IMPROVING THE EFFECTIVENESS OF REGIONAL OPERATIONS: ANNEX 7
BASEL CONVERNTION REGIONAL
CENTRES (BCRC)
CHAPTER 7 :
INDIRECT COSTS
NICOLAS GEIGER
INTERN 2009
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IMPROVING THE EFFECTIVENESS OF REGIONAL OPERATIONS: ANNEX 7
7
INDIRECT COSTS
7.1. Introduction
The aim of this chapter is to clarify which role indirect costs play in project and
programme planning. Many organizations often struggle in clearly defining and
calculating indirect costs although in most cases this is given as a precondition to
receive funding from donor agencies. Thus, the chapter will concentrate on defining
indirect costs and the role they play within budget planning of an international
organization. Finally it tries to offer solutions on how to deal with problem on a stepby-step-basis.
Most of the costs of BCRCs are covered through core grants from the host government
and through a modest level of project work. When costs are covered in this way, there is
a tendency not to even consider the concept of indirect costs, in that all costs are
covered through the core allocations. The objective of establishing the BCRCs,
however, was to generate a substantial increase in work aimed at implementing the
Convention and as such, it was always assumed that BCRCs would rapidly become
substantial implementing agencies, supporting Parties in their regions, through projects
and programmes developed for and marketed to a range of clients, including
development assistance agencies.
Under this type of operation in which the core operational allocation from the host
government and the assessed contributions from countries in the region (where this can
be negotiated), will ultimately be a modest component in the overall operational budget
of the particular Centre, it is important that projects are budgeted and managed so as to
cover ALL their costs. In other words, if a new project requires the time of the Director,
an accountant, project managers, secretarial support, the computer facilities used by all
and the respective office space, all this should be costed and included in the budget of
the project, rather than being covered by the core operational grant. In this way, the core
grant and other unrestricted1 income can be used for more important institutional issues
such as building financial reserves, ensuring the adequate governance etc.
7.2. Direct and Indirect Costs
Direct costs are considered to be output orientated. According to the report of the Openended Working Group of the Basel Convention on the work of its sixth session,
UNEP/CHW/OEWG/6/29, direct costs are defined as expenditures concerning “inter
alia, consultants, contractual services and services provided under memorandums of
understanding, travel, meetings, workshops, training and publications.”2
1
Unrestricted income means that income on which there are no restrictions as to its use, other than it be
applied to the approved programme as decided by the director.
2 Report of the Open-ended Working Group of the Basel Convention on the Control of Transboundary
Movement of Hazardous Wastes and Their Disposal, UNEP/CHW/OEWG/6/29;
http://www.basel.int/meetings/oewg/oewg6/docs/29e.pdf; p.47
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IMPROVING THE EFFECTIVENESS OF REGIONAL OPERATIONS: ANNEX 7
Indirect costs, however, are taken to mean those costs that are essential to the work of
the organisation but which do not contribute to the outputs in a direct and substantive
way. This means that these expenses are not particularly identified with specific activies
or projects. Thus, they concern e.g. the non-productive management services and
facilities (normally referred to as overheads) and the building of essential reserves. It
may also include some strategic programme development.3 Some organisations include
all or part of the governance and direction of the organisation in indirect costs, but in the
case of the BCRCs it is proposed that these activities not be labelled as indirect but
thought of as output orientated in them. The indirect costs are thus made up of:
-
Personnel/HRD: all aspects of the hiring and provision of services to staff and
consultants, including career development, training, etc
-
Administration: office costs, including heating, lighting, rent, depreciation on
equipment and furniture, office supplies, office management
-
Financial services: maintaining the accounts on all activities, carrying out
internal audits, producing financial reports, preparing, up-dating, monitoring and
enforcing the financial regulations;
-
Project Management services: opening project numbers, verifying all donor
and consultant contracts, entering all relevant budget information into the
respective databases, tracking project performance in terms of ensuring timely
reporting, calling in staged payments, maintaining the overall income projection
systems. In smaller organisations, this is usually part of the Finance function;
-
Management Information Services: ensuring the provision of suitable
electronic hardware and software, ensuring continued development of the
electronic systems and the provision of library services to the output orientated
components of the BCRC;
-
Institutional PR and Communications: the promotion of the organisation,
with the objective of increasing awareness of BCRCs within defined target
groups, such as donor agencies, the UN system and governments in need. (This
function could be written up in the form of a project proposal for which donor
funding is sought, thus removing it, at least for a time, from being regarded as an
indirect cost);
-
Direction/Governance: Directing and managing an organisation in which a
large proportion of its budget is devoted to projects, inevitably means that the
time of the Director(s) is partly devoted to promoting, tracking and addressing
problems of those projects. As such, the projects should pay a proportion of the
costs of direction (and governance);
-
Premises: the costs of accommodation, cleaning, maintenance etc.;
-
Fund-raising: ensuring the co-ordination of all fund-raising, identifying new
opportunities, assisting in the preparation of new proposals, managing client
relations, preparing for and managing the various meetings with funding
organisations etc.;
3
Report of the Open-ended Working Group of the Basel Convention on the Control of Transboundary
Movement of Hazardous Wastes and Their Disposal, UNEP/CHW/OEWG/6/29;
http://www.basel.int/meetings/oewg/oewg6/docs/29e.pdf; p.47
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IMPROVING THE EFFECTIVENESS OF REGIONAL OPERATIONS: ANNEX 7
-
Down-time: staff retained for project work generally has gaps in its project
work that needs to be covered from somewhere;
-
Building an operational reserve: non-for-profit organisations cannot operate in
a satisfactory manner without reserves;
-
Project preparation: the preparation of project proposals can be extremely
costly and should be met from eventual project income.
