure, not thrift.
• Price the program at full cost even when a funder will not pay it.

What is the true cost of running a program?

The true cost of running a program is everything the organization must spend for the program to exist, whether or not the spending is traceable to the program. Three layers make up that total, and grant budgets routinely capture only the first. Getting the layers right is the foundation of everything else in budgets and grant finance.

The first layer is direct program cost: the staff who deliver the work, their fringe benefits, the materials, the participant costs, the program-specific space and travel. These are the costs that can be identified specifically with the program or assigned to it easily and accurately (2 CFR 200.413).

The second layer is the program’s fair share of shared and administrative cost: finance and payroll, human resources, information technology, insurance, audit, legal, general occupancy, compliance staff, and the portion of executive time spent running the organization rather than the program. These costs are incurred for a common purpose benefiting more than one objective and cannot be assigned to one program without effort disproportionate to the result. The federal framework requires that all activities benefiting from indirect costs receive an appropriate allocation of them (2 CFR 200.405).

The third layer is capital and reserve requirement: depreciation and eventual replacement of equipment and facilities, technology refresh, and a contribution to operating reserves. Federal cost principles do not recognize a reserve contribution as a chargeable cost, which is precisely why organizations that budget only to the federal standard never accumulate one.

An organization that knows only layer one does not know what its programs cost. It knows what its programs cost the grant.

What does full cost recovery mean?

Full cost recovery is the principle that a funder should pay the total cost of the work it funds, including shared infrastructure and a contribution to sustainability, rather than the marginal cost of the program alone. The term is a budgeting discipline first and a fundraising argument second.

The distinction that matters is between a rate and a reality. The federal system provides two mechanisms for recovering shared costs: a negotiated indirect cost rate agreement, or a de minimis rate available to any recipient without a negotiated rate, at the ceiling shown in the figures above and requiring no documentation to justify its use (2 CFR 200.414). Neither mechanism guarantees that the recovered amount equals the cost incurred. The rate is a recovery instrument, not a measurement.

Two features of the mechanism systematically depress recovery. The first is the base. A rate applies to a modified base rather than to everything the program spends — equipment, participant support costs, and the portion of each subaward above the amount shown in the figures above are excluded — so a rate stated as a percentage of the base always recovers a smaller percentage of the total project.

The second is capping. Pass-through entities and private funders frequently impose caps below actual cost. Federal pass-through entities are constrained here: a pass-through entity “must not require the use of the de minimis indirect cost rate if the subrecipient has an approved indirect cost rate negotiated with the Federal Government” (2 CFR 200.332(b)).

Full cost recovery, then, is not achieved by claiming the maximum allowable rate. It is achieved by knowing the full number, claiming what the rules permit, and covering the remainder deliberately from a named source rather than absorbing it silently. The mechanics of rate construction are covered under indirect cost rates and the de minimis option.

What is the nonprofit starvation cycle?

The nonprofit starvation cycle is the self-reinforcing dynamic in which funders’ unrealistic expectations about overhead lead nonprofits to underspend on and underreport infrastructure, which confirms the expectations and tightens them further. Ann Goggins Gregory and Don Howard named and described it in the Stanford Social Innovation Review.

The authors set out the sequence directly: “A vicious cycle fuels the persistent underfunding of overhead. The first step in the cycle is funders’ unrealistic expectations about how much it costs to run a nonprofit. At the second step, nonprofits feel pressure to conform to funders’ unrealistic expectations. At the third step, nonprofits respond to this pressure in two ways: They spend too little on overhead, and they underreport their expenditures on tax forms and in fundraising materials” (Gregory and Howard, Stanford Social Innovation Review, Fall 2009).

The underlying evidence came from the Nonprofit Overhead Cost Study, which analyzed more than 220,000 IRS Form 990 filings and conducted 1,500 in-depth surveys of organizations with revenue above $100,000. More than one-third of organizations reported zero fundraising costs and one in eight reported no management and general expenses — figures that describe a reporting artifact rather than an operating reality. Among four youth-serving nonprofits examined in detail, reported overhead ran between 13 and 22 percent while actual overhead ran between 17 and 35 percent.

Funder behavior is the engine. The Urban Institute’s national survey of nonprofit-government contracts and grants, with 4,024 respondents, found that half of organizations reported government contracts and grants that excluded or limited reimbursement for administrative costs, and that a majority reported government payments failing to cover the full cost of services (Urban Institute). The pressure is structural, not attitudinal.

