Project overheads – paying what it takes
The 'paying what it takes' initiative includes research and education about indirect project costs.
The ‘Paying what it takes’ initiative is run by Philanthropy Australia in collaboration with Social Ventures Australia (SVA) and the Centre for Social Impact (CSI). Proudly supported by the Paul Ramsay Foundation and the Origin Foundation.
Indirect costs – often referred to as overheads – are a fraught topic in the not-for-profit world. Many people across philanthropy, government, the public and the media all expect indirect costs to be minimised – or not to pay for them at all. Yet they are essential to running a functioning, effective organisation.
In the context of a struggling not-for-profit sector, this is a crucial issue to ensure the long-term effectiveness of Australia’s charities. US research has shown that one of the key drivers of not-for-profit vulnerability is insufficient funding of charity indirect costs. This is called the ‘non-profit starvation cycle’. In this cycle funders have inaccurate expectations of how much overhead is needed to run a not-for-profit. This means that charities under report their costs to funders. This leads to a sector starved of the necessary core funding required to create resilient charities delivering long-term impact on complex social issues.
Three organisations – SVA, CSI and Philanthropy Australia – worked together to understand the extent of this issue in Australia, and to unpack what could be done.
Our research uncovered 4 key points:
- Indirect costs are not a good way to assess charities – not-for-profit organisations that spend less on indirect costs are not necessarily more effective than those who do not. Indeed, there’s clear evidence that spending insufficient resources on indirect costs can potentially reduce overall NFP effectiveness.
- Charities’ true indirect costs are not being covered by funders – on average, the true indirect costs of each charity were 33% of their overall costs. Yet not-for-profit organisations believe – potentially incorrectly – that funders are mostly unwilling to fund above 20%, or even lower.
- This underfunding of indirect costs leads to lower capability and effectiveness – case study not-for-profit organisations universally under-invested into their core capability. Compared to the case study not-for-profit organisations, a corporate sector benchmark study suggested they spent twice as much per employee on key capabilities such as training, IT, quality, and marketing. This increases risk, forces charities to spend time searching for untied funding, and leads to charities deliberately introducing inefficiencies.
- The drivers of indirect cost underfunding are complex and interrelated – the complexity of measuring not-for-profit effectiveness, the power dynamics in the funder–fundee relationship, and a lack of consistency of measurement all contribute to this issue.
About the report
Not-for-profit indirect costs are not being covered by funders in Australia, leading to lower capability and effectiveness across the sector.
New research by SVA and CSI has shown that not-for-profit organisations are underinvesting in critical capabilities, thanks to a belief that funders are unwilling to fund the full cost of impact. Solving this issue requires substantial shifts across not-for-profit, philanthropy, government, the public and the media to ask the question – are we paying what it takes?
To read the full report, see Paying What It Takes.
See resources – workshops