Linking overhead expenses and nonprofit effectiveness: Evidence from Habitat for Humanity

Public scrutiny of the nonprofit sector often focuses on excessive overhead spending, seeing it as an obstacle to mission fulfillment. Yet, there have been few prior studies on the impact of overhead expenditures on the effectiveness of nonprofit organizations. Building and utilizing a unique dataset of Habitat for Humanity affiliates across the United States between 2010 and 2016, this paper analyses the relationship between overhead spending and effectiveness using fixed effects and mediation models. Results indicate that an increase in the overhead ratio leads to greater nonprofit effectiveness in terms of more houses built and revenue raised. However, findings suggest that overhead ratios of more than 15% yield positive but diminishing returns. Findings also show that organizational capacity indicators such as investments into salaries, professional fees, marketing, information technology, and fundraising mediate a positive relationship between the overhead ratio and nonprofit effectiveness. Implications for both scholars and practitioners are discussed.