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More on Developing Federal Grant Budgets: Stay in the Proposal World, Not the Operations World

This is an update to our popular post “Seliger’s Quick Guide to Developing Federal Grant Budgets.” While that post provides a step-by-step description of how to develop a federal grant proposal budget, it assumes that the budget preparer understands the difference between the real world and the proposal world. In preparing proposal budgets, experts in real-world budgets are often too sophisticated for the proposal world.

When Seliger + Associates is hired to write a federal proposal, we send our client an Excel template that models the SF-424 budget form found in all application kit files. Recently, we’ve been working for a series of large nonprofits and public agencies that have skilled Chief Financial Officers (CFOs). The challenge, however, is that most of these CFOs have little or no understanding of proposal budgeting, as they’re accustomed to detailed operational budgets.

Even if we discuss the proposal world with the CFO first, the completed template we receive back is usually way too detailed, because it reflects actual program operations, not the idealized proposal world. This not only makes it unnecessarily difficult to prepare the associated budget narrative/justification, but also makes it hard to get the budget presentation to display well when saved at the required .pdf for attachment to the kit file. It will confuse proposal reviewers (which is never a good idea while being very easy to do).

Here are some additional tips to keep your federal budget anchored in the proposal world, where it belongs:

  • Minimize the number the number of line items—around, say, 20. If you use 40 line items, the spreadsheet bloat will be very difficult to format in a way that is readable and meets RFP formatting requirements (unless you’re a wiz at Excel, which almost no one, including us and the CFOs we encounter, is).
  • Only include staff and line items that will be charged to the grant (or match, if required).
  • Personnel line items must match the staffing plan in the narrative. Resist the urge to load up the budget with small FTEs (2% to 5%) of lots of existing administrators/managers. This will make your agency look bureaucratic (not a good idea, even if it is) and clog the budget narrative. Large numbers of small FTEs are what a federally approved Indirect Cost Rate is for. If your agency has at least one existing federal grant, get an approved Indirect Cost Rate, which is not that difficult, and many of your proposal budgeting woes will be solved.
  • Unless the RFP requires it, don’t line-item fringe benefits. These can usually be lumped together as the percent of salaries your fringe benefit package equates to. For most nonprofits, this will be in the 18% to 30% range. Anything above 30% will probably generate unwanted attention from grant reviewers, even if that is what you pay. If the fringe benefit rate is relatively high, this should be explained in the budget narrative (e.g. lower salaries, high local costs, need to retain staff, etc.).
  • For multi-year budgets, don’t include expected yearly salary increases or annual inflators; this is too detailed and will again result in a very complicated budget justification. Inflation in the current environment is low. In a high-inflation environment like the ’70s, this advice would be different.
  • Regarding the “Other” Object Cost Category on the SF-424A, it’s unnecessary to break down line items too far. For example, lump together facility costs (e.g., rent, utilities, security, janitorial, maintenance, etc.), or communications (e.g., landline and cell phones, mailings, etc.) in single line items.
  • If feasible, try to make the total annual budget level for each project year. This can be a bit challenging, if, for example, the project involves start-up costs (e.g., buying staff furniture, hiring a web designer/social media consultant, etc.) in year one. The way to do this is to increase some other line item(s) in the out years to keep the budget level. Level annual budgets will make the budget narrative easier to write and understand.
  • Make one line item your plug number to enable reconciliation to the maximum allowed grant and/or level annual amounts in multi-year grants. The plug number should be in the Other Object Cost Category and could be advertising, communications, or similar line items that look OK with an odd number in different years. Reviewers are aware of plug numbers and won’t hold reasonable plug numbers against you.

Always remember that the proposal budget is just a financial plan that supports the proposed project activities, not a detailed expression of an operational situation. Following notice of grant award, your agency will have to negotiate the actual budget in the contract anyway.

Also, in most cases, the grantee can move 10% of the total grant among line items by notifying the federal program officer or requesting larger budget changes to reflect operations in the real world as the project is implemented. Unless you ask to swap an Outreach Worker for a lease on a Tesla for the Executive Director, the program officer will likely go along with your plan, as most simply don’t care what you do so long as the grant doesn’t end up in BuzzFeed, Politico, or the New York Times.

