Administration Costs Research Project | Breaking The Starvation Cycle.
The overhead myth that suggests that low overheads in nonprofits are 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, evidence gathered reveals how 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.
The Youth Café believes that administration is essential to the effective, efficient, and safe delivery of projects and programs, including 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 grantees' organizational effectiveness or financial resilience. Restricted funding for project or program grants does not typically cover a full share of the administration costs organization's incur – the 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 commissioned Humentum to gather information on grantees' experiences in Africa, Asia, Latin America, and Europe. Humentum is the leading global non-profit working with humanitarian and development organizations to improve how they operate and to make the sector more equitable, accountable, and resilient.
The report also offers recommendations on how funders could provide adequate cost coverage and strengthen their grantees' financial health and resilience. Humentum's research team worked with national NGOs in ten countries in Africa, Asia, Latin America, and Europe, grantees of at least one of the private foundations involved in the collaboration.
During this, 81 NGOs completed an extensive survey on financial health and cost coverage, and 75 of these NGOs also submitted a self-assessment questionnaire on their cost recovery practice. Humentum adopted an internationally recognized cost classification methodology that was used to analyze up to three years of financial data and details of grantee's largest restricted funding agreements. The financial data was then verified against supporting documentation for a subset of 38 of these NGOs. These 38 NGOs, along with a further 12 from the original cohort of 81, took part in 50 detailed assessment interviews that enabled the research team to make informed judgements on their financial situation and cost recovery practices.
Key findings from the report reveal that most funders provide inadequate coverage of their grantees' administration costs, contributing to a starvation cycle with significant negative organizational impacts. The financial data collected from the 38 NGOs included details of their largest restricted or project-based funding agreements for each year. Humentum's analysis of these 286 restricted funding agreements that came from 92 different funders showed that: ⅔ of both the restricted funding agreements (63%) and of the restricted funders (68%) provided less than their fair share of administration costs.
Another finding was that inadequate cost coverage and limited access to unrestricted income makes it extremely challenging for most NGOs to achieve stable financial health. Analysis of reserve levels for the 38 NGOs with verified financial data found that: 50% of the NGOs had unrestricted reserves equivalent to 21 days or less of annual expenditure.
The third finding is, to stop trapping grantees in the starvation cycle and start building resilience, funders will need to provide: full cost coverage, means by which grantees can contribute to unrestricted reserves, and support to strengthen grantees' cost recovery capabilities.
The three key recommendations arising from this research provide funders with a step-by-step approach to change their funding practices, invest in their grantees' capabilities to secure better cost coverage from all their funders, and lead a transformation process in the funding eco-system. Funders should consistently cover a full and fair share of all associated administration costs. Funders should directly fund grantees to strengthen their financial management, cost recovery, and fundraising capabilities and provide unrestricted funding to build reserves. Funders should systematically collect data on the extent of adequate cost coverage. This data should be used to drive internal accountability and motivate funders to provide their full and fair share of administration costs in restricted funding agreements.
The Youth Café works with young men and women around Africa as a trailblazer in advancing youth-led approaches toward achieving sustainable development, social equity, innovative solutions, community resilience, and transformative change.
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