Executive summary

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.

This study was carried out by Development Initiatives in collaboration with UNICEF and Oxfam, through the Inter-Agency Standing Committee (IASC) Results Group (RG) 5 workstream on the allocation of overhead costs to local and national NGOs (L/NNGOs). This workstream was established in early 2021 under the IASC RG5 as a follow up to a request made by IASC Principals in their December 2020 meeting to address this issue. The aim of this research was to map current practices across UN agencies and INGOs (international non-governmental organisations) around the provision of overheads to local and national partners (also referred to as indirect costs or indirect cost recovery (ICR) in this report) and to identify current and emerging good practice. This informs the IASC guidance note on best practice around the provision of overheads to local and national partners.

The failure of donors and intermediaries (referring to UN agencies and INGOs) to provide funding that covers their partners’ overhead costs ultimately undermines the quality and effectiveness of humanitarian response by trapping L/NNGOs in a ‘starvation cycle’ of under-funding.^[1] While providing overheads will not independently ‘solve’ localisation, it is an important step in enabling more locally led humanitarian practice. It is also an important point of principle and a step toward redressing some of the inequities in the humanitarian financing system.

It is the responsibility of organisations who act as donors to others to cover the full direct and indirect costs of that organisation. This could be through ensuring the indirect costs of the partner are sufficiently budgeted for, or ensuring the pass-through, or ‘sharing’, of indirect costs provided by the donor. It is important to note the differences around the provision of overheads between UN agencies and INGOs. In cases where UN agencies provide overhead funding, it is generally not shared from the specific indirect costs they receive from donors. Rather, funding provided to cover partners’ indirect costs is reported back to donors as direct programme costs, such as under an implementing partner’s budget line. The concept of ‘sharing’ overheads is therefore generally not applicable to UN agencies and relates more to INGOs who do sometimes share the ICR they receive from donors. Very occasionally, INGOs might receive additional overheads from donors that are designed to be passed on to downstream national partners.

Why are overheads important for L/NNGOs?

• L/NNGOs are critical to humanitarian operations. Donors and international organisations have committed to shifting more resources and power to those directly affected by crisis, including first responders.
• Overheads are an intrinsic part of programme delivery. They contribute to the sustainability and preparedness capacity of humanitarian actors, including L/NNGOs.
• L/NNGOs require overheads for the same reasons as international organisations. Depending on how indirect costs are defined, this could be to put in place the overarching policies and processes that enable organisations to deliver quality, effective humanitarian activities, to implement reserves policy, to manage risk, and to deal with unforeseen expenditure. L/NNGOs that remain in communities affected by crisis once acute shocks have passed must build preparedness capacity, for which overheads are particularly critical.
• The current humanitarian financing structure means that L/NNGOs receive most international funding through an intermediary organisation, rather than directly from traditional donors.
• It is therefore essential that intermediaries provide costs to cover the full indirect costs of downstream partners or pass on or share indirect costs provided by donors with L/NNGOs. It is important that this funding is provided in the same way as it is received from the donor (i.e., as unrestricted, flexible, non-time-bound funding that is calculated as a proportion of the total grant).

What are the current practices and what does good practice look like?

Practice around providing overheads to L/NNGOs is inconsistent and indirect costs are often not provided. Not all UN agencies and very few INGOs have policies in place regarding the provision of overheads to local and national partners. Four of the eight UN agencies mapped do have policies which set out a percentage – or percentage range – of indirect costs that local and national partners are eligible to claim (UNHCR, UN Women, UNFPA and IOM). Only two of the 13 INGOs mapped currently have policies (Christian Aid and CAFOD) though nearly all are currently in the process of developing such a policy. The Start Fund and OCHA’s Country-based Pooled Funds (CBPFs)have policies which provide indirect costs equally to both international and national fund recipients.

Despite a lack of standardised organisational approach or guidance, some organisations still provide overheads in practice, normally led by negotiation and advocacy at country level (e.g., Oxfam in Myanmar, Trócaire ECHO funding in Sierra Leone, Cordaid humanitarian programming, WHO in Iraq and the Start Fund in Bangladesh). It is therefore not uncommon for organisations to provide overheads, through this can vary considerably internally between projects and countries. Where organisations either do not have a policy on providing overheads or are unable to ‘share’ the ICR they receive, some ask L/NNGO partners to translate indirect costs into direct budget lines. Some organisations (such as UNICEF) expect L/NNGO partners to be able to recover all costs in the direct budget.

There are also examples of donors incentivising change around the fairer provision of overheads to L/NNGOs. Some donors are providing additional funding to recipients to specifically cover the indirect costs of their downstream partners, including within Danida’s new 2022–2025 guidelines for strategic partnerships with Danish CSOs (civil society organisations), as part of the UK Foreign, Commonwealth & Development Office’s (FCDO) Humanitarian Response Funding guidelines for the Rapid Response Facility (RRF) and the UK Disasters Emergency Committee (DEC). Other donors, such as the Dutch Ministry of Foreign Affairs, are beginning to stipulate that INGO recipients ‘share’ the overhead funding received with L/NNGOs partners.

