Charging an Overhead Assessment against Restricted Donations

Overhead assessments are often applied by a ministry to restricted donations. The rate of the assessment is commonly expressed in terms of a percentage. The following discussion highlights some of the key issues relating to the determination of overhead rates to be applied to gifts, accounting for overhead charges, communication of overhead charges to givers, and much more.

Justification for applying overhead assessments. Since there is generally a cost involved in soliciting donations, either charging a restricted project with fundraising expense or including a fundraising expense component as part of an administrative fee can be plausible. Likewise, it is often reasonable to allocate certain general and administrative costs to the projects and programs for which the funds are raised.

Board or administrative policies. A board or administrative policy concerning any overhead charges made against giver-restricted gifts should be proactively established. This policy provides a baseline for determining and applying overhead charges.

Communicating the overhead assessment to the giver. Disclosure of administrative assessments to givers is generally not required by law. Some ministries disclose this practice while others do not. The disclosure of an overhead assessment policy demonstrates maximum transparency.

If an overhead charge is assessed, the fundraising solicitations and any other communications with givers should not leave the giver with the impression that no overhead charge will be made against the gift. For example, if fundraising costs and/or an administrative assessment is charged against a restricted project, givers should not be told that “all of your gifts” will be used for the project.

For maximum transparency, the overhead assessment policy (see “Board or administrative policies” above) could be published in periodicals that describe giver-restricted giving possibilities, on websites, and/or in brochures that are sent to givers about the ministry’s policies and practices.

Rate of an overhead assessment. Determining the rate of an overhead assessment is a discretionary matter for a ministry. Some ministries elect not to apply an overhead assessment on restricted gifts. Other ministries choose to apply an overhead assessment to certain gifts. While there is no standard overhead assessment, rates in the 10-20% range, based on cost analysis, seem to be most common.

Determining applicable costs. Determining applicable costs is generally a non-issue since the overhead assessment rate is typically an arbitrarily established rate which is significantly less than 100% of applicable costs. For missionary-sending ministries, the arbitrary rate is commonly a result of the tension between covering overhead costs for the ministry and yet maximizing the amount of funds available for front-line missions work. In other situations, the arbitrary rate may simply be based on what the ministry believes is defensible to its donors.

It is generally understood that the assessment is limited to actual costs based on reasonable cost assumptions.

Current practices for determining what is charged against giver-restricted gifts include:

  • Only direct program or project costs (DPCs)
  • DPCs plus fundraising costs
  • DPCs plus an administrative assessment
  • DPCs plus fundraising costs and an administrative assessment or an assessment that includes fundraising costs.

It is important for ministries to clearly and consistently adopt practices that are reasonable. Some ministries limit the costs that are charged (other than DPCs) to a certain portion of DPCs (such as 60%).

Overhead assessment limitations and ECFA standards. The maximum rate for overhead assessments is generally limited to the applicable fundraising and general and administrative costs.

Givers generally understand that overhead is required to solicit gifts and carry out the related program purpose funded by the gifts, while there is probably less comprehension that overhead amounts are sometimes deducted from restricted gifts. Therefore, ECFA’s Standard 7.2 (giver expectations and intent) applies if administrative assessment was applied in excess of applicable costs.

Certain state laws could apply in situations in which a ministry accepted a restricted gift and applied an administrative assessment that exceeded applicable costs, expending less than the appropriate amount for the giver-restricted purpose. ECFA’s Standard 4 requires the use of resources in conformity with applicable laws.

Overhead charges must never exceed actual overhead costs. Applying this principle requires the determination of overhead costs (perhaps based on the most recent annual financial statement) before the overhead assessment fee is established.  Overhead charges should generally be established based on actual experience instead of budgetary projections.

The following considerations may apply in determining the maximum administrative assessment:

  1. The fundraising component. Expenses allocated to fundraising might be compared to the total cash and noncash contributions to determine the fundraising component of the administrative assessment. In theory, the fundraising expenses allocable to raising the restricted gifts represents the most accurate fundraising rate of the assessment.

    A more generalized approach is to compare expenses allocated to fundraising to total expenses to determine the fundraising rate of the assessment.
  2. The general and administrative component. Ideally, the general and administrative expenses relating to carrying out the program funded by the restricted gifts would be compared to the applicable restricted gifts, perhaps even program-by-program. This level of sophisticated expense allocation is rarely possible.

    The more generalized approach is often used, comparing total general and administrative expenses to total expenses to determine the general and administrate rate of the assessment.

Consistency in applying an overhead assessment. Some ministries apply overhead assessments to certain types of restricted gifts and not to others. Or, a full (the maximum rate charged by a ministry) overhead assessment may be applied to some restricted gifts and only a partial assessment applied to others. The discretion in determining the level of the assessments may relate to the public perception of how certain gifts will be used (e.g., hurricane or tsunami relief) or to a variety of other factors.

Complying with giver stipulations with regard to overhead assessments. If a giver adds a stipulation that no overhead is to be deducted from the gift, and if the ministry accepts the gift with the stipulation, the ministry is bound by the stipulation and should not deduct an overhead amount.

Representations by a ministry that 100% of all gifts will be used for program purposes. Occasionally, a ministry will make representations that 100% of all gifts received by the ministry will be applied to program (implying that no part of the gifts will be applied to overhead: fundraising or general and administrative expenses.

ECFA believes it is a rare situation where the above representation is appropriate. This would require the giver or givers to provide gifts specifically restricted to cover overhead expenses and in amounts sufficient to cover overhead expenses for the accounting period(s) in which donations are being generally solicited. Even if restricted gifts are received sufficient to cover overhead expenses, the gifts do not reduce or offset over-head expenses, the gifts are merely a funding mechanism in relation to the overhead expenses.

It would be extremely challenging for a ministry to make on-going statements to givers that 100% of all gifts will be used for program purposes because of the specific requirements by major givers that their gifts be used for overhead purposes and the need to continually raise these restricted gifts at a pace to match actual overhead expenses.

Accounting for overhead assessments. Some ministries record 100% of a restricted gift in the applicable classification (temporarily or permanently restricted) category of restricted gift revenue and then the overhead assessment is reflected as a reclassification from the applicable restricted classification to unrestricted (either in concert with the satisfaction of restrictions or as the funds are raised without regard to whether the restrictions have yet been satisfied). This recording is done on the premise that the entire gift is initially restricted.

Conversely, some ministries record the administrative assessment in unrestricted revenue when the gift is received on the premise that the administrative assessment portion of the gift is unrestricted.

Disclosure of administrative assessment charging policies in the notes to the financial statements is an excellent practice, including stating if the overhead charges are reflected in unrestricted revenue or initially shown in restricted revenue and then reclassified.

Summary.  If your ministry desires to utilize the overhead assessment concept, proactively adopt policies to structure the arrangement, monitor the proper accounting of the assessments, provide flexibility in the application of the assessments, and periodically determine that the rates do not exceed actual costs.


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.