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Seliger’s Quick Guide to the Concept of “Program Income” in Developing Federal Grant Budgets

Almost all federal budgets require applicants to complete the ever-popular SF-424, which has been the cover page for federal grant applications since the Carter administration. The “SF” stands for “Standard Form,” but at the link you’ll find many variants of this “standard” form (don’t ask why). Regardless of the version, the SF-424 includes sub-forms, including the SF-424A, which is a summary of federal “Object Cost Categories.” The “Program Income” Object Cost Category is found near the bottom of every SF-424A.

The Program Income Object Cost Category represents revenue generated by grant implementation, but in most cases it’s a bad idea to declare any Program Income on the SF-424A. Even if Program Income exists, you shouldn’t list it because Program Income is in effect a deduction from the grant request. Let’s say that the Boys and Girls Club of Milaca, Minnesota* is seeking a grant to provide mentoring services for at-risk kids. All Boys and Girls Clubs charge nominal membership dues and/or user fees, although the dues/fees are often waived for various reasons. Still, Clubs charge dues/user fees to support operations and to make parents/caregivers** feel they’re paying for something. People value something they pay for, even when they pay very little, much more than something they don’t. Our applicant Boys and Girls Club would probably want to try to get the parents/caregivers of mentees (yes—this is right word) to pay dues, but this should never be shown on a SF-424A.

We’ll explain why by using a thought experiment.

Assume the mentor program grant request is $200,000. If $5,000 is shown as Program Income from dues, what is the size of the grant needed to implement the project? The answer is of course $195,000.

Almost all grant budgets are based on a “but for” or “gap” analysis—in other words, but for the grant, the project cannot be implemented or the grant represents the missing funding gap (see also our post on the dreaded supplantation concept). For most human services proposals, the grant always equals the size of the “but for” or “gap.” In addition to helping build the need argument, most federal agencies don’t want program income to be included in the proposal budget, as such income would also need to be tracked during project implementation. This would complicate reporting. The legal fiction is that there is no Program Income; both applicants and federal funding agencies usually agree to look the other way.

As in most grant writing generalities, there are exceptions to the No Program Income rule I’ve just illustrated. A good example is a HRSA Section 330 proposal budget for primary health care, which must show income for third-party payers like Medicaid and private insurance. Another example is the HUD Section 202 affordable housing development program. In Section 202 budgets, Section 8 rental income must be shown to demonstrate project feasibility. Affordable housing grants use the “but for” and/or gap analysis in supporting cash flow statements. Unlike privately funded market rate housing cash flow statements, however, which show an excess of income over expenses to prove feasibility, publicly funded affordable housing cash flow statements always show infeasibility. The infeasibility must be solved, or the gap closed, by the grant request.

Our advice to clients regarding Program Income is always, “when in doubt, leave it out,” but we’re just lowly grant writing consultants and our clients are free to ignore our advice, which they often do.

For example, last year we wrote a Family & Youth Services Bureau (FYSB) Transitional Living Program (TLP) for Homeless & Runaway Youth proposal for a very large homeless youth services provider in a big midwest city. Our client, like most similar faith-based homeless services providers, charges nominal rent to homeless youth living in their transitional housing facility and also requires that the residents work part time.

While this may be a good policy to encourage self-reliance among homeless youth, it’s a very bad idea to include this Program Income in the TLP SF-424A. TLP grants are supposed to help youth with no resources whatsoever and to house the most needy—not the ones who can work part-time or somehow have money for rent.

It was very difficult getting our client to understand this conundrum until we pointed out that they were inadvertently proving they didn’t need the grant amount requested, while opening themselves up to being seen as “cherry picking” the best homeless youth clients. I’ll leave the perils of implied cherry-picking in grant writing to another post, but cherry-picking is also usually a fast way to the exit in grant seeking.

If you want to include program income anyway, you should at least increase the total program budget so that the grant amount requested remains at the maximum allowable amount.

