Canadian Council for International Co-operation

39 McArthur Avenue, Ottawa, Ontario, K1L 8L7

tel. 613-241-7007 fax 613-241-5302

website www.ccic.ca

Conseil canadien pour la coopération internationale

39 Avenue McArthur, Ottawa, Ontario, K1L 8L7

tél. (613) 241.7007 téléc. (613) 241.5302

site web www.ccci.ca

Review of the Overhead Compensation Policy for DFATD contribution

agreements: A civil society perspective

I. Introduction

This is the brief submitted by the Canadian Council for International Co-operation (CCIC) to the

Department of Foreign Affairs, Trade and Development (DFATD) as part of the review of the Overhead

Compensation Policy for the department’s contribution agreements (from February 2008).

DFATD presented the parameters of this review to its partners at an official consultation in May 2015.

The objectives are to arrive at a clear, simple and concise policy that optimizes government investment;

to ensure the appropriateness of compensation for overhead costs; to identify cost drivers in order to

determine whether the rate of 12% is equitable; and to clarify certain points (such as the distinction

between direct and indirect costs as well as concepts such as flow-through funds, construction costs and

volume purchases). Following this meeting, CCIC decided to conduct a survey with its members and

other civil society organizations and to prepare this brief. 75 different organizations participated in this

survey.

CCIC welcomes DFATD’s decision to conduct consultations as part of its policy review. We appreciate the

opportunity to contribute to this review by presenting the perspective of civil society.

Our objective is to demonstrate the merits of overhead compensation for DFATD contribution

agreements. We also want to respond to the government’s questions by suggesting improvements to

the policy that are consistent with the spirit of DFATD’s commitments in its International Development

and Humanitarian Assistance Civil Society Partnership Policy.

II. Why pay overhead costs?

Providing for overhead compensation in DFATD contribution agreements is necessary to promote the

achievement of several goals:

1. Reimburse some indirect costs related to Canadian cooperation projects

2. Contribute to an enabling environment that promotes success for projects

3. Maintain the business model for Canadian development assistance, which is based on

cooperation with partners whose ability to achieve results meets government requirements

4. Implement DFATD’s International Development and Humanitarian Assistance Civil Society

Partnership Policy

5. Oversee administrative practices using standards and incentives to contain costs and achieve

optimal return on investment

6. Minimize risks linked to organizations’ activities

7. Pay a fair share of the indirect costs of projects, along with other international donors

8. Invest in innovation to keep the Canadian cooperation sector at the cutting edge

Reimbursing indirect costs

According to the current DFATD policy, “It is recognized that indirect/overhead costs are a necessary

part of an organization's operations, and that the organization will be compensated for some of this

overhead as part of the Canadian International Development Agency (CIDA) contribution agreement.”

Overhead compensation allows organizations in the Canadian cooperation sector to recover part of the

indirect costs arising from the implementation of projects and DFATD requirements. Departmental

standards, the complexity of development projects and risks involved with international operations

entail high operational costs for organizations. Staff costs are higher abroad. Salaries and benefits must

take into account the need for fluency in languages other than French and English, intercultural skills,

mobility for overseas travel, increased health-care-related costs and risks during travel to unstable

regions. Additionally, maintaining overseas offices is a means of investing in a better knowledge of

countries and local partners. During periods between projects (which occur frequently due to the

volatility of funding), the organizations must cover all the costs of the offices. Computer systems must

be efficient, especially since the technological environment is unstable in certain countries. Accounting

systems must be multicurrency. Similarly, higher costs for security, insurance, auditing, communications

and accounting and legal services must be factored in. These indirect costs are part of the real cost of

projects with DFATD.

From the survey on costs included in the indirect costs: “staffing-including local staffing in field offices

and HQ core staffing. Physical infrastructure-office space, IT systems, archives. Oversight and

governance-annual audits, managing internal controls, reporting, maintaining registration and tax

status, board and managerial oversight.”

