Extensive data that reveals systemic underfunding of administrative costs is jeopardizing the financial health of NGOs.
March 28, 2022: Humentum, a global organization focused improving how nonprofits operate, in partnership with Funders for Real Cost, Real Change, a collaborative of private foundations, today released a groundbreaking research report revealing inadequate coverage of administrative costs by funders. The data demonstrates how international funders are trapping their grantees in a “starvation cycle” by not sufficiently funding their administrative or so-called overhead costs.
Humentum’s research team worked with 81 national NGOs in ten countries in Africa, Asia, Latin America, and Europe. During the research period, NGOs completed extensive surveys on financial health and cost coverage, and 38 of these NGOs went on to provide three years of financial data including details of their largest restricted funding agreements.
- The starvation cycle is widespread: Most funders (two thirds working with the national NGOs surveyed) provide inadequate coverage of their grantees’ administration costs
- Poor quality income damages financial health: Inadequate cost coverage and limited access to unrestricted income is damaging the NGOs’ financial health
- Financial health requires quality income and financial knowhow: funders will need to do more than cover costs and provide some unrestricted funding, they need to strengthen financial management capabilities as well.
Inadequate cost coverage and limited access to unrestricted income is making it extremely challenging for most NGOs to achieve stable financial health. 50% of the participating NGOs had unrestricted reserves equivalent to less than 21 days of annual expenditure.
“We’ve heard for years that funders aren’t covering enough of what’s sometimes called ‘overhead,’” says Tim Boyes-Watson, Humentum’s Global Director of Influence and Initiatives. “[During this research], we heard stories of staff foregoing salary to keep organizations running. It is important that we debunk the overhead myth that a low overhead or indirect cost rate is a sign of efficiency. This research shows a low overhead rate more often indicates potential risk to the NGO and to its funders.”
Key recommendations for funders coming out of the report are:
- consistently covering a full and fair share of all associated administration costs
- directly funding financial management capabilities for grantees and making some contribution to unrestricted funds
- systematically collecting data on the extent of adequate cost coverage.
“There’s a real burning platform kind of problem here,” says Tim Boyes-Watson, Humentum’s Global Director of Influence and Initiatives. “Funders are asking these nonprofits to do really challenging jobs, often in difficult places, but are underfunding them and are not investing in their long-term capacity. There is widespread awareness of this problem, but there hasn’t been any consensus on solutions. We believe the data we’ve collected is a big step in that direction.”
Download the Executive Summary below or download the full report and read more about this initiative on our webpage.
Humentum partners with the global development community to be an equitable, accountable, resilient force for social good. Humentum provides training, convening, and consulting support for member organizations and clients working in global relief and development by strengthening operations functions: compliance and risk, financial management, program management, and HR/learning. For more information, please visit http://www.humentum.org.
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