Does a low overhead ratio mean a nonprofit is efficient?

A low overhead ratio does not indicate efficiency. The ratio measures how an organization classifies its costs, and classification varies enormously between organizations doing identical work. An organization that direct-allocates rent, technology, and departmental administration to programs reports a small indirect figure; an identical organization that pools those costs reports a large one.

Three lines of evidence undercut the ratio as a performance measure. The Bridgespan Group’s study of 20 high-performing nonprofits found true indirect cost rates ranging from 21 to 89 percent of total costs, with a median of 40 percent — “nearly three times the 15 percent overhead rate that most foundations provide” — and a median of 63 percent among research labs against 25 percent among direct service organizations (Bridgespan, Pay-What-It-Takes Philanthropy).

A panel study of United States arts and cultural nonprofits using DataArts records from 2008 to 2018 found the relationship between overhead and outcomes to be curvilinear rather than monotonic: results “consistently show an optimal level of overhead captured by an inverted U-shaped relationship between the overhead cost ratio and program outcomes,” with estimated turning points in the mid-thirty-percent range for total participation across model specifications (Altamimi and Liu, Nonprofit and Voluntary Sector Quarterly, 2022). Underspending on infrastructure reduces outcomes; so does overspending. The ratio has an interior optimum, not a floor to race toward.

Sector practitioners appear to know this already. Research by Mirae Kim, Étienne Charbonneau, and Jessica Sowa estimated that nonprofit managers understate reported overhead by roughly 10 percentage points, with a range of 7 to 16 points, and found that managers rated organizations reporting 98 percent program spending as significantly less credible than those reporting 70 percent (Kim, Charbonneau, and Sowa, Nonprofit and Voluntary Sector Quarterly). Improbably low overhead reads as misreporting to the people best positioned to judge.

The Overhead Myth campaign made the argument publicly. BBB Wise Giving Alliance, Charity Navigator, and GuideStar issued a joint open letter to donors in June 2013 stating that “when we focus solely or predominantly on overhead…we starve charities of the freedom they need to best help the people and communities they are trying to serve,” and urging evaluation on transparency, governance, leadership, and results instead (joint open letter, June 17, 2013).

What does a full-cost program budget look like?

A full-cost program budget shows three totals side by side: what the program costs directly, what it costs including its share of shared infrastructure and reserves, and what a funder will actually pay. The gap between the second and third numbers is the amount the organization must cover from another source, and naming it is the entire exercise.

Worked example — illustrative figures

Salaries, fringe, the organization’s true indirect rate, and the reserve policy below are invented to demonstrate the method. The de minimis ceiling and the modified total direct cost exclusions referenced here come from the Current figures table above and are subject to change; verify them at the linked sources. This is not accounting advice.

Program: one site of an after-school literacy program, one year.

Layer 1 — direct program costs

Site coordinator, 1.0 FTE                        $ 52,000
Tutors, 4 × 0.5 FTE                              $ 60,000
Fringe benefits @ 28% of $112,000                $ 31,360
Curriculum and classroom materials               $  9,000
Participant transit stipends                     $  6,000
Classroom space, direct-charged                  $ 14,000
─────────────────────────────────────────────────────────
TOTAL DIRECT COSTS                               $172,360

Layer 2 — fair share of shared and administrative cost

MTDC base = direct costs less participant support
  $172,360 − $6,000                            = $166,360
Organization's true indirect rate: 28% of MTDC
  $166,360 × 0.28                              = $ 46,581

Layer 3 — reserve and capital contribution

Board policy: 3% of program operating cost
  ($172,360 + $46,581) × 0.03                  = $  6,568

Full cost of the program

$172,360 + $46,581 + $6,568                    = $225,509

What a funder using the de minimis ceiling pays

Direct costs                                     $172,360
Indirect at the de minimis ceiling
  $166,360 × 0.15                              = $ 24,954
─────────────────────────────────────────────────────────
FUNDER TOTAL                                     $197,314

The gap

$225,509 − $197,314 = $28,195 per year
= 12.5% of the program's full cost, unfunded

Two observations. First, the de minimis ceiling stated as a share of the base recovers a smaller share of the total: $24,954 against a funder total of $197,314 is about 12.6 percent, not 15. Second, the $28,195 gap does not disappear. It is paid from unrestricted revenue, from another grant, or from not doing something else — most often the third.

How do you talk to a funder about full costs?

