24 CAPTURE. COSTTREE 2016 Q1 ISSUE
HYPOTHETICAL VARIANCE:
in this issue:
GRANTS, IMPACT, & COSTS
AN IMPORTANT factor for a nonprofit’s success and sustainability is for them to identify the most impactful ways to achieve their mission. Identifying grants and funding that mirrors both mission and strengths of the organization is critical. We recently analyzed a new funding opportunity with a nonprofit and gained insight by exposing the true costs through cost allocation and the uncovering of their true indirect cost rate. Having this foresight, gives them the ability to achieve more and thrive. We thought it would be interesting to share three hypothetical scenarios that came from our engagement, not to expose, but to educate.
For confidentiality, we created a fictitious organization that we are calling ABC nonprofit. ABC nonprofit has been in operation for 3 years and was just awarded $500,000. Demands for performance were steep. Naturally, the expectations were high. As the excitement quickly turned into stress, the question of “can this be done” became a valid concern.
There are in addition to the $500 cost of each camera and charging station with warranty:
$1,000
$400
$2,600
$400
$300
$1,600
$200
for server storage hosted by an outside vendor – body cameras generate about 45 gigabytes of data per day.
for a half time employee to update firmware, maintain the equipment and process RMAs.
for an increased burden of at least a half employee in the clerk’s office to handle public records requests.
for three full time employees doing video labeling, redacting, and internal auditing.
for increased liability insurance.
for additional shared support services from all city departments ranging from payroll costs for the additional employees, to office space maintenance, to IT equipment and HR support.
of legal staff time for reviewing the public requests.
After familiarizing ourselves with ABC’s operation, we asked 1. Do you have a Negotiated Indirect Cost Rate Agreement (NICRA), in order to peripherally look at the funding amount and overhead reimbursement, compared to the grant expectations? They did not have one, but were optimistic that with the new guidance, they would be able to capture the 10% de minimus. We then asked question number 2. Have you ever done the work previously that you committed to perform for this funding? They had not, but felt that they would be able to handle the expectations and be impactful. These two questions were critical for us to get a sense of their ability to perform and meet expectations. Our first challenge was to see if a subsidy would be necessary, based on their true cost and funding. At first glance, we identified a significant subsidy using a 10% de minimus calculation, which really ended up being only 7% after removing contractual limitations under the Modified Total Direct Cost (MTDC). We then did full cost allocation to uncover that their true costs was 21%. This definitely was a red flag, without a NICRA they stood to lose significant reimbursement. This prompted us to dig a little deeper to identify any unrestricted funds that we may be able to use or if they had set aside funds in a reserve? The answer was no, we strongly advised them to create an ICRP, so that they would be able to capture their true cost next year and reach their mission’s goal. The first year with this new funding would require them to seek additional unrestricted funding and/or plan a significant fundraising event. Both of these tasks would derail them from their mission and their ability to meet grant expectations the first year.
After all was calculated, the alleged 10% reimbursement was not enough. In reality, it was actually only 7%. After true costs were calculated with a cost allocation plan, it become clear that their true cost of service was really 21%. This created a significant subsidy that required them to seek additional funding, either by obtaining unrestricted funds or creating a fundraiser to mitigate the funding gap. Coupled with the fact that they had not done this type of work before and that they had a serious subsidy with this funding, it was imperative that they create and pursue an Indirect Cost Rate. This would allow them to better capture true costs and maximize their impact, while reducing their risk of sustainability.
SCENARIO ONE:
ANALYSIS ONE: