Overhead cost allocation in the humanitarian sector: Chapter 4
Equitable overhead provision: barriers and opportunities for change
On behalf of IASC Results Group 5 on Humanitarian Financing, DI, in partnership with UNICEF and Oxfam, conducted research on overheads which informed the development of newly endorsed IASC guidance.
The discussion around the provision of overheads to local and national partners is more than just a financial issue – it also has operational, regulatory, and ethical dimensions. While some of the issues raised by cascading ICR present challenges, they also provide opportunities to improve the system. This section of the report presents the key findings to come out of interviews with L/NNGOs, INGOs, UN agencies and donors regarding the complex barriers to sharing ICR and the potential solutions. These barriers have different implications and levels of relevance for individual organisations and require further unpacking to address.
Barriers to providing ICR
There is a lack of funding transparency across the humanitarian sector. It is unclear how much funding is passed onto local actors, let alone how ICR is passed through transaction layers with financial tracking platforms not currently recording this information. Local actors struggle with a lack of clarity regarding overall budgets and are often unsure if the variation in ICR rates is due to donor guidelines or decisions made by intermediaries. This reinforces a ‘sub-contracting’ dynamic as opposed to an equitable partnership. Furthermore, donors are often unaware of the amount of ICR passed on by recipient organisations which further limits the extent to which they can advocate for the cascading of indirect costs.
“There’s a perception that local humanitarian actors are just there to implement without contributing to the direction of the project.”Local NGO
As highlighted above, the different terminology and definitions used to classify direct or indirect costs is a critical issue. A lack of common definition means that there is often considerable overlap between the overhead and direct support cost or administrative cost categories. What some agencies would classify as ‘overheads’ may well be considered shared direct programme costs for others. Ultimately, the issue for local and national partners is funding restrictions – when funding is provided to cover indirect costs as an unrestricted percentage of the total grant, partners have a lot more flexibility in how they use it.
There is also a risk that partners given an overhead rate might find their direct project support costs being squeezed. Both the INGOs and L/NNGOs interviewed raised this as an issue, alongside the risk that L/NNGOs could actually end up receiving less funding overall if they claim an overhead. This point was also highlighted by Humentum in a recent study into the coverage of national NGOs’ administrative costs which found that, within the sample, mandatory direct charging led to lower levels of under-recovery than if the funder provided indirect cost rates. Clear, harmonised definitions of cost types would help with this, as well as transparent budgeting of costs required to deliver programmes.
“The classification of what falls under programmatic and what falls under support, and what falls under overhead; we have never seen similar guidelines across our partners.”National NGO
Financial implications of overhead provision
As outlined above, donors do not generally provide additional overheads for downstream partners. As a result of this, intermediaries – especially INGOs – are faced with the challenge of having to ‘share’ the ICR they receive which they rely on to run their operations. This poses clear practical challenges for both INGOs and UN agencies; mainly in terms of structuring ICR sharing models and compensating for the potential loss of organisational income. Amending ICR practices may also involve challenging restructures of internal systems for budgeting and reporting.
Various factors effect intermediaries’ abilities to ‘share’ overheads. Organisations with larger unrestricted income streams or less projectised funding – such as faith-based organisations or agencies like the UNHCR – have greater financial flexibility to cover partner overheads. INGOs and UN agencies that rely more on project funding than core funding may have less flexibility and face different challenges. For example, these organisations may be less able to cover partners’ indirect costs if they are not specifically budgeted within projects. The regulations around this type of grant funding (i.e., the degree of flexibility) are therefore critical to organisations lacking additional sources of less restricted income.
Whether or not international organisations are able to absorb the loss of income in other ways, discussion around ‘sharing’ overheads with local and national partners raises wider questions around the suitability of the traditional 7% set rate provided by many donors. For many intermediaries, existing ICR rates are not based on actual indirect costs incurred. They are also often insufficient and have to be complemented with additional income, such as private fundraising. Sharing ICR would not necessarily mean an organisation’s overhead costs are proportionately reduced. Some intermediaries feel they are faced with a situation where they will have less resources for the same, if not more, responsibilities, as donor compliance requirements grow ever more stringent.
