Previous Topic

Topic 4: Strategies and processes to get to full cost recovery

Achieving full cost recovery for your NGO involves implementing strategies to cover all expenses associated with its programs and operations. 

This concept might seem a bit complex, but fear not— we are here to break it down into easy-to-understand steps that you can apply to ensure the financial health and sustainability of your organisation. So, let’s roll up our sleeves and get started!

Understanding Indirect Costs and Donor-Funded Projects

Before we jump into allocation strategies, let’s quickly recap what we mean by indirect costs and donor-funded projects.

Indirect costs are expenses that are essential for the overall functioning of your organisation but can’t be directly tied to any specific program or service. These could include things like rent, utilities, administrative salaries, and other overhead expenses.

On the other hand, donor-funded projects are specific initiatives or programs that receive financial support from external donors or grant-making organisations. Donors often prefer to fund direct costs—expenses directly related to the implementation of the project—rather than indirect costs.

Why Allocate Indirect Costs into Direct Costs?

You might be wondering why it’s necessary to allocate indirect costs into direct costs for donor-funded projects. Well, here’s the deal:

  1. Maximising Funding Impact: By allocating indirect costs into direct costs, you can ensure that your donor funds are used most efficiently and effectively. This allows you to maximise the impact of your projects and deliver better outcomes for your beneficiaries.
  2. Enhancing Transparency and Accountability: Donors appreciate and require transparency in financial management. By clearly allocating indirect costs into direct costs, you demonstrate accountability and ensure that donors understand how their funds are being utilised.
  3. Sustaining organisational Operations: Indirect costs are essential for the overall sustainability of your organisation. By allocating a portion of these costs into donor-funded projects, you can relieve some of the financial burden on your organisation and maintain its long-term viability.

Strategies for Allocating Indirect Costs into Direct Costs

Now that we understand why it’s important to allocate indirect costs into direct costs, let’s explore some strategies for doing so effectively:

1. Cost Pooling and Allocation Methods:

One common approach is to pool all indirect costs incurred by your organisation and allocate them proportionally across different projects based on a predetermined allocation method. Here are a few allocation methods you can consider:

  • Direct Labour Hours or Staff Time: Allocate indirect costs based on the amount of time staff members spend working on each project. Projects that require more staff time would bear a larger share of the indirect costs.
  • Square Footage or Space Utilisation: Allocate indirect costs based on the square footage of office space or facilities used for each project. Projects that occupy more space would be allocated a higher portion of the indirect costs.
  • Direct Costs or Expenditures: Allocate indirect costs based on the total direct costs incurred by each project. Projects with higher direct costs would absorb a larger share of the indirect costs.

By using an appropriate allocation method, you can fairly distribute indirect costs across donor-funded projects and ensure that each project bears its fair share of the organisational overhead.

Bear in mind that this gets more complicated as you grow.  At some points you need a full cost recovery policy, especially when your organisation starts to open up new locations. 

2. Negotiating Indirect Cost Recovery with Donors:

Another strategy is to negotiate indirect cost recovery with donors as part of your project proposals or grant agreements. Many donors recognize the importance of covering indirect costs and may be willing to include a percentage of indirect costs as part of their funding support.

When negotiating indirect cost recovery, it’s essential to be transparent about your organisation’s indirect cost rate and explain how these costs contribute to the success of the project. By advocating for fair and reasonable indirect cost recovery, you can ensure that your projects are adequately funded to cover both direct and indirect expenses.

Did you know that different donors offer different cost recovery mechanisms and rates? If you are interested in learning more about specific donors, join our quarterly webinars on donor update (free) here. 

3. Implementing Cost-Sharing Arrangements:

You can also explore cost-sharing arrangements with project partners or beneficiaries to cover a portion of the indirect costs associated with donor-funded projects. This could involve collaborating with other organisations, government agencies, or community groups to share the financial responsibility for indirect expenses.

By sharing the burden of indirect costs with partners, companies or service users, you can reduce the financial strain on your organisation and increase the sustainability of donor-funded projects.

Finally, make sure that your income diversification is geared towards optimising your cost recovery. Just having a few donors who offer low indirect cost recovery rates is unlikely to help you make your NGO a success. 

Allocating indirect costs into direct costs for donor-funded projects is essential for maximising funding impact, enhancing transparency and accountability, and sustaining organisational operations. By employing strategies such as cost pooling and allocation methods, negotiating indirect cost recovery with donors, and implementing cost-sharing arrangements, NGOs can ensure that their projects are adequately funded to cover both direct and indirect expenses.

Remember, keep learning, keep innovating, and keep striving towards a brighter future! Do good. BETTER!

1 hour Webinar – Building the strategy to financial sustainability

Date: 25th June – 13h00-14h00 CET

Topic: Building the strategy to financial sustainability

Webinar Link: https://us02web.zoom.us/webinar/register/WN_BNFJ4w–R02t3ApLxqZ8UQ

Host: Chris Meyer zu Natrup

Join us as we explore innovative approaches to financial management, budget optimization, and revenue diversification. Whether you’re representing a nonprofit, NGO, or social enterprise, this webinar is tailored to help you navigate the complexities of funding and propel your organisation towards long-term success.

Here’s what you can expect from our webinar:

  • Insights into effective fundraising techniques and donor engagement strategies
  • Practical tips for maximising the impact of existing funding streams
  • Guidance on developing sustainable financial plans and budgets
  • Interactive discussions and Q&A sessions with industry experts
  • Networking opportunities to connect with like-minded professionals

Conclusion

This module should have equipped you with essential insights and strategies to optimise our organisation’s financial resources. 

By delving into concepts such as cost recovery, understanding indirect costs and rates, and leveraging these for unrestricted income, we’ve gained a deeper understanding of how to maximise our funding streams. Through implementing strategies aimed at enhancing unrestricted income and pursuing full cost recovery, we’re poised to strengthen our NGOs financial sustainability.