Overhead cost allocation in the humanitarian sector: Chapter 3
What does good overhead allocation practice look like for local and national partners?
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.
Current practice around overheads varies, both between and within international organisations. As a result of this, local and national partners’ experiences of receiving overheads depends very much on the partner and the donor. This section outlines some of the examples of good practice identified in interviews and focus-group discussions; L/NNGOs’ priorities for future overhead sharing; and some examples of donor-led good practice.
L/NNGO experiences and priorities
The local and national organisations interviewed reported that they have been able to claim overheads more frequently over time. However, while most could give examples of partners providing overheads, provision was generally inconsistent and percentage rates varied. In some cases, L/NNGOs were still not receiving any overheads.
According to the L/NNGOs interviewed, receiving indirect costs allowed them to cover expenses that were vital for the running of their organisations but were not included in direct budgets. Common examples of uses for indirect funding included capacity building, such as staff training; organisational development activities, such as improving financial management systems, communications, and publications; and other operating costs, such as auditing fees or rent. Organisations also use overheads to invest in emergency response reserves and to manage other financial risks.
Aside from developing and strengthening their organisations, L/NNGOs also gave examples of having to use overheads to cover project costs that were not fully covered in direct budgets, such as office rent, utilities, and security staff. This clearly demonstrates that direct project costs are not always fully covered by project budgets. Interviewees reported that this was due to partners not always accepting all their costs or disallowing certain costs. L/NNGOs would prefer to use overheads to develop their institutional capacity – for example, building the reserves necessary to respond to emergencies – but in many cases are required to use them for project-related costs they are unable to recover via the direct budget.
“I would prefer not to spend unrestricted funds on rent of a warehouse or an office; I would prefer to keep that to one side for emergencies and cover any shortfall with funding. We are unable to build up reserves.”National NGO
Overall, L/NNGOs want to receive ICR on the same terms as international organisations. This is a matter of principle and fairness – L/NNGOs should not be subject to more scrutiny over overhead spending than INGOs. In cases where overheads were provided, the following characteristics were identified as good practice:
- Providing funding to cover overheads as unrestricted funding. International organisations can request that L/NNGOs include indirect costs within direct programme budgets, rather than providing this funding as a percentage of the total grant to cover indirect costs. This requires identification of specific expenditure for each budget which undermines the value of unrestricted funding that in part can be used for unforeseen needs, as per an organisation’s overhead policy (where this exists). This is separate to the calculation of an organisation’s indirect cost recovery rate. If overhead-type costs are only permitted as itemised direct budget lines, partners are also unlikely to prioritise the same things. For many L/NNGOs, overheads are the only source of flexible funding they have access to.
- Providing overheads that are not time limited or subject to individual project audit. Having to spend ICR within a fixed time period and provide proof of expenditure for project auditing undermines the value of overheads, especially in the case of short-term projects.
- Providing overheads as a proportion of the partner’s total budget. In some cases, ICR is only provided on part of the partner’s budget – such as operating costs – rather than the total project budget. This means that for some types of project, e.g. in-kind or cash programming, organisations only receive overheads based on a small proportion of their overall project budget which is accordingly a limited sum.
- Covering overheads in addition to administrative and project support costs. Overhead allowances should not undermine other expenses. Administrative and support costs associated with any given project should be included as direct costs so that overheads can be used to develop and strengthen the institution as a whole. Due to the inconsistent provision of ICR, L/NNGOs are often obliged to use what ICR they do receive to plug gaps in programme budgets, rather than investing in their organisation’s sustainability and development. This is because L/NNGOs already find it difficult to recover direct project costs from partners, particularly direct admin costs. Other requirements – such as co-funding where partners are required to contribute their own resources to the project – can also undermine overhead provision. This is because organisations may have to use the entire overhead funding they receive to cover co-funding requirements. Some INGOs and L/NNGOs expressed a concern that moving to a set percentage overhead rate may ultimately mean fewer resources for some local partners. A capped overhead percentage may mean there is pressure on L/NNGOs to reduce the costs they include in the direct budget due to an assumption they should be covered by the overhead. This is partly due to the lack of formal definitions on what is meant by direct or indirect costs.
