How did all of this madness evolve? In the beginning was a social ill, a problem that needed solving. Enter government funds set aside to help with that particular problem. If 100% of your funding goes to pay for 100% of one project, you only need be concerned that the expenditures are reasonable right? Wrong! Read the federal regulations (if you can stay awake) and first find out if they are allowable costs. Once you have an allowable cost and determined that it is "reasonable" you should be in the clear. Unless....
Unless you have two sources of funds funding one project. Sound's simple, but that's when the trouble begins. Have $100,000 from source A and $100,000 from source B, it's logical to charge 50% of the costs to each. But wait, I hope you have a cost allocation plan. And wait, I hope that plan isn't derived from your budget. What?
If source A pays for a counselor who spends 30% of her time on the project, then your 50/50 plan is not accurate. Furthermore, who pays for the other 70% of her time? Not one of these sources! Back to the drawing board, better start fundraising if you want to run this project.
Could it be worse? You got it, yep! What if there are two funding sources funding TWO programs; what if there are 60 funding sources funding 10 programs? Only the smallest organizations (with a single source of funding for a single program) can avoid the dreaded issue of "allocability".
I once knew a program that bought 10 computers for 10 youth centers (all allowable by federal regs, all reasonable in that they were needed and used by the kids), but instead of charging 1 computer each to 10 separate funding sources, all had been paid for by a single source. And guess what? That source wanted the money back! "But it was for the good of the kids", I cried. "But it was allowable!" I whined. "But it was not allocable" the auditor intoned. We won that battle (by some technical miracle), but it doesn't always come out in the agencies favor. Worse, these things are not settled in court, they are settled on the side-lines; reduced ultimately to a negotiation.
If these disagreements were handled in a court we'd establish precedent, we could learn from others, we could have case law with which to refer. But....
What are nonprofits to do? Sue the hand that feeds us?