Talk to a funder about full costs by showing the number rather than arguing about the principle. A budget that presents direct cost, full cost, and the requested amount as three explicit lines gives the funder a decision to make; an appeal to fairness gives them a position to defend.

Five moves work better than advocacy:

• Lead with the program, not the overhead. Present what delivery requires — supervision, data systems, financial compliance, insurance — as inputs to the outcome the funder wants, because that is what they are.
• Show the derivation. A rate with a computation behind it is a fact. A rate asserted without a base is a request, and the difference is visible immediately.
• Name the gap and how it will be covered. Funders are far more receptive to “here is the unfunded portion and here is our plan for it” than to a budget that pretends the gap does not exist.
• Ask what the cap actually is. Many caps are convention rather than policy, and some are negotiable — particularly at pass-through entities, which face constraints on capping a subrecipient’s negotiated rate.
• Point at the sector shift where it helps. A meaningful group of funders has moved toward general operating support, multi-year commitments, and higher or eliminated indirect caps; the Bridgespan work is the most-cited evidence base behind that shift.

The tone that fails is adversarial. A funder that is told its cap starves the sector will not raise the cap on that application. A funder that is shown a competent full-cost budget with a named gap learns something about the applicant’s financial management, which helps the current request and every one after it. Being the organization that can produce that budget is itself part of organizational readiness.

What happens when a program is chronically under-recovered?

Chronic under-recovery does not show up as a crisis. It shows up as deferred everything — a finance function that is one person, a database nobody has time to migrate, an executive who does grant reporting at night, no reserve, and no capacity to absorb a late payment. The failure is slow and looks like normal operations until it does not.

The financial evidence is consistent. The Nonprofit Finance Fund’s 2025 State of the Nonprofit Sector Survey, fielded January to March 2025 with 2,206 respondents, found 81 percent citing raising funds that cover full costs as a challenge, 52 percent holding three months or less of cash on hand, and 36 percent ending the prior fiscal year with an operating deficit — the highest deficit rate in the survey’s ten-year history (Nonprofit Finance Fund). Under-recovery and thin liquidity are the same problem observed at two points in time.

Three consequences compound. Growth becomes destabilizing, because each additional program adds unfunded shared cost; an organization that under-recovers loses more money the more it wins. Compliance capacity erodes, and the resulting findings produce tighter award conditions and sometimes reimbursement-only payment, which is examined under grant cash flow and reimbursement. Staff turnover rises, and turnover is a full-cost item nobody budgets.

The internal discipline is separable from the fundraising question. Price every program at full cost in the internal management accounts even when a funder will not cover it, so the subsidy is visible and deliberate. Federal guidance for developing indirect cost rates is public and usable as a template even by organizations that never negotiate one (U.S. Department of Labor, Guide for Indirect Cost Rate Determination). An organization that knows its subsidy per program can choose which subsidies to sustain. An organization that does not know is making the same choice without seeing it.

This article is general information about nonprofit cost structure and federal cost principles, not accounting, tax, or legal advice. Cost allocation decisions for your organization should be made with your accountant and against your own award terms.

Frequently asked questions

What is the difference between overhead and indirect costs?

Overhead is a colloquial term, usually meaning management and general expenses plus fundraising as reported on IRS Form 990. Indirect cost is a defined term in federal cost principles: cost incurred for a common purpose benefiting more than one cost objective and not readily assignable without disproportionate effort. The two categories overlap but are not the same, and fundraising is never an allowable federal indirect cost.

Is there an ideal overhead ratio?

No published ratio functions as a target. Research on arts and cultural nonprofits found an inverted-U relationship with program outcomes, meaning both too little and too much overhead spending reduce results, with an interior optimum well above the caps many funders impose. The relevant number is your organization’s actual cost structure, not a benchmark.

Can you charge a reserve contribution to a federal grant?

No. Payments to a contingency reserve are unallowable under the federal cost principles (2 CFR 200.433), and reserves are not a recognized cost item. Reserves are built from unrestricted revenue, earned income, or funders who explicitly support capitalization. Budgeting only to the federal standard is a reliable way never to build one.

Why does a stated indirect rate recover less than the percentage suggests?

Because the rate applies to a modified base rather than to total project cost. Equipment, participant support costs, and the portion of each subaward above the amount shown in the figures above are excluded from the base, so the recovered amount is a smaller share of the total project than the rate implies.

Should you claim zero indirect costs to look competitive?

Claiming zero indirect costs reads to experienced reviewers as financial naivete rather than efficiency, and it makes the project look under-resourced. It also compounds: the unrecovered amount comes out of unrestricted funds that would otherwise cover the next program’s gap.