- Open and transparent budget negotiations and partnerships with international organisations. L/NNGOs are not always told who the back donor is or the amount of ICR received by the intermediary partner where this is relevant. In some cases, L/NNGOs receive different ICR from partners with the same back donor. L/NNGOs would like to see greater clarity regarding donor and partner overhead regulations so that they receive them on a more consistent basis. This will allow them to improve their own financial management and forecasting.
- Clear and harmonised policies on overheads. The Country-Based Pooled Funds (CBPFs) were consistently mentioned by local and national partners as being an example of good practice; in part, because their budget regulations are clear and are not subject to negotiation. Similarly, UNHCR’s set rate was also mentioned as a notable improvement, though the percentage (4%) was still considered by some interviewees to be too low to cover all indirect costs.
Case study 2
Somalia Nexus platform
Nexus is a platform of Somalia- and Somaliland-based civil-society organisations. It was formed in 2019 by nine Somali NGOs. Two INGOs (Oxfam Novib and Save the Children International) were invited to join as international partners to support the start-up of the consortium. Nexus seeks to advance locally led approaches to emergency responses, peacebuilding, and development programming – in part by facilitating increased provision of direct funding and investment to L/NNGOs.
Given the barriers L/NNGOs face in receiving funding directly from donors, the platform appointed Oxfam as the fund manager and acting intermediary partner. It was tasked with conducting due diligence assessments where appropriate. Nexus projects receive 8% ICR from donors of which the fund manager (Oxfam) shares half (4%) with the consortia members implementing the project. This half is shared proportionately based on each implementing organisation’s budget and is provided as unrestricted, unaudited funding. This model is based on a similar one implemented by Oxfam as fund manager in the EU-funded Durable Peace Programme in Myanmar which was led by a coalition of L/NNGOs.
Nexus’ model was highlighted as being somewhat progressive, given that ICR INGOs in Somalia do not generally share ICR with L/NNGO partners – with tangible impacts for the local consortium members. These funds have allowed one L/NNGO – Save Somali Women and Children (SSWC) – to cover costs that they would be otherwise unable to. These costs include rent, utilities, and security costs as well as costs related to activities that help strengthen the organisation, such as staff capacity-building which has with retention of key staff members. However, given that ICR is one of the few sources of flexible funding available to L/NNGOs in Somalia, Nexus Core Members originally advocated for full proportionate sharing of the full amount of ICR available (8%), rather than the current negotiated model. There were various barriers to this; not least Oxfam’s internal organisational policies around ICR sharing and negotiations between the country office and headquarters.
Overhead enabling factors
Various enabling factors were identified by L/NNGOs as helping facilitate access to overheads.
– Only a few organisations consulted had been able to successfully receive direct funding from donors. In these instances, accessing overhead funding is much easier as there is no intermediary organisation. One example given was a national NGO who was able to receive funding directly from USAID’s Bureau for Humanitarian Assistance and received 5.3% for indirect costs. This enabled the organisation to update their internal systems.
– Joint local advocacy around overheads can be more effective than acting alone. Many of the good examples shared had emerged from consortium arrangements where L/NNGOs were able to jointly negotiate with international organisations. In some countries, such as Myanmar and Indonesia, L/NNGOs have been more active on advocacy around this issue than in other contexts. For example, the Joint Strategy Team – a consortium of nine L/NNGOs in Myanmar implementing the EU-funded Durable Peace Programme – were together able to negotiate an equal split of ICR from the INGO grant holder.
– Receiving overheads gave some L/NNGOs the leverage to negotiate ICR with other intermediary partners which can create a snowballing effect. It can also give L/NNGOs the confidence to refuse to partner with international organisations if overheads are not negotiated which can be a powerful advocacy tool. For example, one national NGO interviewed progressed from receiving very minimal overheads to having almost 80% of their grants include ICR.
– There is a perception that more well-established organisations are better able to secure overheads from international organisations. Local and national partners face very different realities when it comes to negotiating overheads. Organisations with a good understanding of partner localisation commitments (for example, those with partners who are Grand Bargain signatories) and who can afford to negotiate and potentially lose grants, have an advantage over L/NNGOs who are often smaller and more dependent on project grants. In some cases, these organisations may also be unaware that they are entitled to claim overheads.