* When I was a kid growing up in Minneapolis in the late 50s, my dad was a big wrestling fan and I often accompanied him to watch wresting matches live at the very dingy Minneapolis Auditorium. One of my favorite wrestlers was Tiny Mills, “King of the Lumberjacks.” Tiny was kind of a good bad guy and was always introduced as being “formerly from Alberta, Canada, but now hailing from Milaca, Minnesota.” For some reason I found this endlessly amusing, only learning later as a teen going on road trips that Milaca is actually a charming town in North Central Minnesota on the way to the beautiful Lake Mille Lacs.

** In writing proposals about at-risk children and youth, always refer to them as having “parents/caregivers,” not just “parents,” to account for those living with grandparents or in foster care.

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Thirty day deadlines favor the prepared

The cliche goes, “Chance favors the prepared mind,” and we could repurpose it to, “Short deadlines favor the prepared nonprofit.” I have the dubious pleasure of reading the Federal Register every week and have noticed that deadlines are shrinking like hemlines. This means the organizations that apply with a complete and technically correct proposal are, even more than usual, the ones who don’t dawdle in deciding to apply and don’t procrastinate once they’ve made the decision.

If you’re thinking about applying for a grant with a thirty-day deadline, don’t take a week to mull it over. Take an hour. Need to wait on a board meeting? See if you can schedule an emergency meeting that night. Can’t do it? Text the chairperson immediately and set up a conference call. If you wait long enough, you won’t be able to get your application together, and, in an environment like this one, you don’t want to miss a deadline for a good program. It could be the life or death of your organization. Small delays tend to turn into big ones; don’t delay any part of the process any longer than you have to.

We sometimes find ourselves in a situation where a couple of clients hire us before a funder issues an RFP. Once the RFP is issued with a very short deadline, we get deluged with calls; as a result, we often have to say “no” to jobs because we lack the capacity and the time to do them. For us, this sucks, since we want to help our clients get funded. But we’re also unusual because we always hit our deadlines; part of the reason we can always hit deadlines is because we decline work if we can’t finish it.

This sometimes makes potential clients, who think hiring a consultant is like shopping at the Apple Store, irritated: “Whaddaya mean, you can’t write the proposal?” “We don’t have the capacity.” “That’s ridiculous! I’m ready to pay.” But consulting isn’t like stamping out another MacBook Air: it’s an allocation of time, and, like most people, we only have twenty-four hours in our days. While we can often accept very short deadlines, sometimes our other obligations mean we can’t. No matter how much it hurts to say “no,” we say it if we have to. This is one reason it is a good idea to hire in advance of a RFP being issued.

There are also situations with misleading or hidden double deadlines. For example, the HRSA Section 330 programs Isaac wrote about last week list application deadlines of October 12. But that deadline is only for the initial submission, which requires an SF-424, a budget, and a couple other minor things. Stuff you could do in a day. The real application—the HRSA Electronic Handbook (EHBs) submission—isn’t due until November 22. So what looks like thirty days is actually closer to two months, but only to people in the know (like those of you who read our e-mail grant newsletter; I’ve seen lots of sites present the October 12 deadline HRSA offered instead of the real deadline). If you’re not paying attention, you’re going to miss what’s really happening on the ground.

But you should still make your choice to apply for any grant program quickly, not slowly. Slow food might be a virtue, but slow grant application decision-making and proposal writing aren’t.

When Seliger + Associates began, the Internet was just breaking into the mainstream and relatively few nonprofits used computers in the workplace and few business and home computers had reliable Internet connection. Grant deadlines were routinely in the neighborhood of 60 days. They had to be: disseminating information about deadlines was slow, shipping hard copies of RFPs was slow, research was slow and required trips to libraries. Plus, there’s an element of fundamental fairness in giving nonprofit and public agencies enough time to think about what they’re doing, gather partners, solicit community input, decide to hire grant writers, and so forth, and funders appear to have lost interest in that issue. Now, nonprofits have to do this much faster. The ones that succeed are the ones who realize that circumstances on the ground have changed and then adapt to the new environment.

