How do charity watchdogs like Charity Navigator and CharityWatch calculate administrative cost ratios?
Executive summary
Charity Navigator historically used expense ratios (program, administrative, fundraising) drawn from IRS filings to score charities, but in 2023 it dropped the administrative-expense ratio from its rating mix and now emphasizes program expense ratios and broader “beacons” like Impact & Results and Accountability & Finance [1] [2] [3]. CharityWatch still calculates adjusted program% and a “Cost to Raise $100” after analysts modify reported figures for non‑cash goods, joint costs and other items, then derives administrative-related views from those adjusted numbers [4].
1. How the classic administrative ratio worked — and what it measured
For decades watchdogs measured administrative cost as a slice of total expenses: administrative (or “overhead”) costs divided by total expenses (or sometimes total revenues), producing a percentage that donors used to judge efficiency [1] [5]. That metric showed what share of a nonprofit’s spending was not directly on program services; lower percentages were presented as preferable by many sites and donors [1] [6].
2. Charity Navigator’s change: dropping the administrative-expense metric
Charity Navigator publicly revised its methodology in 2023, removing administrative expense ratio, fundraising expense ratio and program‑expense growth from the set of metrics it uses to compute overall ratings. The organization said the goal was a more balanced evaluation focused on outcomes and multiple “beacons” — Accountability & Finance, Impact & Results, Culture & Community, and Leadership & Adaptability — rather than headline overhead numbers alone [2] [3]. Charity Navigator still publishes expense pie charts and a program expense ratio metric for transparency, but it no longer treats administrative ratio as a direct engine of its composite score [7] [1].
3. CharityWatch’s method: analysts adjust the numbers before calculating ratios
CharityWatch continues to present ratios, but it does not simply take reported 990 line items at face value. Its published ratios are the end result of an in‑depth financial analysis in which analysts make adjustments for non‑cash gifts and services, high asset balances, joint‑cost allocations, and other accounting items; after those adjustments they compute Program % and the Cost to Raise $100 — the latter being CharityWatch’s central fundraising‑efficiency metric [4]. In short, CharityWatch’s numbers are analyst‑refined, not raw 990‑line arithmetic [4].
4. Who divides by what — subtle methodological differences matter
Different evaluators define denominators differently. Some measure administrative costs as a share of total expenses; Charity Intelligence (a Canadian group cited here for comparison) computes administrative ratio as administration costs divided by total revenues less investment income, with explicit cutoffs for scoring [5]. These choices — whether to divide by expenses or by revenues, whether to exclude investment income, and how to classify joint costs or noncash items — materially change the percentage that appears on a charity’s page [5] [4].
5. Why the field moved away from raw overhead ratios
Research and commentary in the sector argue that the overhead metric is a blunt instrument. Fixed costs, accounting classifications, and incentives to reclassify expenses can make low overhead appear misleading; charities may underinvest in necessary infrastructure to chase a low percentage [8] [9]. That critique underpinned Charity Navigator’s 2023 shift toward outcome‑focused beacons, and other funders and evaluators have urged donors to consider impact and capacity, not only overhead percentages [2] [10].
6. What donors should watch for when they see an “administrative” number
An administrative percentage alone does not reveal what was adjusted, what counts as program versus overhead, or whether fundraising efficiencies were measured per dollar raised. CharityWatch’s transparency about adjustments offers one model; Charity Navigator’s move means its composite rating now weighs broader indicators though it continues to display expense breakdowns for users who want them [4] [7] [3]. When comparing charities, check which denominator and adjustments an evaluator used — those technical choices drive differences in the reported ratios [5] [4].
7. Bottom line: ratios are signals, not definitive judgments
Expense ratios remain popular because they’re simple, but their simplicity hides important methodological choices and incentives. Charity Navigator has intentionally stepped back from using administrative ratios as a primary scoring lever [2] [1]. CharityWatch still reports adjusted ratios but emphasizes analyst review and context [4]. Donors should treat any single percentage as one part of a fuller review of governance, transparency, outcomes and the evaluator’s adjustment rules [3] [4].
Limitations: available sources do not provide Charity Navigator’s precise post‑2023 formula for how each beacon’s scores are combined into a single rating, nor do they list every adjustment CharityWatch applies to every line item — readers should consult each organization’s methodology pages directly for the full technical details [7] [4].