“We reached a point where we started negotiating and telling our partners that if they’re not demonstrating some positive action towards localisation and recognising that L/NNGOs need to cover their overheads, we will name and shame you.”National NGO
International organisations identified many of the same enabling factors as well as the following:
– ICR sharing (for those organisations who do not have a standard policy) is more likely to be negotiated in contexts where organisations have long-standing relationships with local partners, where local partners are perceived by intermediaries to have good capacity, and where there is a strong local advocacy around localisation and overheads.
– Strong commitment to localisation and a willingness to cede power among INGO staff at both headquarters and country office level was also a key factor. The importance of workplace champions is clear, especially in financial management positions.
– Donor engagement with the issue of overheads is a key driver of change. This could be donors requesting recipients report how ICR is shared with onward partners. Both INGOs and L/NNGOs interviewed reported how this transparency request forces a more open discussion around how ICR is cascaded. More concretely, some donors have provided additional funding for downstream partner overheads (see section on 'Donor-led change'). In the example of the Dutch Relief Alliance and the Netherlands, donor regulations that stipulate ICR sharing are affecting policy change within the alliance (see Case study 5). Furthermore, donor interest and movement on this issue gives staff within international organisations further leverage to advocate for internal policy change.
Case Study 3
Consortium models – an example from Lebanon
Consortia have provided opportunities for more equitable ICR sharing to be negotiated. In Lebanon, the French Agency for Development (AfD) has funded several consortia in the education and health sector that are composed of both international and national NGOs. Amel, a national Lebanese NGO, was the lead partner in one of these consortia which had both INGO and L/NNGO members.
The overhead for the consortium (10%) was shared between all members using a proportional model, whereby each partner applied a 10% overhead on the total grant they implemented. The overhead was provided as fully flexible, unrestricted funding which had to be 'related to the mission of the NGO' but did not have to be related to project implementation. However, supporting documents for the overhead were still required and it was also subject to audit.
The main enabling factor for ICR sharing was that AfD asked for the division of overheads to be reported back. This request for transparency in part forced the consortium members to consider how the overhead would be shared and what would be most equitable. The ICR allowed Amel to cover areas that they were not formerly able to cover with direct project funding, such as capacity-building activities and publications. It also allowed Amel to resource a position which meant they could act as the health sector co-lead, therefore enhancing their involvement in the coordination of the response. This arrangement has also given Amel leverage to request the same overhead sharing structure from donors in other consortia.
Case study 4
UNOPS in Myanmar
UNOPS was identified by several L/NNGOs in Myanmar as having good practices around the provision of overheads. The Livelihoods and Food Security Fund (LIFT) in Myanmar is a multi-donor fund established in 2009 that operates under the management of UNOPS. LIFT funding guidelines include indirect costs which are provided as up to 6% of direct programme costs. In the cases of partnerships and consortiums, the guidelines stipulate that the 6% should be shared among all implementing partners – proportionate to their implementation budget – including with local civil society organisations. UNOPS also manages an EU-funded programme called the Nexus Response Mechanism in Myanmar which takes this proportional sharing requirement further. When the full allowable percentage of indirect costs is not passed through to a sub-grantee, the Secretariat requires a written explanation “as overheads are the critical investment tool of organisational strengthening and producing sustainable results.” These regulations ensure that a proportional and fair share of ICR reaches L/NNGOs and is not left to negotiation between partners where local partners may have less leverage.
Donor-led change in overheads for local and national partners
As well as change being led by local and national actors, there are some examples of donors stipulating greater ICR sharing or providing additional ICR for L/NNGO partners, which is leading to changes in practice.
– Danida’s new 2022–2025 guidelines for strategic partnerships with Danish CSOs includes provision of 7% overheads for Danish INGO recipients as well as an additional administrative fee to support local partner overheads. This can be up to 7% and must be justified based on the organisation’s knowledge and assessment of the local partner’s capacity. The 'usual requirements for annual financial audit' still apply. Danida cost categories are aligned with the cost classification component of the Money Where It Counts (MWIC) protocol. While these are guidelines and therefore not mandatory, Danish CSOs are now required to report on the transfer of these funds to Danida.