For L/NNGOs partners interviewed, their experiences of receiving overheads were very mixed, with some still not able to access any overheads as part of grants. Where overheads were received, the following was identified as good practice:

• Overheads provided as unrestricted funding. Good practice included where overheads were provided as unrestricted funding, not subject to individual project audit, and were not time-limited. Overheads were also calculated on the whole partner budget, not just a proportion. L/NNGOs report this is both a matter of principle – that L/NNGOs should receive overhead funding in the same way that INGOs do – but also a matter of effectiveness, as itemised overhead funding undermines its value.
• Providing overheads in addition to administrative and project support costs. Examples of good practice included where the provision of overheads did not undermine or squeeze direct project costs. This meant that L/NNGOs do not need to use the overhead to plug gaps in programme budgets but could use the funding to strengthen and develop their organisation.
• Having clear policies and transparent funding partnerships. Examples of good practice included where intermediary partners were transparent with L/NNGOs about overall project budgets and donor overhead allowances and where intermediary organisations had clear and consistent policies on the provision of overheads (e.g., UNOPS Nexus Response Mechanism in Myanmar which stipulates proportional overhead sharing and the CBPFs which has clear policies on overheads).

Recommendations

This study identified a number of barriers to providing overheads to L/NNGOs. These included a lack of transparency around how funding is currently passed to local actors; the lack of common cost classifications which limits meaningful comparison between different budgets; the potential financial implications for both donors and intermediaries of providing sufficient funding to cover the direct and indirect costs of L/NNGO partners; and current regulatory and internal organisational policy barriers to providing overheads.

As a result, separate recommendations have been identified for intermediary organisations and for donors. It is important to note that UN agencies and INGOs define, access and manage indirect costs in different ways. The following recommendations are therefore designed to be broad enough to provide overall guidance for a range of different organisations. However, they will inevitably need unpacking and contextualising for individual organisations in order to be actioned.

Recommendations for UN agency and INGO intermediaries:

1. Start to provide or share overheads with partners, where possible. Organisations may not need to wait for organisational policies on overheads to be developed and finalised to start providing overheads to partners. Depending on the organisation type, this could be through including partner indirect costs in programme budgets or encouraging country offices to start sharing overheads. Pilots and learning can be used to inform such policies and advocate internally and externally on this issue.^[2] Organisations should start including overheads in each new funding agreement with partners, including within consortia and bring the issue of full indirect cost recovery for L/NNGOs to their donors. As well as providing overheads, organisations should also support local partners, where relevant, to develop their own internal indirect cost policies and systems for the allocation and use of overhead funding.

2. Prioritise generating organisational buy-in to the issue. There needs to be widespread socialisation of the importance of this issue across all organisation departments, to ensure there is both political and technical buy-in to the issue. Organisations could assemble cross-departmental technical teams, including finance, grant management and donor management colleagues, to identify key barriers and drill down into the necessary operational detail. Senior-level leadership on this issue is critical given the potential implications for changes in organisational practice.

3. Develop organisational policies on overheads for local and national partners in delivering humanitarian action. While a one-size-fits-all approach may not suit all organisations, intermediaries need to develop organisational policies and/or guidance for country offices to standardise an equitable approach to partnership with national organisations. The starting point for these policies should be a commitment to cover all of the costs incurred by partners while delivering the objectives of a partnership agreement. While many INGOs are currently in the process of developing such policies, UN agencies need to also make this an internal priority urgently, as part of wider efforts to realise ‘localisation’ commitments. Providing overheads to partners does not negate the need for UN agencies and INGOs to also cover their own overheads. Existing policies and examples that are publicly available include UNHCR,^[3] UNFPA,^[4] and UNOPS^[5]. Organisational policies could include the following (and will depend on the type of organisation and funding model):

• Recognise L/NNGOs and their operational needs as equal to INGOs and their needs, and that all organisational partners, whether international or local should have their eligible indirect and direct costs fully covered.
• Recognise the role funding intermediaries have in leveraging resources for partners, including overheads, and facilitating direct connection between partners and donors where feasible.
• Stipulate that all partnership agreements with L/NNGOs must include agreements on covering indirect costs.
• Stipulate, for INGOs, that all partnership agreements include a split of the overheard provided by donors to the grant holder, either a fixed approach or guidelines for negotiation (e.g., proportional split, 50-50, negotiated share, etc.).
• Clarify that overheads are provided to partners with the same conditions as specified by the donor (i.e., unrestricted, flexible funding, not subject to individual project audit and not time-bound with a project duration) and comply with the relevant donor regulations.
• Align, to the extent possible, organisational policies and partnership agreements with the cost definitions in the first component of the Money Where It Counts protocol to harmonise cost classifications.
• Make the issue of covering overhead costs for all partners an agenda item in regular meetings with donors, and in all new funding proposals.
• Provide capacity strengthening support to local partners where necessary, for example supporting the development of internal cost recovery policies.