“The fact that overheads are arbitrarily capped at 7% doesn’t help. If donors were willing to meet real indirect costs for each partner, that would make a big difference. For us, 7% is not enough, so sharing that would put us in an untenable situation… If donors really are committed to localisation, they need to enable that.”INGO
One important dimension of this is risk management. As the overall grant holder, INGOs and UN agencies are ultimately accountable to their donors and often take on liability for programme delivery, including any ineligible costs. The additional cost of paying for the systems to mitigate this risk is part of the argument advanced by international organisations for requiring (relatively higher) overhead costs. If additional overheads are not provided by the donor, and existing overheads must be shared, should risk be passed to local and national partners too? There are various issues with this, not least that some donors purposefully fund intermediary organisations to provide this layer of accountability. While some more established L/NNGOs interviewed expressed a wish for risk to be more fairly shared, this may not be the case for all, especially those organisations who have not previously received overheads which are essential for building effective risk-management systems. Some INGOs interviewed also expressed concerns that their L/NNGO partners are not ready for this and that it would be unfair to expose them to such risks.
The wider risk-sharing debate should not impact on whether ICR is fairly provided to L/NNGOs. L/NNGOs face different – and arguably more – risks than intermediary organisations and must therefore be able to manage these risks through overheads. Without recovering overheads and developing reserves, L/NNGOs are also less able to manage risk effectively. ICR is also used by organisations for many other things beyond risk management. However, for some INGOs, the discussion around ‘sharing’ ICR does impact on wider conversations around where risk, responsibilities and costs fall within partnerships. This re-emphasises the importance of having more transparent conversations around whether the current overhead rates meet the true costs of all partners involved in the humanitarian response.
International organisations face a number of regulatory barriers. Firstly, many intermediary cost-recovery policies only grant overhead funding to partners if it falls within donor regulations, yet most donors do not permit additional funding for partners’ overheads on top of the overall grant overhead. While some donors are experimenting with policy change around this (see section on ‘Donor-led change’), most do not currently allow the overall proportion of indirect funding to be increased. Secondly, some UN and INGO policies only allow ICR to be shared with international partners, perpetuating the idea that INGOs have greater support costs.
“If we are challenged ourselves, we can only share the challenge. The quality funding we provide is totally based on the quality funding we receive. If donors really are committed to localisation, they need to enable that.”INGO
In some cases, donor compliance regulations have prohibited INGOs from providing ICR to partners. For example, donors may have regulations around the auditing of overheads, the cost of which L/NNGOs may be unable to meet.
International organisations face other internal regulatory barriers to consistent provision of ICR. Many cost-recovery policies state that ICR should be used to fund the activities of international headquarters. Country office staff managing partnerships and negotiating grants have no power to change this. Organisations can also be divided internally over the issue of ICR provision to partners with varying levels of buy-in between departments and fields of responsibility, such as finance and policy. Many of the L/NNGOs interviewed felt that there was a disconnect between country offices and headquarters when it came to localisation rhetoric and actual practice. This means that country offices often face internal blockages when they attempt to share ICR with partners.
“There is a disconnect between the rhetoric at the headquarter level and the real practice at the country operation level. Perhaps the issue lies with the concept of ‘performance’ of the employees who negotiate the contracts with the partners. Those employees consider that the fewer resources we commit to local partners, the more the operation will be ‘efficient’.”National NGO
What needs to change?
Ultimately, the humanitarian community must live up to the commitments it made to channel more direct funding to local and national actors. Direct funding from donors is the easiest way for implementing organisations to recover all the costs associated with delivering efficient and effective humanitarian programmes as ICR does not need to be passed through an intermediary.