Contributing to an enabling environment

Indirect costs are necessary to create and maintain an environment that promotes an organization’s

operational effectiveness. An effective infrastructure implies responsible governance, reliable and

efficient computer and financial systems, skills development and innovation, fundraising and ongoing

communication with Canadians, as well as functional offices and equipment.

The quality of infrastructure plays a crucial role in the success of an organization and its programs. The

rate of compensation for overhead costs allows organizations to provide the support services required

for successful project execution. DFATD’s Overhead Compensation Policy reinforces its partners’

capacities to properly carry out the projects to which it contributes.

“No, the 12% is not sufficient to maintain effective operations with competent and experienced staff. The

basic costs to run an organization and maintain competent staff requires funding for tools

(Hardware/Software etc.) that can help with efficiencies and help with analyzing various scenarios

required to make decisions, to provide timely and accurate financial reporting, and maintain important

reports and records that can be easily accessed... Developing proposals for competitive bids and

unsolicited proposals is a very expensive process that is a cost above and beyond basic operations.”

Maintaining DFATD’s business model

DFATD’s business model and its ability to deliver public development aid will be heavily compromised

without the participation of diverse and high-performing partners whose ability to achieve results meets

DFATD’s requirements.

Joint programming with DFATD represents non-negligible costs for organizations: the development of

programs and calls for tenders, compliance with the department’s administrative requirements, sharing

of project costs, and communication to highlight the Canadian government’s contribution are just a few

of the factors at work. The Overhead Compensation Policy allows DFATD to offer sufficiently attractive

conditions to encourage CSOs to implement projects in partnership despite the high costs of the system.

“A lower overhead rate will reduce our ability to operate government programming.”

“DFATD expects high quality program delivery which is compliant, on time, on budget and on result. This

requires a substantial indirect contribution of the Canadian executing agency. Overhead is core element

in ensuring strong programming with strong results.”

Implementing the Civil Society Partnership Policy

According to DFATD’s International Development and Humanitarian Assistance Civil Society Partnership

Policy, in force since February 2015, the Canadian government “recognizes the diverse expertise and

experience of civil society actors, as well as the importance of an enabling environment for civil society. .

. . Canada engages with those actors that can best deliver development results.”

The Canadian government’s commitments include: facilitating an enabling environment for civil society;

fostering Canadian CSO leadership in international development and innovation; and establishing

predictable, equitable, flexible and transparent funding mechanisms. DFATD also reiterates that

Canadian CSOs should strive to be both politically and financially independent.

Overhead compensation is one of the funding mechanisms that foster an enabling environment allowing

civil society to be a dynamic, innovative and independent partner. In other words, CSOs becoming more

fragile as projects are funded by DFATD due to the indirect costs they have to bear is contrary to the

partnership policy. Overhead compensation is an investment in maintaining a robust sector that is able

to partner with DFATD to successfully deliver Canadian cooperation programs.

“It is impossible to deliver programs without having solid institutions and institutional viability.”

“(With a rate under12%), It would be a substantive challenge for our sustainability as projected in our

business model (re generating a surplus, building reserves, etc). It may also prompt us to reconsider

DFATD funded agreements, or at least to call for other adjustments (match requirements, cost

definitions, etc.)”

Overseeing to contain costs and achieve optimal return on investment

The government and the Canadian public want the best development results at the optimal price. It is

expected that, just like donations, public funds will be used for the cause and not to benefit the

organizations themselves. In the process, it is expected that CSOs will be frugal in terms of

administrative costs and that they will dedicate a maximum of funds received to activities on the

ground.

A common misconception regarding overhead costs is the idea that the rate of overhead is a measure of

the CSO’s effectiveness, and that a low rate is a sign of efficient use of funds. The rate is actually an

accounting ratio that compares administrative and operational costs. It says nothing about the context

of operations, their impact, the nature of the work or the results, and it is not an indicator of success

potential.

Effectiveness results from the quality of leadership and staff, implemented systems, financial health,

and design and management processes—those are the things that ensure good operational results. As

for overhead costs, they contribute to the success of activities by serving to provide proper services and

support.