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Seliger’s Quick Guide to Developing Federal Grant Budgets

Many novice grant writers, and more than a few old hands, are terrified of federal grant budgets. Oddly, I find budget development one of the easiest aspects of grant writing, so I thought I would provide Seliger’s Quick Guide to Developing Federal Grant Budgets:

* When you first read the RFP, ignore the budget instructions, except for the following: what is the maximum grant allowed, is the maximum grant for an annual budget or project period, is there a minimum, and what are the eligible and ineligible cost items? These answers are all you’ll need to develop the project concept and write the first two drafts of the narrative. When the second draft of the narrative is finished and incorporates changes to the first draft from all interested readers, you’ll have a more or less complete narrative description of the project concept, including a staffing plan. Budget development time will arrive.

* Learn to love the SF 424A, which is, as it sounds, the federal Standard Form (“SF”) for budgeting. The SF 424A is part of the SF 424, which is the basic “Application for Federal Assistance” or cover sheet used for most federal grant applications. This being the federal government, there are of course many different versions of the not-quite-Standard Form SF 424 and 424A, including alternate versions used by the Department of Education, HUD, DHHS, etc., as well as hard copy and versions.

But all SF 424A variants share common “Object Cost Categories”, which are found on Section B of the form. Object Cost Categories are the categories into which you have to allocate all budget line items. You’ll notice that the SF 424A Section B includes Object Cost Categories summary input boxes for grant costs only, which means you’ll have to create a line item budget using Excel or a similar program to calculate the Object Cost Category subtotals—unless you love using a pencil, legal pad and calculator and want to return to the Disco Era.

Once you have a line item spreadsheet created using the Object Cost Categories in column one, add as many columns as you need for the number of years. Keep in mind that you will usually need three columns for each budget year (“Federal,” “Non-Federal” and “total”), as well as three columns for the multi-year total, unless it is a one-year grant. Even though the SF 424A Section B only requests information for use of grant funds, you’ll need the non-federal amount to fill in the SF 424 and Section A of the SF 424A (I know there’a a lot of “A’s” and “B’s”” in all of this, but welcome to federal grant writing), as well as for the budget narrative (see below).

It’s always handy to have two or three calculation columns as well, which enable readers to easily see how you developed each line item (e.g., 12 mo. x $4,000 = $48,000 for the salary of the Project Director). Having been in business for 18 years, we have lots of SF 424A templates to use as a starting point, but I’ve never seen the feds bother to make one available. As far as I can tell, no one has told federal grant making agencies that Excel exists and it is still 1977 at the Department of Education.

* Now that you have a spreadsheet, it’t time to dream up the costs. That’s right, I said “dream up.” This is because federal budgets are rarely scored and all you really have to accomplish is stay within any maximum/minimum amounts and eligible/illegible item instructions in the RFP (see step one above) and make sure the budget is consistent with the narrative (this is why it is a waste of time to work on the budget until the narrative is gelled). “Consistency” means, for example, that if the narrative lists two Outreach Workers and a van for them to cruise around in, the budget needs to have these two positions listed under the Personnel Object Cost Category and a van lease under the Contractual Object Cost Categories. Most human services program budgets are composed of about 75% personal/fringe benefit costs and 25% everything else.

Thus, start with personnel and estimate salary costs, based on your agency’s current salary structure, calls to other agencies or the ever popular WAG method. Keep in mind that a person year is 2,080 hours, meaning that 1.5 FTE Outreach Workers can be calculated as 3,120 hours x $15/hour. Fringe benefits are expressed as a percent of salaries. Depending on the agency, fringes usually range from 15% to 30%. Part-time employees, interns and the like who do not receive full benefits are best listed in the Other Category, using an hourly rate jacked up by a dollar or two per hour to account for their reduced benefits.

* Once the Personnel and Fringe Benefits Categories are complete, it’s time for the rest. We rarely have more than about 15 line items beyond Personnel and Fringe in our budgets because it is a waste of time to have 100 line items. Remember, the budget is usually not scored, you’ll have to create a Budget Narrative (see below), and the more line items you have, the more complex the Budget Narrative becomes. Also, after you receive a Notice of Grant Award, you’ll have to negotiate a real budget with a federal Budget Officer anyway.