4. Publicise widely the issue of providing overheads to L/NNGOs and be transparent with local and national partners about current and evolving practice. UN agencies and INGOs should publish their organisational strategies and guidance on overheads for partners, share learning with other organisations and raise the issue as a critical priority in relevant networks and fora (e.g., IASC, Grand Bargain, Charter for Change, ICVA and SCHR, etc.). Intermediary organisations must be open and transparent with local and national partners about how overheads are received and provided or shared. They should also publicise evidence and learning about the impacts of enabling L/NNGOs to fully recover their costs.

5. Listen to partners and create opportunities for local and national actors to advocate to donors, directly and alongside UN agencies and INGOs. There is plenty of evidence^[6] around the challenges L/NNGOs face because of not being able to access overhead funding. Intermediaries need to understand the challenges faced by their partners and the actual costs they incur to reach a common understanding around what humanitarian programming costs. They should continue and expand advocacy efforts on this issue and create opportunities for L/NNGOs to speak to donors directly. This may enable donors to better understand, recognise, and address the challenges faced by many L/NNGOs, and the need for L/NNGOs to fully recover all their direct and indirect costs. Intermediaries should also more systematically advocate with donors about the barriers they face in providing or sharing ICR, including through the key advocacy asks for donors as listed in the below recommendations.

Recommendations for wider systemic change:

6. Adopt a clear and harmonised approach to cost classification. A blockage in providing overheads is the lack of common cost classifications. There is not currently a common understanding of what types of costs are defined as overheads, making it difficult to identify where specific costs are carried within budgets. Relevant cost-harmonising initiatives – such as the first component of the Money Where It Counts protocol on cost classification and the Dioptra tool – provide useful high-level models and could be integrated with other cost harmonisation projects such as the UN Finance and Budget Network and the IFR4NPO. A harmonised approach to cost classifications and setting out clearly the direct and indirect costs incurred by organisations, is the starting point for more honest conversations about the true cost of quality humanitarian programming and whether the current system is covering these costs sufficiently.

Recommendations for donors:

7. The issue of recovering full costs, including indirect costs, for L/NNGOs should be selected as a priority issue in relevant donor fora, such as the Good Humanitarian Donorship (GHD) initiative and the Grand Bargain.^[7] There is a need for collective donor action on this issue and consensus around the importance of covering the full legitimate indirect costs of both local partners and intermediaries. Donor agreement on this will ensure greater coherence and help facilitate change on a system-wide level. Donor coordination will also increase knowledge of best practices. Donors should also create opportunities to communicate directly with L/NNGOs to better understand the reality and urgency of the situation.

8. Donors need to commit to covering the full direct and indirect costs incurred by all implementing partners in delivering activities. The simplest way to ensure L/NNGOs receive overheads is for donors to directly fund them. Where L/NNGOs are funded by donors through one or more intermediaries, there needs to be clarity around the true direct and indirect costs of all organisations in the transaction chain, so that programmes can be funded in a way that allows all parties to fully recover their costs. To support this, donors should have honest conversations with recipients that are intermediaries and who do not have policies on the provision of overheads to local partners about the barriers they face in providing these indirect costs. Intermediaries face different challenges in providing overheads that vary between different organisations and between INGOs and UN agencies. These challenges include being able to adequately finance their intermediary function (including compliance, risk management, etc.) as well as meeting donor compliance regulations (e.g., around auditing). Overheads do not always cover all implementing organisations’ indirect costs and ICR sharing will only stretch these resources further. Donors should therefore assess whether the resources they provide are sufficient based on partners’ responsibilities, or whether costs could be better carried in different parts of programme budgets.

9. Donors should actively incentivise change. As noted above, this should start from a commitment to covering the full direct and indirect costs of all partners’ activities. Donors could incentivise change among grant recipients (depending on the organisation type) by:

• Requesting policies on the provision of overheads to L/NNGOs from UN agencies and INGOs. This would send a clear signal to intermediaries that fully covering the overheads of L/NNGOs is a priority area for donors. It would also help to initiate more productive conversations around the reality of ICR and ICR sharing. An example of this is the Netherlands Ministry of Foreign Affairs who have requested the Dutch Relief Alliance develop an ICR-sharing policy in 2022 for future funding agreements.
• Stipulating in funding agreements that all partners in the funding chain receive funding to meet their overhead costs.
• Requesting that overheads for local partners are included in partner budgets as a specific budget line.
• Requesting reporting on how overheads will be/have been passed through funding chains.
• Requiring written justification in cases where overheads are not provided to downstream partners.
• Allocating funding specifically to support L/NNGOs to develop overhead policies and systems.