The Overhead Compensation Policy is a tool that allows DFATD to manage the administrative practices

of partner CSOs by specifying eligible direct or indirect costs and by establishing maximum refundable

overhead rates. By doing this, the department sets standards to help the sector keep administrative

costs under control.

However, encouraging a reduction of overhead costs without concern for the results is not the best way

to obtain the optimal return on investment. Insufficient compensation has a perverse effect, forcing

CSOs to cut essential services, which ends up eroding organizations’ potential and efficiency. A

compensation policy based on minimizing overhead costs would jeopardize the long-term objective of

cost-effectiveness based on results.

“Yes, if the current definition are maintained and no cash match funding is required. If the definitions of

overhead are changed or cash matching funds are required, the rate will no longer be sufficient. The 12%

rate covers most costs but still encourages organizations to stay ‘lean’ and efficient, encouraging

competition.”

“Indirect costs are a cost of doing business. Compensating organizations for indirect costs/overhead

safeguards against the erosion of capacity and infrastructure within the industry, decreases overall risk,

encourages healthy competition (which leads to increased efficiency and overall cost savings), ensures

sustainability of NGOs and enables NGOs to engage with Canadians to showcase government investment

and results.”

Minimizing risks

One of the effects of overhead compensation is that it helps CSOs invest in management infrastructure

so they can better manage the risks associated with international projects and develop financial health.

Conducting operations abroad is riskier than doing so in Canada: you need to contend with political

volatility and insecurity common in fragile countries, and with the dangers of working in remote areas or

regions subject to climate disasters. Significant financial risks also exist due to the inadequate banking

system in a number of countries, fluctuating exchange rates, corruption and the costs of remote internal

controls.

According to a U.S. Government Accountability Office report released in May 2010 on the

reimbursement of administrative and indirect costs for CSOs, organizations that are not sufficiently

reimbursed offset the shortfall by making cuts to operational support. Over time, they thus end up

compromising their ability to fulfill their mission. They no longer have any financial safety net or the

capability to operate properly during gaps between projects. As a result, their status as an effective

partner for the government in providing services to vulnerable populations is affected (2).

In fact, the risk increases each time a CSO accepts a project whose indirect costs are not covered.

Inversely, when donors provide for overhead compensation in their contributions, they allow CSOs to

implement the necessary systems so they can deliver the expected results while reducing the risks

associated with their investments.

“With an organizational mandate to ensure that every child is able to attain their rights, it requires us to

work in geographical areas that are marginalized, insecure and have a higher level of risk. As a result,

the operational costs may be quite substantive and thus the 12% overhead puts limits on our ability to

reach the hardest to reach.”

Paying a fair share

Overhead compensation from donors is standard practice in international co-operation; modalities and

rates of reimbursement vary according to the context, the nature of projects and the source of funds.

Our survey indicates that the rate offered by DFATD is within the average of those obtained by Canadian

CSOs from approximately 20 donors (see table in Appendix 1).

Each new CSO project occupies part of the organization’s capacities and contributes to increasing its

indirect costs. Sufficiently compensating indirect costs resulting from a project that we fund is grounded

in a user-payer logic; it means that we agree to pay our fair share.

“Contributing to organizational overhead is a standard and accepted practice of all bilateral and

multilateral donors. Many, such as USAID, contribute substantially more than 12%. USAID's NICRA

(negotiated indirect cost recovery allowance) is typically between 20% and 30%.”

Investing in innovation

Canada is recognized in the international community for having implemented several innovative

development approaches that have been adopted by other countries. Canada is a pioneer in such fields

as gender equality, strengthening local governance and participatory development, strengthening

endogenous capacities to prevent and manage natural disasters, the social and cooperative economy,

technical and professional training based on market needs, and preventative health programs. Many of

these innovations are a result of collaborations between the government and civil society, both within

the country and internationally.

Compensation for overhead costs is also an investment in CSOs’ research and development initiatives.

These organizations are well positioned to test new operational solutions in the face of development

challenges, given their proximity to the field and their knowledge of local realities and community

actors.