– The Rapid Response Facility (RRF) is a UK FCDO funding tool that can provide funding to pre-registered NGOs in the immediate aftermath of crises. The RRF is governed by the CHASE Humanitarian Response Funding guidelines. As part of the RRF allocation to the Covid-19 response in 2020, additional funding for L/NNGO overhead costs was provided. Budgets included direct costs; indirect costs known as Non-Project Attributable Costs (NPAC); and Localisation Support and Administrational Costs (LSAC) – the latter two of which are equivalent to overheads. The guidelines stipulate that lead partners must pass on LSAC to local and national downstream partners either at their own NPAC rate or at 10%; whichever is highest. The guidelines state that 'for downstream partners to be able to manage project-related risks effectively, and to strengthen their ability to provide essential services to the communities they support, it is essential that they have access to indirect costs.' Furthermore, RRF recipients are required to report the value of indirect costs they pass onto downstream partners. The LSAC is provided as unrestricted and unaudited.
– The UK Disasters Emergency Committee (DEC) allows INGO recipients to claim a 7% overhead. It also allows downstream partners to negotiate an overhead percentage. Overheads are not subject to audit by DEC, though audits are carried out by members themselves.
Case study 5
Dutch Relief Alliance
The Dutch Relief Alliance (DRA) is an alliance of 14 Dutch INGOs established in 2015 and funded through the Netherlands Ministry of Foreign Affairs (MFA). In 2020, EUR 79 million was channelled through the DRA in 18 joint responses. The DRA, through its partnership with the MFA, has evolved into a testing ground for operationalising Grand Bargain and Core Humanitarian Standards commitments, including those pertaining to localisation and quality funding. The DRA is committed to increasing funding to L/NNGOs and aims for 35% of funding to the DRA to flow as directly as possible to L/NNGOs. DRA’s new strategy for 2022–2026 reiterated the coalition’s commitment to localisation with the aim of becoming the leading example in humanitarian reform.
As part of this, the DRA are now working on a proposal on behalf of the MFA that would mandate sharing ICR with L/NNGO partners. The MFA allows the DRA members to claim 8% of the project budget as indirect costs. In previous agreements before 2022, the MFA had allowed DRA individual members to manage ICR according to their own policies. To push this issue forward, MFA proposed in the latest framework agreement that from 2022 onwards, the DRA share this 8% ICR with downstream partners based on a proportional split in line with each partner’s budget. For the DRA, ICR is necessary to cover the costs of all partners in the response as well as those of international and national NGOs. In its strategy, DRA has committed itself to investing in the capacity and leadership of local and national NGOs and ensuring the costs associated with the role and responsibilities of local and national NGOs are covered. However, MFA’s proposition posed a number of concerns for the DRA. Firstly, they worried that in the short term, this type of proportionate split would mean DRA members are able to recover fewer resources despite playing the same role and incurring the same costs. This is in the context of increasing due diligence, compliance and financial administration demands being placed on DRA members, as well as the increasing complexity of humanitarian response more generally. Secondly, they were concerned that INGOs who implement primarily through local and national NGOs would receive little ICR and be forced to cover the costs of their intermediary role themselves. This would run counter to the localisation agenda. The MFA acknowledged these concerns and have given the DRA space to consult and propose their own model for the equitable sharing of ICR with local partners with the aim of having a workable policy implemented by the end of 2022.
NEXUS, 2022. Governance and Structure. Available at: https://heca.oxfam.org/latest/policy-paper/governance-and-structure-nexus-somalia.Return to source text
Durable Peace Programme: https://durablepeaceprogramme.com/en/background/.Return to source text
For example, see this positioning paper on localisation and intermediary roles in Myanmar civil society, published in January 2022, available at: https://www.near.ngo/voices/tag/Myanmar.Return to source text
LIFT, 2017. LIFT Operational Guidelines. Available at: https://www.lift-fund.org/en/operational-guidelines-0.Return to source text
Nexus Response Mechanism, 2021. Operational Guidelines, available at: https://www.nexusresponsemechanism.org/partner-resources/.Return to source text