Cost transparency for DFID grants: improvements and obstacles

Civil society organisations have been working with the Department for International Development (DFID) to achieve true cost transparency in our grants.

Since October 2017, a group of NGOs convened by Bond and Humentum started working with DFID to co-create a practical methodology, template and guidance that would satisfy the needs of all key stakeholders.

Nine months ago DFID launched a prototype of this standardised way of calculating overheads on DFID grants. Since then DFID has been going through the final stages of completing the full template in consultation with the same group of NGOs and on clarifying the guidance around certain costs eligibility.

DFID published the revised templates and guidance on 11 June 2019. While DFID’s leadership has committed to making the new approach mandatory, the new templates and guidance will only be recommended practice for DFID teams in 2019, due to DFID’s stretched capacity from other priorities, such as managing the implications of Brexit.

DFID has set up a small central team and email address to support implementation. NGOs experiencing challenges in negotiating with DFID over the new guidance and templates are being strongly encouraged to contact this central team.

Sticking to our key principles

We have maintained the spirit of the original seven principles that were agreed to achieve cost transparency and have added two new ones:

  • Simplicity
  • Transparency
  • Fairness
  • Scalable
  • Predictable
  • Value for money
  • Substantive
  • Comparable (added)
  • Compatible with other funders (added)

The two extra principles reflect the challenge of getting consistency within DFID and then ultimately beyond DFID. A key area of concern is that each DFID country office will have different interpretations of the same organisation’s programme overhead rates and contexts and how to compare these with other organisations.

DFID’s remaining obstacles to providing full cost recovery

DFID is yet to meet its principle of providing the full economic costs of the projects it funds because there are costs DFID treats as ineligible that are essential for delivering the projects it funds and which other donors would treat as eligible

These differences between eligibility requirements of donors adds to the complexity of compliance and often requires intricate re-analysis of financial data by NGOs for different donor reports. The Boston Consulting Group and the Norwegian Refugee Council estimates more than 2.3 million human hours across our sector are being wasted in needless administration that could be avoided through donor harmonisation.

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There are UK-government wide rules, which DFID would need to address were they to make its eligibility criteria more consistent with other donors. This will be difficult for DFID to address, but we welcome that they remain open to dialogue on these issues and continuing to work with us in the year ahead.

Bid and proposal costs and depreciation

DFID treats bid and proposal costs and depreciation as ineligible for cost recovery. Whereas donors like USAID accept that bid and proposal costs are a legitimate indirect or Non-Project Attributable Cost (NPAC). Depreciation would normally be accepted as part of a cost of operation in either direct or indirect costs under commonly accepted accounting principles.

DFID’s inability to cover depreciation costs may damage value for money, as it will, unfortunately, prompt grantees to lease or hire vehicles and equipment, which would otherwise be more cost effective to purchase and depreciate.

Complex eligibility criteria

Some of DFID’s eligibility definitions and requirements are complex, resulting in disproportionate amounts of time spent on grant negotiation and approval.

The more judgement, argument and discretion there is in accepting certain costs as eligible, the stronger the unequal power dynamic between donor and grantee becomes, preventing true cost transparency and fair cost recovery.

Two examples of these:

  1. Statutory payments, which may be incurred as from operating in a specific country. DFID requires significant explanation and negotiation to accept these costs, despite being a legal requirement for NGOs to operate in certain countries.
  2. Insurance. DFID has accepted this as an eligible cost, but requires prior negotiation and approval. This should be regarded as a necessary cost of doing work in a given context, as much as travel or accommodation.

The best approach in these circumstances is to flag these costs early in the budget negotiation to obtain the specific confirmation needed.

Challenges beyond the grant templates

These new rules only apply to grants and yet many NGOs receive contracts as well. Inconsistency and duplicative due diligence processes also create a lot of extra work. DFID was praised for using the same due diligence template for the Rapid Response Facility (RRF) that the START network uses for its emergency grants – clearly delivering on the comparability and compatibility principles outlined earlier. We welcome more cases of DFID seeking to harmonise its approaches with other donors.

Are we nearly there yet?

We recognise DFID’s strong commitment to collaboration and co-creation with our NGO working party. We have made tremendous progress and have a template, guidance and underlying principles that have got us close to enabling DFID to provide its grantees with the full cost recovery it promised five years ago.

However, these new approaches are not yet mandatory and will inevitably be inconsistently applied with teething problems. DFID and NGOs must continue to collaborate and to communicate transparently about the challenges we come across, despite the inherent power dynamics.

It is in DFID and the sector’s interest to keep working at this while recognising that achieving true cost transparency and fair cost recovery will always be a journey, not a destination.

Access the latest cost transparency templates and guidance.

Join the Bond Funding Group to share experiences of donor relationships and undertake joint advocacy with UK funders.