“Ultimately, this will result in a standardization of solutions and reduced creativity, a technological gap

in terms of finding innovative solutions. We will make cuts in non-billable areas first: supervision,

recruitment costs, R&D.”

“It’s important that we do more than simply survive. We need to be able to invest in innovation and

improved procedures”

III. Paying less for overhead costs: real savings?

Reducing compensation rates for overhead costs is an attractive measure for an administration that

legitimately wants better returns on its investments. Yet according to the studies we have read on the

issue (1), there is no evidence that such measures increase CSO efficiency or improve results.

However, a number of studies have shown that an inability to recover indirect project costs makes

organizations more vulnerable. An organization that cannot invest in better management systems,

trained and sufficient staff, and training and innovation is much more likely to be overwhelmed by an

increase in the volume of projects. Consequently, it becomes more vulnerable and achieves worse

results (1).

Eighty-two per cent (82%) of survey respondents viewed the prospect of reduced overhead

compensation for their organization in a negative light. None reported a positive impact. The main

effects cited were: fewer funds allocated to the infrastructure required to ensure efficiency and to

manage risks properly; a drop in the quality of programs and services; lower amounts being dedicated to

R&D and innovation; difficulty meeting DFATD requirements; a drop in the volume of activity and

communications with the Canadian public; and difficulty compensating for the shortfall through

fundraising, since unrelated donations are limited and donors want resources to be used for the cause

and not the organizations.

Choosing to lower compensation rates for overhead costs means starting a downward spiral. Fewer

development actors will be able to participate in DFATD programs. This means there will be less diversity

and innovation, which will, in the long term, lead to weaker results and impact—exactly the opposite of

the desired result.

Choosing to sufficiently compensate overhead costs and to continue focusing on results in contribution

agreements means encouraging investments that increase efficiency and impact. It offers a chance to

establish standards of excellence where costs of production are weighed not according to short-term

administrative savings, but rather according to long-term results.

“Would put pressure on our capacity to maintain an acceptable level of service and quality, particularly

in a context where the eligible or billable direct costs tend to be reduced by funders… Would also limit

our capacity to continue to develop and offer innovative development approaches.”

“We would not be able to remain a strong and resilient organization and there would be a potential

dilution of program quality.”

“A lower overhead rate would result in the organization refusing to enter into grant agreements based

on a cost/benefit analysis.”

“It is much harder to raise funds for Governance, professional fees, rent, office supplies and insurances –

these are not the exciting parts of organizations’ programs that the majority of Canadians want to

contribute to. It is a much smaller group of donors that realize the value of this foundational work in

order to be successful in projects/programs.”

“Ultimately, the services provided by NGOs and charities reduce the burden on the government. By

continuing to provide services that the government does not or cannot perform, these organizations

serve a vital role. The alternative is clearly not desirable: if some of these organizations are forced to

scale back their operations due to inadequate funding, or outright cease to exist, then the government

has limited options. The overhead for government itself is very likely much higher than 12%. Engaging

private, for-profit organizations also fails to solve the problem -- a typical company spends much higher

than 35% of their revenue to sustain their day-to-day operations.”

IV. CCIC comments on the Overhead Compensation Policy for DFATD contribution

agreements

CCIC conducted its own review of the policy by consulting with its members and other civil society

groups. Here are our main findings on the question of overhead costs and our recommendations:

Finding #1: Since 2008, the business processes for donors (including DFATD) and their administrative

requirements have exerted upward pressure on CSOs’ overhead costs. In spite of efforts to contain

the resulting costs, CSOs are having difficulty reducing their overhead costs since they must

increasingly invest and innovate to cope with the growing complexity of international development.

CCIC recommends that DFATD review its business processes and its requirements in order to curb this

increase in overhead costs or increase the compensation rate so that CSOs can continue to perform.

Cost drivers related to transactions with donors play a significant role in the increase of overhead costs

for CSOs. Dealing with DFATD requires a great deal of time and work. The hours worked are often for

activities that cannot be billed as direct costs, such as program development or cost sharing. Other

activities, such as managing contribution agreements and accountability, are putting increasing pressure

on the administrative systems and management of organizations. The costs for staff, office space and

equipment must also be taken into account.

