Should we apply for a grant? Use the Opportunity Cost Formula to find out

Updated: Sep 18




A few months ago, I was attending a grant application webinar and had the pleasure of virtually meeting someone from Wyandot County Public Health. He was considering the grant but wanted to really think about the “opportunity cost”. This sparked my interest because I had never heard anyone describe their process in that way, and of course it got my brain going! Opportunity Cost is similar to “return on investment” and other economic performance indicators used to figure out if the benefits of an activity outweigh the expense.


In grants, the “Opportunity Cost” can help us measure how much value (aka money) we will lose from a grant after we factor in the cost of the resources (aka staff hours) we put into the application process. I usually recommend that an organization not apply for a grant when the opportunity cost exceeds 7 percent. Most of the nonprofits that work with Sidnae Global Research apply for grants that exceed $500,000, and the opportunity cost end up being about 2 to 5 percent. The great thing is the most, if not all, of the grant management costs can be incorporated into the budget as administrative or salary expenses, and future grant writing can be recouped under the indirect costs as a fundraising expense.


I think about Opportunity Cost a lot when I am working with SGR’s grant writing customers. It almost comes second nature to me after writing 100+ grants. But wouldn’t it be great if there was a standardized formula grant writers could use during the Go/ No Go decision-making process? I like a challenge, so, I put on my thinking cap and developed the “Opportunity Cost” formula below based on my experience as a grant writer that oversees a team of grant writers, and as a project manager.


Opportunity Cost= Percentage of the Potential Grant Award Spent on Grant Writing and Grant Management Opportunity


Formula


Opportunity Cost= (Grant Writing Team Hours multiplied by Hourly Rate or cost of flat fee) + (Number of Additional Staff multiplied by Average Hourly Rate of employees) + (Grant Management Hours multiplied by Average Hourly Rate of employees) . Divide that number by the Total Grant Award Amount.


Let's try it out:


Scenario 1: An organization is thinking about using a grant consultant to apply for a $100,000 Federal grant. The Opportunity Costs is: $16,000 + $3,000 + $3,000/ $100,000= 22%. In this case, the opportunity cost is too high. It might make more sense to hire a grant writer with a fee that keeps your organization below the 7% opportunity cost.


Scenario 2: The same organization is thinking about using the grant consultant from the first scenario to apply for a $750,000 grant. The Opportunity Costs is: $16,000 + $3,000 + $3,000/ $750,000= 3%. In this case, it makes much more sense to hire this grant writer, because the opportunity cost is 3%; your nonprofit will have 97% of the grant funds for the program, maybe more if you can request grant management and indirect costs.


The opportunity cost formula is great because once you know how much a grant will cost to apply for and manage you can make a reasonable decision on whether your nonprofit should apply. It's another tool to add to your decision-making toolbox.


Do you think measuring the “Opportunity Cost” before applying to grants could make it easier for your organization to decide which grants to apply for?