Indirect cost recovery for 'local' NGOs: an urgent issue for humanitarian reform

Current practices of UN agencies and international non-governmental organisations (INGOs) not providing indirect costs to local and national partners has been described as ‘scandalous’. New guidance published by the Inter-Agency Standing Committee (IASC, the international humanitarian system's policy and coordination platform) emphasises the urgent need for international organisations and donors to change this practice, and recognise that overheads are fundamentally important for local partners.

Overheads provide organisational sustainability

Overheads, also known as indirect costs or indirect cost recovery (ICR), are essential for all organisations – big or small, international or local. They are used to cover costs that are not directly related to a project, but that support the efficient, effective and safe running of an organisation. Overheads don’t just ‘keep the lights on’; they help organisations invest in the people, leaders, processes and systems which build institutional capacity and contribute to organisational sustainability, crisis preparedness and response. This is especially important for local and national actors, who know the needs of their communities best and are often the first to respond when crisis strikes.

Local actors trapped in funding starvation cycle

Local and national partners access most donor funding indirectly. UN agencies and international non-governmental organisations (INGOs), who play an ‘intermediary’ role, have been criticised for only allowing local and national partners to budget direct costs and not sharing or providing indirect costs. Without funding to cover indirect costs, local partners can find themselves trapped in a starvation cycle of chronic underfunding, jumping from project to project with no investment in institutional sustainability. This can mean they are unable to cover staff salaries, are forced to undermanage security or operational risk and, due to a lack of resources or capacity, are effectively locked out of local response coordination and decision-making.

UN agencies, INGOs and donors must change practices and policies

This funding arrangement reinforces a sub-contractor mentality, undermines genuine partnerships and erodes trust between international organisations and national partners. Current practice presupposes that local and national partners’ overheads are less important than international organisations’. The issue of overheads is therefore not just a technical matter – it embodies many of the current debates in the humanitarian system around where power lies, local humanitarian leadership and decolonisation of aid. While humanitarian actors talk of the importance of shifting power and resources to local actors in humanitarian response, in practice power has shifted little and slowly. Sharing or providing overheads represents a practical and impactful way for international organisations to realise commitments made around ‘localisation’.

New IASC guidance based on research offers practical how-to advice for international actors

Local actors have advocated for many years around the issue of fair overhead allocation. Interest and momentum among international actors is now finally building. Many UN agencies, INGOs and donors are reflecting on their current practice and changing industry standard. Overheads are a priority for the current Grand Bargain caucus on localisation, and the outcome from the intermediaries caucus included a commitment to allocate overheads to local and national partners. Recent guidance published by the IASC also provides a practical call to action to international organisations, based on the following recommendations:

• UN agencies and INGOs must start providing overheads to local and national partners, building on the pockets of good practice that already exist within many organisations.
• The importance of this issue needs to be socialised throughout organisations. It is vital to generate cross-organisational buy-in to change well-established funding practices.
• International organisations that partner with local and national organisations need to develop clear and transparent policies on overheads that include providing overheads as unrestricted funding, in addition to direct administrative and project support costs.
• International organisations should publicise their changing policy and practice, as well as learning on this issue, to build momentum for wider change.
• International organisations should create opportunities for local and national organisations to engage with donors directly around their experiences of overheads and should also advocate with donors about the barriers they face in providing overheads.

While all organisations face challenges in fully recovering their indirect costs, local partners have been disproportionately affected by inequitable funding practices, which ultimately reduces their capacity to respond to needs. Now is the time for UN agencies, INGOs and donors to make change happen.

Read the IASC guidance (available in English, French, Spanish and Arabic) and the research report

In 2020, the Inter Agency Standing Committee (IASC) selected overheads as a priority issue for the Results Group 5 (RG5) on humanitarian financing, which conducted a mapping of current practice and developed new IASC guidance for UN agencies and INGOs on the provision of overheads to local and national partners. The guidance sets out clear recommendations for how international organisations can develop overhead policies, drawing on best practice identified in the research, and highlights key advocacy priorities for donors, acknowledging the critical role they must play in incentivising change. The co-chairs of the working group were UNICEF and Oxfam, and the work was delivered by Development Initiatives.

This blog was co-authored by Fran Girling-Morris, Senior Policy & Engagement Advisor, Development Initiatives; Amy Croome, Humanitarian Policy Advisor - Local Humanitarian Leadership and Aid Reform, Oxfam, and Luc Chauvin, Chief, Inter Agency and Humanitarian Partnerships, UNICEF.