1. Developing programming and managing calls for proposals is becoming increasingly costly. Since

2008, the business processes of donors like DFATD have become longer, subject to frequent

change and unpredictable, all in a context of reduced funding for public assistance. This results

in a strong volatility in the portfolio of CSO projects, and funding gaps that must be covered.

DFATD’s open-bidding principle and the proliferation of the number of players contribute to

increasing the number of proposals that must be prepared and lowers the success rate, leading

to increased costs for the management of calls for proposals.

2. The management of DFATD contribution agreements is a significant cause of the increase in

overhead costs for CSOs. Funding levels and project length have been reduced, but small

contracts remain costly to manage and generate less revenue that could compensate for the

overhead costs they entail. In addition, DFATD’s administrative requirements are getting

significantly stricter with the adoption of the bilateral contract format for contribution

agreements. There is less flexibility and an increased need to provide justifications and obtain

prior approvals. What’s more, a dual management logic is at work: activity-based management

on the one hand, and justification of disbursements in terms of the nature of costs on the other

hand. There are also many compliance requirements to be met, such as those relating to

purchasing processes and environmental reviews for construction, among others.

3. The tightened process of accountability toward donors and the Canadian public puts pressure

on CSOs’ monitoring and assessment systems and accounting and communications services.

CSOs need to produce more reports, undergo more audits and assessments, justify

administrative costs, promote the Canadian government, and meet the demands of the public

and the media for better transparency and efficiency.

4. Donors, including DFATD, are increasingly counting on project costs being shared, and the level

of expected contribution from CSOs is on the rise. In a context characterized by economic

slowdown and increased competition in the voluntary sector, it is a major challenge for CSO

fundraising services to meet the Canadian donation targets provided for in contribution

agreements.

The public’s expectations and the growing complexity of international development work also exert

upward pressure on overhead costs, due to the staff costs they entail. The prominent cost drivers are

the design of development projects, partnership management, security and risk management,

professionalization and compliance with codes of ethics.

5. The design of development projects has become much more complex, as CSOs must contend

with donors’ expectations for increased innovation and results, compliance with aid

effectiveness standards, market-based approaches, and greater use of new technology.

6. Several projects require multi-sectoral partnerships. DFATD, like other donors, strongly

encourages CSOs to work in consortia with the private sector, but the growing costs of

partnership management are considered to be indirect costs.

7. Security and risk management is more demanding and costly given increased instability, the

targeting of humanitarian workers and an increase in natural disasters in the countries where

projects are being carried out.

8. The government’s and the Canadian public’s expectations regarding professionalization and

compliance with codes of ethics require CSOs to invest in the quality and transparency of

governance and community life, management of human and financial resources, and

communications.

Finding #2: Most CSOs consulted prefer the simplicity of a single fixed rate but want the rate of 12% to

be increased.

CCIC recommends maintaining a fixed compensation rate and implementing an increase to 15% for all

projects except volunteer cooperation programs, which will remain at 12% of direct costs and in-kind

contribution from volunteers.

CCIC received responses to its survey from 75 different organizations that are active in international

development and humanitarian assistance. Among respondents, 73% have contribution agreements

with DFATD, 20% with other Canadian departments, 24% with other bilateral or international donors,

and 41% with foundations. The table in Appendix 1 shows the results obtained according to the donors.

The rate of 12% lies within the median. Donors whose compensation modalities entail billing of

overhead under direct costs (such as the allocation of the Conseil du statut de la femme) or case-by-case

negotiation of a verifiable institutional rate (such as USAID’s NICRA) pay between 15% and 25% of

overhead costs. At the other end of the spectrum, donors paying less than 10% are either branches of

the UN that already factor in high administration fees for projects they subcontract to CSOs, or donors

that agree to indirect administrative costs being billed as direct costs, which brings compensation within

the median. We also note that overhead costs for humanitarian projects are compensated between 5%

and 7.5%.

