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UK and European NGO cost benchmarking study: improving cost management within NGOs and cost recovery from donors
NGOs need to invest in the same infrastructure and overheads as for-profit organisations if they are to succeed. But in reality they struggle to meet all of the costs associated with delivering and supporting programmes through donor funding alone, often resorting to financing holes in programme funding using precious unrestricted funds. The goal of the study is to:
- Gather cost benchmarking data from NGOs so that each NGO can understand its cost structure better and compare this to its peer NGOs
- Benchmark indirect costs by proposing a standardised method for cost allocation
- Understand and compare the extent of cost recovery being achieved with common donors and use this to to build an evidence base for donor advocacy
- Enable NGOs to see how their cost recovery practice compares with others and offer advice for NGOs to improve their practice.
What were the results of Phase 1 of the Cost Benchmarking Study?
Mango and Bond have published a high-level report on Phase 1 of the study which is available at https://www.bond.org.uk/resources/cost-recovery-what-it-means-for-csos
Mango's overall conclusions from Phase 1 of the study are:
- Donor practice currently creates large funding gaps. The funding gaps are particularly large when donors cap or offer low rates
- Smaller NGOs tend to have higher Central Support Costs or 'overhead' rates. Therefore donors that cap rates, like the EC and UN, particularly penalise smaller NGOs. More enlightened donors like USAID, DFID and some Foundations do not have a cap or 'one size fits all policy' and provide higher rates to those smaller NGOs that can demonstrate the need for this
- All NGOs are able to reduce funding gaps by improving their cost recovery practice. It tends to be the NGOs that are most reliant on restricted funding that have better cost recovery practice
- The biggest funding gap for most NGOs is Programme Support costs, not Central Support costs or what is traditionally known as ‘overhead’. It appears that both NGOs and donors are paying insufficient attention to managing Programme Support costs.
Join Phase 2 of the Cost Benchmarking Study
Now that Phase 1 of the study has been successfully completed, we are inviting NGOs to participate in Phase 2. We want as many NGOs to participate as possible. As the data set grows, the study will increase in its value as a learning tool for NGOs, and as evidence for donor advocacy. You can find further details and how to sign up here. We have to charge in order to recover our own costs, but have set the subscription rates to make it as accessible as possible to smaller NGOs. We are grateful to Bond for providing a grant to help us develop the survey and would be very interested to hear from anybody willing to sponsor the survey so we could make it even better value for NGOs.
If you participate in the study, your NGO will be able to:
- see how your cost structure compares to other NGOs. You will receive an analysis of how your cost rates fit within the ranges of rates for all NGOs in the study. You will also see how your rates compare to a smaller group of peer NGOs, who are of a similar size or who have a similar operational model, (eg if you work primarily through local partners)
- see how the indirect cost rates you receive from major donors compare to the rates being received by other NGOs
- see how your cost recovery practice compares to other NGOs, and your peer group
- receive Mango’s advice on issues that your organisation NGO look at to improve.
Participants in Phase 1 found the peer comparison and individual advice to be particualrly useful in developing their own performance and practice.
Self-assess your cost recovery practice now for free
We have extracted the cost recovery practice questionnaire from the survey tool we use to collect information in the study. This should enable you to self-assess your current practice and get some ideas and tips for improving your cost recovery practice straight away. Take a look at our handy Cost Recovery Good Practice Check List & Self-Assessment Tool. If you participate in the survey we will use the comments you provide alongside your answers as well as the cost analysis data you provide to offer you tailored advice on how to improve.
Previous research into cost benchmarking and recovery: the 'starvation cycle'
Research into the state of U.S. NGO cost recovery practice unearthed evidence of NGOs struggling to meet both direct and indirect programme costs, with many taking the decision in times of austerity to further shrink the proportion of funding allocated to supporting overheads. The potential impact of this is disastrous, with increasing numbers of NGOs unable to adequately fund essentials such as IT and staff training. In some cases, it was found that the actual cost of administering grants far surpassed the amount they were permitted to allocate to overheads as stipulated in their donor contracts.
During the results analysis of a five-year study into US NGO cost recovery conducted by Ann Goggins Gregory and Don Howard of the Bridgespan Group, a worrying trend began to emerge. Extensive research revealed a ‘chicken and egg’ scenario, with NGOs and donors becoming trapped in what the researchers termed as the ‘nonprofit starvation cycle’.
Perpetuated by a culture of unrealistic donor expectations fed by positive reporting by NGOs around the true ratios of direct versus indirect programme costs, the starvation cycle was found to be damaging NGOs’ ability to sustain themselves in the longer term. In response, InsideNGO launched a campaign to tackle the issue head-on, which has gained significant momentum in the U.S.
Take a look at the information and articles on the InsideNGO website. We also recommend watching this Ted Talk by Dan Pallotta, founder of the Charity Defense Council, that explores the topic brilliantly.