Related topics

• Budgets and Grant Finance — the hub for cost categories, indirect rates, match, and cash mechanics
• Indirect Cost Rates and the De Minimis Option
• Direct vs Indirect Costs
• Grant Cash Flow and Reimbursement

Sources

1. Electronic Code of Federal Regulations, 2 CFR 200.414, “Indirect costs.” https://www.ecfr.gov/current/title-2/section-200.414 (accessed 2026-08-11)
2. Electronic Code of Federal Regulations, 2 CFR 200.1, “Definitions” (Modified Total Direct Cost; Equipment; Participant support costs). https://www.ecfr.gov/current/title-2/subtitle-A/chapter-II/part-200/subpart-A/section-200.1 (accessed 2026-08-11)
3. Electronic Code of Federal Regulations, 2 CFR 200.413, “Direct costs.” https://www.ecfr.gov/current/title-2/section-200.413 (accessed 2026-08-11)
4. Electronic Code of Federal Regulations, 2 CFR 200.405, “Allocable costs.” https://www.ecfr.gov/current/title-2/section-200.405 (accessed 2026-08-11)
5. Electronic Code of Federal Regulations, 2 CFR 200.433, “Contingency provisions.” https://www.ecfr.gov/current/title-2/section-200.433 (accessed 2026-08-11)
6. Electronic Code of Federal Regulations, 2 CFR 200.332, “Requirements for pass-through entities.” https://www.ecfr.gov/current/title-2/section-200.332 (accessed 2026-08-11)
7. Office of Management and Budget, “Guidance for Federal Financial Assistance,” 89 FR 30046, April 22, 2024, effective October 1, 2024. https://www.federalregister.gov/documents/2024/04/22/2024-07496/guidance-for-federal-financial-assistance (accessed 2026-08-11)
8. U.S. Department of Labor, Office of the Senior Procurement Executive, “Guide for Indirect Cost Rate Determination for Nonprofit and Commercial Organizations.” https://www.dol.gov/agencies/oasam/centers-offices/office-of-the-senior-procurement-executive/cost-price-determination-division/guide-for-indirect-cost-rate-determination-for-nonprofit (accessed 2026-08-11)
9. Ann Goggins Gregory and Don Howard, “The Nonprofit Starvation Cycle,” Stanford Social Innovation Review, Fall 2009 (secondary source; peer-reviewed practitioner journal). https://ssir.org/articles/entry/the_nonprofit_starvation_cycle (accessed 2026-08-11)
10. The Bridgespan Group, Pay-What-It-Takes Philanthropy, executive summary (secondary source; consulting research). https://www.bridgespan.org/insights/pay-what-it-takes-philanthropy-executive-summary (accessed 2026-08-11)
11. Mohammad Altamimi and Zhongsheng Liu, “Does Overhead Spending Really Impact Program Outcomes?” Nonprofit and Voluntary Sector Quarterly (secondary source; peer-reviewed). https://journals.sagepub.com/doi/10.1177/08997640211057404 (accessed 2026-08-11)
12. Mirae Kim, Étienne Charbonneau, and Jessica Sowa, “The Nonprofit Starvation Cycle: The Extent of Overhead Ratios’ Manipulation, Distrust, and Ramifications,” Nonprofit and Voluntary Sector Quarterly (secondary source; peer-reviewed). https://journals.sagepub.com/doi/10.1177/08997640241233724 (accessed 2026-08-11)
13. BBB Wise Giving Alliance, Charity Navigator, and GuideStar, joint open letter to the donors of America, June 17, 2013 (secondary source; sector announcement). https://news.cision.com/guidestar/r/bbb-wise-giving-alliance—charity-navigator—and-guidestar-join-forces-to-dispel-the-charity—overhe,c9429255 (accessed 2026-08-11)
14. Nonprofit Finance Fund, 2025 State of the Nonprofit Sector Survey, fielded January 30 – March 14, 2025, n=2,206 (secondary source; sector survey). https://nff.org/wp-content/uploads/NFF-2025-Survey-Report.pdf (accessed 2026-08-11)
15. Urban Institute, National Survey of Nonprofit-Government Contracts and Grants, n=4,024 (secondary source; research survey). https://www.urban.org/sites/default/files/publication/24231/412962-Nonprofit-Government-Contracts-and-Grants-Findings-from-the-National-Survey.PDF (accessed 2026-08-11)