Some respondents discussed the idea of variable rates being negotiated on a case-by-case basis (e.g.,

USAID’s NICRA) or floating rates based on the nature or scale of the project, but the vast majority

preferred the simplicity of a fixed rate, on the condition that it is sufficient. No respondents

recommended lowering the rate below 12%. Some are satisfied with this 12% rate but worry about

trends that may render it insufficient: some direct costs are being transferred to overhead costs, more

cumbersome contract formats are being adopted and cost-sharing requirements are increasing. In fact,

for 60% of respondents, the rate of 12% is well below actual rates, which are between 18% and 20% on

average. Some requested an increase that ranged from a minimum of 15% to as high as 20%. For

comparison, the median overhead rate in the US is 14.8%, and the average rate is 19.8% (1).

CCIC therefore recommends a moderate increase in the rate of compensation to bring it to 15%. This

solution means that most CSOs will continue to assume 20% to 25% of overhead costs, given the gap

with the actual rate. A number of CSOs said in the survey that a rate of 15% would be fair from a cost-

sharing perspective (the DFATD-to-CSO ratio is said to be 3:1 on average). CCIC also believes that such a

rate would ensure optimal return on DFATD’s investment by encouraging efficiency and curbing upward

trends.

Opinions vary on whether there are economies of scale according to the size of projects. Some

respondents mentioned the high management cost of small projects. Others gave as an example labour-

intensive projects, such as those based on voluntary cooperation, to illustrate that size does not always

result in savings. But since the current rate of 12% also applies to volunteers’ in-kind services,

compensation is believed to be sufficient. CCIC believes it is relevant to discuss whether small and large

projects should receive different rates. For example, the rate of 12% could continue to apply to larger

projects, while the rate for others could be increased to 15%. We would like to pursue the question

further with DFATD.

“The advantage to a fixed percentage is that it prevents some organizations that have really high

overhead rates from charging such rates on Canadian government grants. The other advantage is that it

reduces costs of having to calculate, negotiate, and adjust the rates all the time”

“Our actual overhead costs are above 12% despite considerable effort put into reducing overhead over

the past few years. Overhead rates are also linked to the definition of what is considered a direct cost.

Costs deemed ineligible for direct expenses are shifted to overhead. Having said this, 15% overhead

would still be under our actual costs but would allow organizations to recover some of the costs related

to producing bids.”

“If we are sticking with a flat rate, then 15% would be more realistic”

Finding #3: During recent negotiations with DFATD, CSOs saw a reinterpretation of the definitions of

eligible direct and indirect costs and a tendency to consider certain direct costs as overhead costs. This

accentuates the gap between compensation rates and actual costs for overhead.

CCIC recommends clarifying the definitions in the policy in order to simplify case-by-case negotiations

and eliminate their arbitrary features.

One of the advantages of the current policy is its list of eligible and ineligible costs with simple

definitions based on generally recognized accounting rules and standards. CSOs believe that the policy is

reasonably clear. In recent negotiations, however, DFATD categorized certain direct costs as overhead;

for instance, salaries for senior employees who directly contributed to project management. According

to the CSOs, these employees performed tasks for project delivery and not for general services or

operations at headquarters. Using timesheets, CSOs could attribute a portion of the time for these

employees to project implementation. In previous contracts, these costs were found to comply with the

policy and were not invalidated by the audits.

Some hold the view that in its efforts to limit costs, DFATD is creating confusion regarding interpretation

of the policy and the definition of direct and indirect costs.

CCIC therefore suggests that DFATD decide on the question of senior employees and specify the decision

in the policy rather than address the matter during negotiations. For example, it could systematically

consider that senior employees (CEO, CFO, etc.) are part of indirect costs. This measure would increase

overhead costs for smaller organizations whose senior managers tend to be actively involved and

perform project-related tasks—hence the importance of increasing the overhead compensation rate, as

we propose. CSOs have compared this measure to USAID’s approach, which excludes direct costs for

positions that are part of overhead costs, unlike CSOs, which choose the positions that fall within this

category.