Commitment in principle and in practice
Discussions around the provision or sharing of overheads must start from a place of principle. L/NNGOs require overheads for the same reasons as international organisations. There are clear ethical and practical justifications for ensuring they can recover all indirect costs. INGOs and UN agencies must commit to the principle of sharing ICR equitably or providing adequate overheads that cover all the costs incurred by local and national partners on the front line of the humanitarian response. While this is generally accepted with many organisations reviewing their policies, intermediaries must also be willing to adjust their practices accordingly and be open to sometimes challenging operational changes. To support these changes, buy-in is essential at all levels, including senior leadership.
“INGOs must also be willing to cede power and resources. If [you] come at it from a localisation perspective – while less ICR for INGOs might mean shrinking resources, [it] also means local actors receive more resources.”INGO
Clearer, more consistent definitions and policies
Consistency in the definitions and types of costs eligible for inclusion within indirect cost classifications are essential to more transparent and fairer provision of ICR. For INGOs, an understanding of the different costs involved would help with auditing and budget negotiations with donors. If intermediaries developed clear guidance or policies on ICR sharing, this would also help foster more equitable partnerships. These policies should be transparent and widely shared to raise awareness across the humanitarian sector; enable L/NNGOs to use them as negotiating tools in their conversations with country staff; and prompt other organisations to do the same.
“There should be consistency [of ICR] because, in my experience, this is a lifesaving safety net for us. We can use it for institutional capacity building purposes without any restrictions.”National NGO
Increasing donor incentives for change
There was broad consensus across interviewees that the most effective way to push this agenda forward would be for donors to incentivise change. This could be by mandating recipient organisations to share ICR or providing additional ICR specifically for L/NNGOs. As a minimum, donors should request transparency from recipient organisations regarding ICR sharing practices to demonstrate their commitment to this issue.
“Donors should push INGOs to share ICR costs and to work with local actors if they can’t fund the local actors directly.”National NGO
“At times we can focus too much on donor behaviours that present barriers to equitable partnerships; we don’t talk enough about how donors can use their power to drive change. As an example, I would like to see donors mandate equitable sharing of indirect costs.”INGO
Re-evaluating existing ICR practice
A broader understanding of the costs involved in delivering quality humanitarian programmes and the extent to which current donor ICR allowances meet actors’ costs is essential. This is especially important as both donor compliance requirements and the complexity of humanitarian response grow. INGOs are calling on donors to increase the amount of allowable ICR. This will allow for coverage of both their indirect costs and the costs of their downstream partners; or alternatively, for headquarters’ costs to be funded from direct programme budgets, thus enabling greater sharing and/or cascading. While this study did not seek to closely analyse donor practices, variable rate methodologies – such as USAID’s negotiated indirect cost rate agreement (NICRA) and FCDO’s non-project attributable costs (NPAC) – were mentioned by interviewees as being more accurate approaches to calculating overhead costs than flat-rate approaches. Further investigation of donor practice could inform future studies in this area.
Many of the L/NNGOs interviewed felt that INGOs/UN agencies lacked trust in local actors. As a result, international organisations were reluctant to provide unrestricted funding. Some were concerned that they would lose some control by passing on overhead funding and that it would increase their own risk level. There was also a worry that the provision of additional overheads to partners would lower the overall amount spent on programming. Several intermediaries and local actors felt that the provision of specific capacity-strengthening support where necessary could help build more trust. For organisations that previously received no overheads, support with developing cost-recovery policies and building financial management’s capacity to manage unrestricted funds could prove helpful. Open and transparent dialogue around the real costs of humanitarian programmes is also essential to drive change.
Advocating for greater ICR sharing
The L/NNGOs interviewed stressed the importance of stronger joint advocacy on overhead provision to international partners. They also felt that international actors should advocate to donors on their behalf. Intermediaries, donors and L/NNGOs need to promote emerging examples of good practice help the movement towards more equitable overhead provision gain momentum.
“Among local NGOs and CSOs, we need to talk openly without shame about ICR and the reality of what we need, instead of trying to conceal indirect costs elsewhere; and we need to build a common language among actors.”Local NGO
Humentum, 2022.Return to source text