How to Set the Nonprofit Overhead Rate

by Kathy Adams McIntosh, Demand Media

Many nonprofit organizations provide services to meet the needs of the community, including the less fortunate. They may offer counseling, perform concerts or provide training. These organizations need to set nonprofit overhead rates to understand their total financial cost for providing these services.


An organization uses the nonprofit overhead rate to charge overhead costs for individual services. The organization incurs these costs to remain in existence and continue to provide services. Its ability to do so depends on activities that are funded by overhead costs.


The nonprofit overhead rate refers to the measure used for charging overhead costs for individual services. Overhead costs are those not directly related to the service provided, such as administrative costs or building depreciation. Although these costs don't relate directly to the service, they increase the cost for the organization to exist. The overhead rate determines the specific amount to add to the cost of each service provided. The organization calculates the rate by gathering specific information.


The organization must estimate its overhead costs and the number of services it will provide in a year. It gathers the estimated overhead costs by reviewing its expense budget and identifying such costs. The organization creates its expense budget by estimating the number of services it expects to provide.


The organization adds up its overhead expenses to determine the total overhead cost. It then divides the total overhead cost by the expected number of services provided for the year. The result equals the nonprofit overhead rate. The organization adds this amount to the cost of each service to determine the total cost.

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