Ken Goldstein, MPPA

Ken Goldstein has been working in nonprofits and local government agencies from Santa Cruz, to Sacramento, and back to Silicon Valley, since 1989. He's been staff, volunteer, board member, executive director, and, since 2003, a consultant to local nonprofit organizations. For more on Ken's background, click here. If you are interested in retaining Ken's services, you may contact him at ken at

Wednesday, May 16, 2007

How do you allocate overhead costs?

One of the clients I'm working with has always only had one budget for the entire organization. This is fine for small nonprofits that only really have one or maybe two programs, but this client has grown out of that stage, and has at least five or six distinct programs and program areas that should be broken out of that budget.

While we were working on that, the question from staff came up of, "How do we allocate the overhead costs to each program?"

There may be many more ways to do this than I am aware of (I'm a grantwriter and management consultant, not an accountant), but the three basic ways I went over with them were Dollars, Time, and Space.

Dollars: The simplest way to do your overhead calculations is by overall dollars and percentage of the budget. In this method you break your budget down by program, including administration and fundraising as an overhead "program." If your overhead is 12% of the total programs budget (full budget, less the overhead), you simply add an overhead line item to each program of 12%.

This type of calculation is easy to do in Excel or any other accounting or spreadsheet program you may be budgeting in, and looks nice and clean. It's also handy to know what your agency's overhead rate is, in case a donor or funder wants to know.

But, it's also a bit deceptive. Do all programs draw from overhead equally? Are each of your programs really requiring the same percentage of your nonprofit's overhead? If you really want to get an idea of a program's true cost to your agency (and I'd think you'd want to), you'll probably want to look at one of the other methods.

Time: In this method, you break your budget down by programs, and make an "overhead program" as you did in the previous method, but you do not divide the overhead equally. Instead, you look at the total hours each of your employees puts into each program, then determine what percentage of total hours that program demands. If a program eats up 25% of your staff's time, then it gets 25% of the overhead budget.

This method is based on the idea that if that's where all your employee's energy is going, it's probably also where the attention of management and fundraising is going as well. And, you might be surprised that a program that's only 20% of your budget is eating up 60% of your staffing hours. This method recognizes that labor intensive programs require more overhead (management, space, supplies, etc.) than other programs.

Space: This method is similar to the time method, but instead of looking at your time sheets, you look at your square footage. Figure out the percentage of your total square footage each program uses, and use that percentage to divide out the overhead. Does one program require a massive building, while another with similar staffing require only a room with a few cubicles? Then that program should take up a larger share of the overhead.

This method is based on the idea that overhead costs are often directly related to space costs, including rent, utilities, taxes, and insurance. If you own your own building, or have donated space, this might not be as important to you.

Every organization is different, and you may want to base your overhead split on a combination of Time and Space, or some other factor that I've left out in this simple explanation. For the client in question, I suggested we go by the Time method, at least in this first time breaking out the programs from the total budget.

What other ways do you use to allocate your overhead costs? Post a comment if you're doing something different than the methods I've just described.

1 comment:

  1. Deepak Nandana6/30/2007 1:46 AM

    With spare capacity at 0% and high attrition rates, for sure consultants are in a not so pleasing state. At the same time, why not they think 'out of the box' and while advising their clients to outsource, now even consultants could offload few functions, not-so-critical ones to experiment if they save on resources.

    Deepak Nandana