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:
On the other side, the nonprofit leaders must also;
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