Canada shows it's possible: Systematically providing overhead costs to partners
Having sufficient funds to cover staff resources and administrative costs in an organisation is key for the sustainability of any organisation, be it international or local. While donors recognise they play an important role in advancing localisation, they are often confronted with institutional and political barriers. Canada has been addressing this challenge by putting in place funding guidelines for NGO partners, which include the provision of overhead costs to local implementing partners, opening new pathways and working with other donors to build a more accountable and sustainable humanitarian response system.
Overhead costs to local and national responders: a stalled challenge for decades
Humanitarian operations require a significant amount of resources, including financial, human, and material. Often overlooked is the indirect cost (overhead cost), associated with running an organisation, including administrative, management, and infrastructure expenses.
Local and national responders may face challenges in covering overhead costs. The Grand Bargain recognised and emphasised the importance of strengthening the capacity of local and national responders to lead and deliver humanitarian response, in line with the principle of making humanitarian action as local as possible and as international as necessary. This includes supporting the overhead costs for local and national responders. The Inter-Agency Standing Committee in 2022 developed guidelines with recommendations for how to improve current policy and practice to ensure that local and national partners can access overhead funding.
A recent paper produced by Development Initiatives in partnership with UNICEF on overhead costs notes that “most donors currently rely on the pass-through policies of their UN and INGO partners and provide no guidance or regulations of their own around how funding should be provided to local and national actors”, which has led to a challenging environment for local and national aid delivery. However, some donors have been proving that change is possible, and Canada is one of them.
Canada’s approach: actioning the Grand bargain commitments by standardising the overhead costs
In line with the IASC guidelines, Canada updated its International Humanitarian Assistance Funding Guidelines for NGO partners in 2021 to enable local implementing partners to receive overhead costs by including a dedicated budget line for up to 7.5% of their direct project costs, rather than a share of the overheads allocated to an intermediary partner. This change enables dedicated funding to be allocated from the overall budget for local partner indirect costs, helping to empower and support local and national responders, who are often best placed to deliver effective humanitarian assistance. While this policy update is relatively recent, it has been positively received by Canada’s NGO partners.
This comes as an important step to address the issue of overhead costs which has been a long-standing challenge in the sector. Although it is not mandatory for NGOs to use this budget line, Canada incentivises their NGO partners to apply the overhead costs to the implementing partners, by asking how they plan to work with local partners, who these partners are, and how much of their budget proposal will be allocated to these organisations. NGO partners are also required to provide the amount allocated for overhead fees to local partners in their final financial reports.
“We believe that ensuring that local organisations also have access to overhead costs is crucial and supports their capacity to respond to humanitarian crises, in line with Canada’s Grand Bargain Commitments. By allowing partners to budget specifically for local partners' overhead, it standardizes these costs for local implementing partners across Canadian humanitarian NGO projects and ensures that they are not dependent on NGO policies.”
By providing overhead costs in such a systematic and standardised way, Canada is setting an example, and demonstrating its commitment to build a more efficient, effective, and accountable humanitarian response system.
In the same vein, in 2022, the Grand Bargain caucus on intermediaries recognised importance of overheads as one of the actions to strengthen principles of equitable partnerships. Furthermore, the Grand Bargain caucus on funding for localisation reached an agreement between USAID, DG-ECHO, OCHA, UNHCR, Save the Children, IFRC, A4EP, and Syria NGO Forum, by setting a clear goal to reach the 25% local humanitarian funding target in the coming years. Find more information here.