In the effort to be a good custodian of their philanthropic funds, some donors impose a cap on overhead expenditure (i.e. indirect costs). This amount is typically somewhere between 10%-20% of total grant value.
These organizations, and much of the public, believe that by limiting such expenditure, they will be getting more value-for-money; that the endeavour will be more moral. This belief is based on a superficial view of how non-profit organizations achieve impact.
While there may be contexts when this rule is appropriate, its blind application can easily harm good organizations.
Justifiably, this method of funding is frequently referred to as the “starvation cycle”.
This article will explain what is meant by the 10% overhead cap, how it can easily do more harm than good, and how donors can use much better measures to judge the merit of their philanthropic investments.