If the compensation rate is to decrease, CCIC recommends not taking this route, but rather continuing to

apply the current definition, to the letter: “Indirect costs are those costs that cannot be obviously traced

to a specific program/project. This means all indirect costs associated with the organization’s Canadian

office(s).” Another definition is even clearer: “a partner organization’s headquarters costs associated

with operational expenses unrelated to a project.” In our view, this definition makes it possible to bill the

portion of verifiable time that senior employees spend performing project-related tasks.

“Our actual overhead costs are above 12% despite considerable effort put into reducing overhead over

the past few years. Overhead rates are also linked to the definition of what is considered a direct cost.

Costs deemed ineligible for direct expenses are shifted to overhead. Having said this, 15% overhead

would still be under our actual costs but would allow organizations to recover some of the costs related

to producing bids.”

“Indirect costs should be compensated for the same reasons DFATD funds direct costs. There is no

separate or different reason for compensating indirect costs. In all situations, there will be indirect costs

to deliver projects. In other words, direct cost (project) cannot be delivered without indirect costs i.e.

space for work, financial and administrative services, computer, internet, office supplies, utilities,

communications, accountability and oversight.”

“We have a significant concern that cost containment, including rate reduction and changes in policy

regarding expanses currently considered direct will result in a double impact.”

Finding #4: For non-eligible indirect costs related to the management of flow-through funds,

construction or volume purchases, several CSOs believe that non-compensation for overhead costs is

inequitable, but that the rate could be lower.

CCIC recommends that DFATD review its policy and the appropriateness of considering these types of

expenses as overhead that is eligible for compensation, but at a reduced rate.

Our consultations showed that CSOs incur indirect costs for these expenses:

Who is exposed to risk with flow-through funds? Mitigating it is very costly for CSOs in terms of

legal and accounting costs, many internal controls, and a lack of financing alternatives given the

deficient banking systems in some countries.

The policy does not take into account the nature of construction work and its impact on the

results of development projects. Productive infrastructure such as agricultural facilities, village

water and sanitation systems, and labour-intensive rehabilitation projects have more in

common with local capacity-building activities than with major construction work. These

activities mean significant indirect costs for CSOs.

The policy excludes construction costs but imposes compliance requirements such as

environmental impact assessments. Costs for due diligence should be factored as eligible

indirect costs.

Local volume purchases such as those for food aid require a great deal of control and

administrative oversight from CSOs. Costs for due diligence are high.

CCIC recommends reviewing the policy and considering the appropriateness of reducing the

compensation rate for overhead applicable to these expenses. In comparison, humanitarian aid that

is granted a rate of 7.5% often includes rehabilitation of infrastructure and volume purchases

(medication, food, shelter, etc.).

Finding #5: CSOs believe that the Overhead Compensation Policy must not ignore cost-sharing

requirements. In their view, the total cost of projects includes the contribution that is provided for in

the contract in excess of donations received, non-compensated indirect costs, the gap between actual

overhead costs and the compensation rate, and the sharing of overhead costs with implementing

partners.

CCIC recommends that DFATD ensure that the policy clearly covers cost-sharing and other elements of

production costs for CSO projects in order for the overhead compensation rate to better reflect the

efforts made by CSOs.

“There is very limited supply of unrestricted donations from individual donors within the INGO sector –

these are the only funds that can be applied to Canadian headquarter, fundraising and business

development costs. Organizations currently are forced to use unrestricted donations to cover the existing

shortfall in overhead compensation and the cost share fundraising/overhead costs on all its DFATD

projects.”

“DFATD projects that include Match obligations in actual terms are operated at a loss by organizations.

DFATD currently allows for 12% OH recovery but when the agreement also specifies a 15-25% match, the

organization is then in fact operating the project at a loss of between 3% and 13%. DFATD position

assumes that Match will be covered by Canadians but in reality organization takes all of the risk

associated with the shortfall and all of the infrastructure cost for fundraising.”