* The Travel Category usually includes milage reimbursement (always a popular line item with staff) and travel for conferences (an even more popular line item with staff). Your agency probably has a reimbursement rate of around .50/mile and, depending where you are in the country, $1,500 – $3,000 / person trip is about right for conference travel and per diem.

* We rarely use the Equipment Category in federal grants and you should avoid it as well. This is because the feds consider anything with a unit cost of less than $5,000 to be a “supply” and you can buy $4,999 copiers the same way you buy paper clips. As soon as the unit cost goes over $5,000, you enter the realm of federal purchasing rules, which is not a place you want to be. This is one reason vehicles and other big ticket items are better proposed as leases, even though it may make little economic sense. Remember, you are in the Proposal World, not the Real World.

* The Supplies Category is used for consumables and things most normal people would think of as equipment,but cost less than $5,000 each. Consultants, partner subcontracts, leases and similar items go into the Contractual Category. Construction is another Category we rarely use. Most federal grant programs specifically preclude the use of grant funds for construction and, guess what, there is yet another budget form, the SF 424C, for construction programs, which I will ignore in this post. Any quasi-construction “paint-up/fix-up costs,” modular buildings, etc., that you think you can squeeze by your Budget Officer should be put in the Other Category. The Other Category is loaded up with anything that doesn’t fit in the other Categories, including matching funds from your agency and partners, if applicable. This leaves the Indirect Charges Category.

Unless your agency has a federally approved indirect cost rate, based on an approved cost allocation plan, $0 is the correct entry for this Category. If you have an approved rate, it will be expressed as a percent of salary costs, total direct costs or whatever your rate approval letter states in the Indirect Charges Category. If you don’t have an approved rate and want to claim administrative costs, they would be placed as individual line items in the Other Category, assuming the RFP states that administrative costs are allowable. Typical administrative line items would be accounting, payroll, janitorial, purchasing, personnel administration, etc.

* It’s time for the fun-filled budget narrative. Typically, the feds do not provide a format for the budget narrative, instead going on for pages about what the narrative is supposed to include. If you want to return to the Disco Era I mentioned above, you could respond with something like the following for every line line item, ending up with a 25 page budget narrative:

Two Outreach Workers are needed to reach out to the target population because the target population is difficult to reach, doesn’t trust the government and is too busy doing other things to readily accept wraparound supportive services without being dragged to the intake center. The Outreach Workers will conduct outreach, using the Project NUTRIA van (see the Van Lease line item below in the Contractual Category for more detail), since the project area is pretty big and outreach will be conducted mostly at night, when it is also pretty scary. By having two Outreach Workers, outreach will be able to be conducted seven days per week for at least ten hours per day . . . and so on. Cost calculated as follows: 2 Outreach Workers x $2,500/mo. each x 12 months = $60,000. This salary is reasonable, based on salaries paid to Outreach Workers by the applicant and other agencies in Owatonna.

It’s easy to see how the above can get pretty tedious to write and even more tedious to read, particularly since the explanation for why Outreach Workers are needed should already be in the narrative. Instead of all this regurgitated drivel, we usually present our budget narrative in one of two ways: a “Narrative Justification” column in the Excel spreadsheet or a Word table that models the spreadsheet.

For the above example, the narrative justification would read something like this: “Two Outreach Workers to conduct outreach and intake, as detailed in the attached Project Narrative, 2 @ $30,000/yr.” That’s it. In 18 years of presenting simple and easy-to-understand budget narratives, I’ve yet to see any review comments that said the proposal would have been funded if only it had included an incomprehensible 25 page single spaced budget narrative instead of a one page Excel spreadsheet or two page Word table.

Now that you know how to tackle the federal budgeting challenge, go forth and budget.

EDIT: If you’re into budgets—and really, who isn’t?—you should also check out our “Quick Guide to Developing Foundation Grant Budgets.”