The distinction between restricted and unrestricted grant funding runs through almost every grantmaking debate. Should funders specify exactly how their money is spent (restricted), or trust grantees to use it as they see fit (unrestricted)? The answer has significant implications for grantee organisations, for funder accountability, and for the overall effectiveness of philanthropic capital.
Restricted grants are funds designated for a specific purpose — a particular project, activity, or expenditure category. The grantee is accountable for spending the money on the specified purpose and cannot use it for other organisational needs.
Common types of restricted funding:
- Project grants: Funding for a specific, time-limited project (e.g., a community health programme, a research project, a one-off event)
- Capital grants: Funding for a specific asset (equipment, facility, building)
- Programme grants: Funding for a defined programme of work within an organisation
Unrestricted grants are funds that the grantee can use for any legitimate organisational purpose — including management, administration, rent, staff salaries, and activities the funder might not have chosen to fund specifically. Also called "general operating support" or "core funding."
Accountability and control. Funders who restrict grants know specifically what their money is paying for. They can assess whether the funded activity was delivered and whether it achieved the intended outcomes. For government funders accountable to ministers and auditors, this specificity of accountability is often a governance requirement.
Strategic focus. Restricted grants allow funders to direct investment toward specific priorities — ensuring their funds contribute to the outcomes they care about rather than being absorbed into general operations.
Risk management. If a grantee organisation has governance or financial problems, restricted funds that haven't been spent may be more recoverable than unrestricted funds that have been absorbed into general operations.
Donor intent compliance. For foundations with specific donor intent — where the founding gift was given for a specific purpose — restricted grantmaking ensures the funder is carrying out the donor's wishes.
Organisational effectiveness. Organisations need to invest in the things that make them effective — strong management, good systems, staff training, governance support. These "overhead" costs are often excluded from restricted grants. Organisations starved of unrestricted funds become less effective over time, even when their project grants are fully funded.
Grantee knowledge. The organisation delivering the work knows better than the funder what it most needs. A community health provider knows whether it needs a new outreach worker or a better data management system; a funder assessing a project proposal from the outside doesn't. Unrestricted funding respects organisational knowledge.
Flexibility to respond. Community organisations operate in changing environments. A fixed project grant that specifies exactly what must be delivered may prevent an organisation from responding appropriately when circumstances change. Unrestricted funding allows adaptation.
Reduced administrative burden. Project grants require detailed budgets, expenditure tracking against approved categories, and budget variation approvals when money needs to move between line items. Unrestricted grants require far less financial administration — releasing grantee management time for programme delivery.
The "overhead myth." Research by GuideStar, Charity Navigator, and others has documented the "overhead myth" — the belief that low administrative cost is a sign of an effective charity. In reality, charities with adequate investment in management, systems, and staff capability consistently outperform those that starve overhead. Funding that perpetuates the overhead myth actively harms sector effectiveness.
The trust-based philanthropy movement — including Philanthropy New Zealand's equity-centred grantmaking work — argues strongly for unrestricted, multi-year funding as the highest-value grantmaking approach. The core argument:
This doesn't mean unrestricted funding is appropriate for all contexts — but it challenges funders to consider whether their default preference for restricted project grants serves their accountability needs or primarily reflects risk aversion.
The spectrum of restriction. Grants don't have to be purely restricted or unrestricted. Common middle-ground approaches:
- Programme grants with overhead allowance: A project grant that includes a percentage (10-20%) for organisational overhead
- General operating support with light reporting: Unrestricted core funding with a simple narrative report
- Flex funds within a project budget: A project grant with a defined "flex" percentage that can be reallocated without approval
Matching restriction to relationship maturity. For new grantees with no track record, restricted grants with defined accountability provide appropriate risk management. For established grantees with a long track record of delivery, unrestricted support demonstrates trust and reduces administrative burden.
Outcome-based funding. Some funders focus accountability on outcomes rather than expenditure — paying for results achieved rather than activities delivered. This approach allows grantees flexibility in how they achieve the outcomes while maintaining strong accountability for what matters.
Tahua supports both restricted and unrestricted grant management — with configurable grant types, flexible budget tracking, and reporting frameworks that can accommodate project accountability or outcome-based general operating support.