V. Conclusion

In preparing this brief, CCIC tried to clearly establish the appropriateness of overhead compensation. We

wanted to demonstrate that overhead costs contribute to project success. When contribution

agreements are focused on results rather than on strict cost control, overhead compensation helps

ensure optimal return on investment. We also believe that overhead compensation facilitates DFATD’s

fulfilment of the commitments set out in its Civil Society Partnership Policy in the context of each of its

development projects.

We hope that our comments and recommendations, which are made in a constructive spirit, will serve

to support DFATD in its review and contribute to improve the policy, not only from the government’s

point of view, but also from that of its civil society partners.

To review the recommendations to DFATD in this brief, CCIC recommends:

Maintaining a fixed compensation rate of at least 12%

Maintaining a 12% rate for voluntary co-operation

Increasing the rate to 15% for other projects

Continuing discussions on the appropriateness of having a rate for major projects that is lower,

but not below 12%

Updating the definitions of direct and indirect costs in the policy, rather than during

negotiations

Reviewing the appropriateness of a reduced overhead compensation rate for flow-through

funds, construction and volume purchases

Clearly covering cost sharing in the policy, and continuing discussion on the matter following the

update

We are available to DFATD for any clarification regarding this brief and for consultation on topics related

to the Overhead Compensation Policy such as timesheets, the value of services rendered by volunteers

and the cost-sharing policy.

References

(1) University studies on CSO overhead costs

Riseboro, C. Rating Charity Overhead Rates: The Limitation of Overhead to Determine

Charity Performance. Carleton University, Sept. 2014.

Lecy , Jesse D., Ass. Professor of Public Policy, Georgia State Univ.; Searing, Elizabeth

A.M., Ph.D student. Anatomy of the Nonprofit Starvation Cycle. Arnova Annual

Conference, Nov. 2012.

Bedsworth, W.; Gregory, A.G.; Howard, D. Nonprofit Overhead Costs: Breaking the

Vicious Cycle of Misleading Reporting, Unrealistic Expectations, and Pressure to

Conform. Bridgespan Group, 2008.

Wing, K.; Hager, M.A. Getting What We Pay For: Low Overhead Limits Nonprofit

Effectiveness. Urban Institute. Indiana Univ., 2004.

(2) US government studies and standards

U.S. Government Accountability Office. Report on indirect cost and administrative

reimbursements for nonprofits. May 2010.

White House Office of Management and Budget. Cost Principles for Non-Profit

Organizations. Circular A-122.

Appendix 1

Overhead compensation rates obtained by Canadian CSOs

Canadian and Quebec

departments

DFATD (partnerships and

bilateral) 12%

DFATD (humanitarian assistance) 7.5%

IDRC 13%

Citizenship and Immigration

Canada

12%

to

15% Not a rate. Indirect expenses are billed as direct costs.

Conseil du statut de la femme

12 to

20%

Not a rate. Allocation for administrative expenses

billed as direct costs.

City of Montréal / Ministère de

l'Immigration, de la Diversité et

de l'Inclusion (Quebec) 15%

Ministère des Relations

internationales et de la

Francophonie (Quebec) 12%

Public Health Agency of Canada

(PHAC) 12% Not a rate. Indirect expenses are billed as direct costs.

Bilateral and multilateral donors

European Union 7% Possibility of charging indirect costs as direct costs

USAID

15 to

25%

NICRA rate based on an audit of actual costs for each

organization

Organisation internationale de la

Francophonie 10%

UK Aid Network

13 to

14.5%

Varies according to the actual rate of each

organization

AFD (France) 12%

World Bank 12%

Asian Development Bank 12%

WFP 5% United Nations World Food Programme

WHO

5 to

10% United Nations System

Global Fund 7% United Nations System

Unicef 7% United Nations System

WFF 7% United Nations System

Foundations

Bill and Melinda Gates

Foundation 15% Rate for NGOs

The MasterCard Foundation 10%

American Jewish World Service 12%

Ford Foundation 7%

Part of a program with the European Union.

Alignment with the rate of the Union.

Canadian private sector

Royal Bank of Canada 15%

Telus 12.5%

TD Bank 15%