DFID to offer NGOs full cost recovery on grants

LONDON — The United Kingdom’s Department for International Development is introducing new procurement guidelines which mean NGOs will be able to recover the full cost of their DFID-funded programs and no longer face a “starvation cycle.” The new templates and guidance are designed to ensure NGOs are able to negotiate sufficient funding from DFID to cover all of their costs, including overhead expenses and other costs not exclusively linked to a particular project. DFID describes these as “non-project attributable costs,” or NPAC. The agency will advise country teams to adopt the new templates from October and continue to develop them before a mandatory rollout in spring 2019. The move comes after the funder promised to revise its approach to reimbursing overhead costs in its 2016 Civil Society Partnership Review. Civil society groups have welcomed the reforms. The hope is that it will put an end to what NGO network Bond has described as a “starvation cycle,” in which organizations struggle to cover the overhead costs associated with delivering aid programs. This can result in underinvestment in essential infrastructure and other support services, such as human resources and safeguarding, as well as innovation. The recent Oxfam scandal served to highlight the potential consequences of this underfunding. “We are currently in a world where the risks and the burdens of compliance mean the cost of doing business in the international development sector is going up … This is a welcome recognition by DFID that if civil society organizations are going to succeed, they need to be able to invest in core services,” said Tim Boyes-Watson, who worked with DFID to develop the new guidelines alongside a small group of U.K.-based aid groups convened by Bond, which has been campaigning on the issue for three years. The new approach is also intended to make the true costs associated with development programming more transparent, levelling the playing field for smaller groups who tend to have higher overhead costs. The reforms will also reduce the time and expense associated with applying for DFID funding, Boyes-Watson, who is global director of alliances and advocacy at Humentum, said. The changes are especially welcome at a time when NGOs are facing declining fundraising returns and uncertainty around European Union funding after Brexit, according to Rachel Hewitt, finance director at CARE International UK, who worked on the new budget templates. She also said the DFID pipeline has been “unpredictable” over the past 18 months. “In this fundraising climate, being able to achieve full cost recovery on programs is really important ... so this engagement [with DFID] around trying to address one critical aspect of our financial sustainability is really welcome,” she said. DFID’s reforms can also make bidding less “onerous” for NGOs, Hewitt said. In the past, the agency’s policy on cost recovery and eligibility, and its application of that policy, has been “variable,” she said. That has meant CARE spending months negotiating individual grant and contract terms, including overhead rates. “The organizational costs of winning DFID business has been getting more and more expensive … more onerous and longer to negotiate,” Hewitt said. Technically, DFID has been committed to full cost recovery since 2002, after a review by the U.K. Treasury. In practice, however, it has generally negotiated NPAC on a grant-by-grant basis. Research by Bond and Humentum suggests this averaged out at about 7 percent per grant. Other donors have formal caps on indirect costs. The United Nations sets this at 7 percent for international organizations working in humanitarian assistance; the European Union also has a 7 percent cap; while the Bill & Melinda Gates Foundation offers 15 percent. The new template will put the U.K. in line with the U.S. Agency for International Development, which has a full cost recovery policy, Boyes-Watson said. DFID will calculate NPAC by taking an average of the organization’s fixed and variable costs over the past three years, excluding ineligible costs such as fundraising. It can also include adjustments to reflect planned changes to the organization, around staffing for example. The aim is to come out with a figure that represents a “fair share of project expenditure,” and DFID will agree to a “lump-sum of NPAC payable for each year of the grant,” according to a Bond blog explaining the new approach. This gives greater predictability to NGOs since previously the donor paid a fixed percentage, meaning the amount could vary each year. While in reality bidding CSOs will still have to negotiate with DFID to agree a figure, Boyes-Watson said it is likely to be significantly higher than the average 7 percent now and will also reflect the size of the organization. In addition, though it should cut out some of the lengthier negotiations and avoid the need for NGOs to scrape around in budget lines in an effort to claw back some of their overhead costs, Boyes-Watson admitted the new template will be “cumbersome” to complete since it asks grant writers to make a case for all of their NPAC costs and why they should be covered. But CSOs stand a good chance of getting their money back, he said. However, he admitted there were risks that the new approach could lead to a “race to the bottom” among competing CSOs offering the lowest NPAC. “We don’t want a situation where the funding community says it only wants to pay bottom dollar and the more expensive organizations don’t get the funding,” he said. Hewitt added that questions remain. For example, it is unclear how the new templates will work for consortia. However, her biggest worry is around implementation, as DFID will need to make sure its staff are fully up to speed on the new guidelines, she said. A DFID spokesperson told Devex: “DFID has committed to revising its approach to the overhead costs of projects for NGOs and other civil society groups it works with, as part of the Civil Society Partnership Review. Our new approach will allow civil society organizations of all sizes to access funding to cover the full cost of their project. It will also provide greater transparency and enable DFID to continue to ensure the best possible value for money in its programs.” Update, Sept. 17: The headline on this story was amended to clarify that the new approach to cost recovery will apply to accountable grants only, not contracts.