The Justification of Overhead for Non-Profit Organizations

Overhead, usually referred as general operating expenses, is a percentage of amount charged for covering of management fee by a non-profit organization YOURURL.com. These expenses are an indirect to cost the project and are not included in program costs. These items are for paying  utility bills, salaries of staff involved in general operations not booked to projects administration and communication / IT.

The question what should be the overhead rate? The answer is that there is no single accepted rate that can be applied to every non-profit organizations. Non-profit organization spend varying amounts of their budget on administrative costs, depending on the scope and structure of their operations.  Many donors have policies regarding the percentage of overhead that they will allow within a project budget. Some do not allow any overhead, while others allow overhead to be a specific percentage of total costs or personnel costs. However, we have seen recently that donors are reluctant to pay overheads to local nonprofit organizations, which is leading to “The Nonprofit Starvation Cycle”.

Researches have shown that underinvesting in overhead creates negative outcomes which undermine quality and sustainability. For instance limited or no staff for administrative roles like finance, administration and development, would result in limited ability for organization to manage/monitor finance and development etc. Some other issues include; underfed overhead resulting in non-development of staff in terms of trainings and misleading reporting resulting in fraud corruption and weak responses to partners.

One of the major cause of refusal to pay organizational overheads is “Funders’ Unrealistic Expectations,” it means that donors tend to reward organizations with the “leanest” profiles. They also skew their funding towards programmatic activities that would ultimately result in proper output results

In order to break this cycle starvation cycle, donors need to change policies:

• They must Increase support to organizations with overhead funds as % of project cost of 10-15% of total project cost. Doing so will allow organizations be deliver much better projects that will be saving good money that could be lost due tofund strangulation.
• Commit to pay a greater share of administrative overheads in use-restricted grants.
• Foster more open discussions about “real” overhead rates that can help shift the focus to the real target—outcomes.
• At a policy level the State Bank should step in by earing p credit provision for civil society organizations.

On the other side, the nonprofit leaders must also;

• Develop strategies that explicitly recognize organizational infrastructure needs and frame strategy discussions around goals and investments.
• Communicate the logic for increased overhead investment throughout the organization, and to the board.
• Begin to provide funders with better ways to measure performance than program ratios. A conversation about costs to achieve outcomes (and how investments in overhead can reduce those costs) can be much more meaningful.

Hence we can conclude that the donors need to recognize the value of providing grants and donations that cover overhead costs and be aware of the full costs required to achieve specific results.

We all want to invest in the most important work in which organizations are engaged, but without the lights, and the computers, and the salaries, the non-profit organizations can’t function. Donors should rethink policies that limit support for important infrastructure costs and encourage non-profit organizations to ask for appropriate and adequate funding in their grant proposals. The government and multilateral institutions can surely help too.

by Aamir Mufti
Program Coordinator