The Overhead Myth that suggests that low overheads in non-profits is a sign of efficiency has led to many donors underfunding the associated administration costs of their project grants and driven a vicious ‘starvation cycle’. Through the Administration Costs Research Project, we gathered evidence on the extent to which international donor funding covers the real administration costs of national NGOs. The Funders for Real Cost, Real Change (FRC), a collaborative of private foundations, commissioned this research and sought recommendations on how funders could provide adequate cost coverage and strengthen their grantees’ financial health and resilience.
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Learn more about the project in the video below:
Administration is essential to the effective, efficient, and safe delivery of projects and programs. These could include organizational management, finance, and payroll functions, or other necessary non-program costs, such as head office rent and utilities. Inadequate coverage of these administrative “overhead” costs risks undermining organizational effectiveness or financial resilience of grantees. Restricted funding for project or program grants does not typically cover a full share of the administration costs organization’s incur – our research has further revealed what a large problem this is for national NGOs.
Organizations not getting their administrative costs covered by donors must draw on reserves to fund such functions or fund them disproportionately from unrestricted income. A reluctance by NGOs to reveal their actual administration costs can add to the issue. There can be a perception in the sector that expenditure in these areas demonstrates inefficiency and undermines legitimacy. This creates a vicious cycle with organizations reporting lower administration costs and funders not knowing whether they cover a fair share of these costs.
The community of international grant-making foundations identified this as a global issue and has been raising awareness over the last few years. They came together and commissioned Humentum to gather information on grantees’ experiences in Africa, Asia, Latin America, and Europe as part of that work.
Breaking the starvation cycle: report findings
The information and anonymized data collected were used to write and publish a report, helping inform donors’ future policies concerning cost coverage.