Why core costs matter and how to ask for them

What are core costs?

Core costs are the costs of running the organisation as a whole. They are also called indirect costs, overheads or institutional costs. Typical examples are:

• Management and leadership time.
• Finance, HR and procurement staff.
• Office rent, utilities and internet.
• IT, security and data systems.
• Audit, legal and registration fees.
• Safeguarding, policy development and staff training.

No single project uses all of these, but every project depends on them. A project without finance staff cannot report. A project without safeguarding systems puts people at risk.

Why do core costs matter?

When donors and intermediaries do not pay for core costs, organisations must cover them from other sources or go without. Research done for the Inter-Agency Standing Committee (IASC) found that the failure of donors and intermediaries to cover partners' overhead costs undermines the quality and effectiveness of humanitarian response. It describes a "starvation cycle" of under-funding in which local organisations cannot build the systems that donors then ask them to have.

The result is predictable. Staff are overloaded, systems stay weak and the organisation cannot invest in its people. Then a donor questions its capacity, and the cycle repeats. Our guide on why local partners need overhead looks at this from the partnership side.

How do you calculate your core costs?

Know your numbers before you ask. A simple approach:

1. List all running costs for a full year, using your accounts.
2. Separate direct costs that belong to one project from shared costs.
3. Choose a fair method to share costs across grants, such as share of staff time or share of total budget. Write the method down and apply it the same way each time. See cost allocation across several grants.
4. Work out your rate or amount for each grant.
5. Check it against donor rules. Some donors set a fixed rate, some cap it and some ask for a justified rate. Read the guidance for each one.

Keep the working in a short note. When a donor asks how you calculated your rate, you can show it.

What does good practice look like?

The IASC research describes practices that local and national NGOs reported as helpful. Overheads were treated as unrestricted, flexible and not time-limited, and calculated on the whole partner budget. They were provided in addition to project and administrative costs, so that organisations did not need to use them to fill gaps in programme budgets. Intermediaries were open about project budgets and the overhead donors allowed, and they had clear, consistent policies.

The Grand Bargain localisation guidance note adds a related point. Where an intermediary receives indirect costs as a percentage of direct costs, the rate passed on to local actors should ideally be no less than the rate the intermediary receives. You can cite this kind of guidance in a negotiation, together with your own numbers.

How do you ask for core costs?

Use a clear, calm process:

Link core costs to results. "We need an accountant" is weaker than "A part-time accountant lets us submit monthly financial reports on time, which the donor requires." Our guide on the budget narrative shows how to explain each line.

What if the donor or partner refuses?

Some donors have fixed rules, and some partners cannot share what they receive. You still have options:

• Ask for alternatives, such as shared staff costs, a capacity-strengthening budget line or a smaller rate.
• Show the effect. Tell them plainly what the gap means for delivery, with numbers.
• Join others. Raise the issue through networks and coordination forums so donors hear it from many partners.
• Plan for your own unrestricted income over time. See how to build unrestricted funding.

Do not move costs into other lines in ways the agreement does not allow. Rules differ between donors, so check your agreement or ask a qualified adviser.

What mistakes should you avoid?

• Not knowing your own rate. You cannot negotiate with a guess.
• Asking after signing. The best time to raise core costs is in the budget and the agreement.
• Treating core costs as shameful. They are a normal, necessary part of delivery.
• Using core funds to patch programme gaps. Keep records that separate the two.
• Weak records. If you cannot show how costs were shared, donors will doubt the figure.

How EMPO can help

EMPO is a reliable, Yangon-based training and consultancy provider and one of Myanmar's leading names in practical NGO training, with 1,200+ people trained and 15 partner organisations. We run budget management training and organisational development support in English and Burmese, online and in person. You can also see the Master Project Budget Tracker or contact us.

Sources

• Overhead cost allocation in the humanitarian sector — Inter-Agency Standing Committee, 2022
• Guidance note on arrangements between donors and intermediaries — Grand Bargain Localisation Workstream, 2020