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'Anyone who works in the not-for-profit sector will tell you that many people still believe that staff should work for free'

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Recover or die: the case for realistic cost recovery

22 December 2015
Author: Rose Longhurst

I was saddened to hear that Target TB, a small NGO that was lauded for their achievements despite minimal resources, has made the decision to close. After 12 years of dedicated work, responsible examinations of their financial situation led them to conclude they couldn't go on.

In their final email to stakeholders, they concluded that "increasing pressure from statutory and philanthropic donors in reduced funding for vital overhead costs such as fiduciary risk management, programme quality assurance and public accountability was a major consideration in Trustees’ closure decision."

That a lean charity should be in this position is as frustrating as it is saddening. Cost recovery should not still be a threat to our sector. The need for a grown-up approach to financing indirect costs has been recognised for some time, especially in the US where conversations about the overhead myth and the starvation cycle have led to initiatives such as the challenging I am an overhead campaign.

Cost recovery should not still be a threat to our sector.

For many years, non-profit organisations and their donors have been trying to address the issues of how we pay for the less exciting aspects of our work: the lighting, the insurance, the finance people (sorry finance friends!) So why are we still struggling with this? Simply put, we have three audiences to convince:

The general public

Anyone who works in the not-for-profit sector will tell you that many people still believe that staff should work for free, and that everything should be donated. Irresponsible charities then perpetuate this myth with claims that "100% of donations go directly to the cause", as though mosquito nets can fly themselves to where they’re needed, train people on how to use them, and then report back to supporters on how many lives they’ve saved.

The donors

There is some really good practice out there. USAID’s negotiated indirect cost rate agreement and DFID CHASE’s non-project attributable cost calculations both aim to allocate reasonable funding to support elements that aren’t easily allocated to a "project". But many other donors are notorious for their unreasonable approach. Private foundations especially appear to take reductionist approaches to arbitrary admin caps, and one wonders whether the European Commission would be able to operate on the 7% administration amount that they allocate to NGOs.

The NGOs

At the base of the pyramid of those whose attitudes need to change are the non-profit organisations themselves. If we don’t know and manage our own costs, and communicate these realistically to donors and supporters, then why would they ever change their minds about "less is best"?

We need to advocate, and in order to do this, we need to understand. Furthermore, once we have clarity, we can then make informed decisions about how and when to work with donors who allocate below a realistic amount.

Bond, Mango and InsideNGO have been working on this issue over the past year.  We have undertaken a ground-breaking study to benchmark NGO costs and support our advocacy. This will:

  • Enable NGOs to understand their current cost recovery practice and how this compares to others.
  • Benchmark indirect costs by proposing a standardised method for cost allocation.
  • Provide an evidence base for donor advocacy to promote an approach which better reflects the varied cost structures of NGOs and programmes.

We have made the case that, to succeed, non-profits need to invest in the same infrastructure as other organisations. The current reality is that NGOs struggle to meet all of the costs associated with delivering and supporting programmes through donor funding alone. We have raised this issue at Bond’s annual conference, in meetings with foundations, and in our submissions to DFID’s Civil Society Partnership Review.

My new year’s wish is for an end to NGOs cutting the learning, capacity building or programme quality aspects from budgets in order to get under arbitrary donors’ caps.

In 2015, forward-thinking foundations such as the Ford Foundation have committed to addressing the overhead fiction. Let’s make a new year’s resolution now to get real about the true costs of NGOs’ work in 2016, whether we’re a supporter, a donor or an NGO.

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Cost recovery: what it means for CSOs

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About the author

Rose Longhurst
Bond

Funding Policy Manager at Bond