Humentum Releases Report on Administrative Costs Research Project

Humentum has been advocating for full-cost recovery of indirect and administrative costs from donors for years. USAID and the federal government have been good about funding Negotiated Indirect Cost Rate Agreements (NICRAs). But other donors either cap indirect cost rates or limit reimbursement of administrative support costs, believing that more of the funding will then reach the beneficiaries. What these non-federal funders don’t realize is that indirect costs are essential to sustaining these organizations.

• One of the findings of this latest research is that half of the NGOs in the study have less than 3 weeks of unrestricted cash if funding from their primary donors is interrupted. This indicates the precariousness of many NGOs that face the challenges of full-cost recovery, diversifying funders, and building unrestricted reserves.
• The report states that approximately 2/3rds of the funding agreements of the sampled NGOs did not pay a fair share of administrative costs, resulting in underfunding of safeguarding, fundraising, premises, HR, and IT functions. Two-thirds of the NGOs state that they have difficulty attracting or retaining knowledgeable and experienced staff. This “starvation cycle” results from donors believing low indirect costs drive efficiency. The limited unrestricted funds and inadequate cost recovery make it difficult for these NGOs to achieve and maintain stable financial health.
• The study recommends that NGOs adopt a cost recovery strategy to more effectively budget and fund all costs associated with the activities and operations of the organization. Many of the organizations rely on a single large award or a few smaller funding agreements. The study recommends a concerted effort to diversify funding sources while investing in longer-term funding agreements.
• The donors also need to commit to full and fair cost recovery by their recipients. The report also recommends that funders directly fund and support their grantees’ financial management, cost recovery, and fundraising capabilities. Funders should also collect data and information on administrative costs to understand their impact to break the “starvation cycle.”

Read the details of this important research here.