The indirect costs of a typical international NGO are
shown in the inset table, although the costs of project INDIRECT COSTS AS % OF BUDGET IN
TYPICAL INTERNATIONAL NGO
preparation have not been included here. Each BCRC Personnel
Services
1.4
should make its own calculation of its indirect costs and Central Administration
1.8
2.6
there may be considerable differences with this table. Financial & Legal Services
Project management Services
1.0
Consultancy firms have to finance the preparation of Computer Services
1.6
project proposals and the associated tendering processes Information/PR
1.0
Directorate
2.1
through profits and overhead charges taken from the
Premises
4.0
projects they manage. A reasonable success rate for Fund-raising Services
0.4
1.9
bidding in the consulting world is one in four, and the Down-time
Reserve Fund, Contingency
2.0
preparation of project proposals and the associated
Total indirect costs 19.8
bidding process on small contracts can cost up to 4% of
the ultimate cost of the project, so that costs of project preparation and bidding can cost
as much as 16% of the budget of the successful project! A charge of 12% -16% for
project preparation is not unreasonable. BCRCs are not in the business of bidding for
projects in competition with others, but they still have to finance the development of
project proposals. The main inputs for proposal preparation will be from the technical
staff working on projects. Assuming an 80% success rate (i.e. 80% of all project
proposals developed and submitted to funding agencies will ultimately be funded by
one agency or another, which is exceptionally high for an NGO), the annual cost of
project preparation will be around 5% of the total project budget. Many NGOs have no
alternative but to include this as part of the indirect costs to be distributed between the
fee-earning projects, but even though this is an estimate of the real costs of programme
development, 5% is still a very substantial amount for BCRCs to add to their charges
for indirect costs. The alternatives are:
1. To systematically include the charge for project/programme development as a
discrete budget line in the budgets of each project proposal;
2. To develop and market a project proposal for project/programme development,
to be managed as a Fund and to be reimbursed where possible from projects that
are eventually funded;
3. To finance project development from the core grant or subvention provided by
the host government;
4. To simply not recognise the cost, staff effectively billing the costs (their time) to
the projects on which they are already working. This is often quite a reasonable
solution in that new projects are extensions of existing projects.
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7.3. Minimising Project Development Costs
The most effective way for the Convention to minimise project development
expenditure is to standardise proposals throughout all BCRCs. In this case, project
proposals on the main programme themes of the Convention have been developed
centrally with involvement of respective BCRCs, marketed centrally again with the
involvement of centres and then managed centrally, as for example projects on
Persistent Organic Polutants (POPs) and e-waste. This also refers to Decision IX/4 of
the ninth Confernce of the Parties which states that SBC “plays, inter alia, an important
facilitative and catalytic role, in mobilizing financial resources and technical assistance
for programmes delivered through regional centres and in providing guidance on
effective governance and administration arrangements, subject to the availability of
resources.”4 Where it is considered sensible for a particular centre to develop a
particular project proposal alone, it should normally be able to base that proposal on
existing templates provided by SBC. In the field of training, SBC should make
available the basic curriculum, the templates and the know-how to submit project
proposals to funding agencies (e.g. SAICM-QSP; GEF; UNEP, CDM Fund, etc.).
An additional approach to programme development is to recognise the need for BCRCs
to be able to respond rapidly to emergency situations in the provision of support to
Parties. Taking into account the existing emergency response mechanism under the
Basel Convention (Decision V/325; Decision IV/146) SBC might thus look with Parties
and development agencies at the possibility of establishing a “Rapid Response Fund”,
probably within the BD Trust Fund, but accounted separately. Much of the work under
such a Fund would be project and programme design in response to specific emergency
situations. The overall principle remains the same as with the project development fund
suggested above - that a project proposal is written for the creation of a new fund that
donor agencies contribute to the fund and to its replenishment, ideally on an annual
basis.
An NGO that has no unrestricted income must meet all the indirect costs from annual
operations and therefore include them in an appropriate way in the budgets of all the
programme and project activities. As stated above, BCRCs are in a different situation in
that they do at present have enough budgetary support or core grants and can therefore
allocate part of the core grants to cover all or part of these functions. But it is strongly
suggested that all efforts be made to include full indirect costs into project budgets in a
way that can be accepted by the respective funding agencies. Calculating the exact
indirect costs on any project is usually difficult and most organisations are content to
charge them simply as a fixed and agreed percentage of the total project cost. In this
case, it is necessary to establish an indirect cost rate.
4
COP9: Report of the Conference of the Parties of the Basel Convention on the Control of
Transboundary Movements of Hazardous Wastes and their Disoposal on its ninth meeting;
UNEP/CHW.9/39; http://www.basel.int/meetings/cop/cop9/docs/39e-rep.pdf; p.22
5
COP5: Legal Matters - Work on the Emergency Fund and Mechanism; UNEP/CHW.5/14;
http://www.basel.int/meetings/cop/cop5/predocs/Eng/cop5-14e.pdf
6
COP6: Enlargement of the Scope of the Technical Cooperation Trust Fund; UNEP/CHW.6/10;
http://www.basel.int/meetings/cop/cop6/cop6_10e.pdf
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IMPROVING THE EFFECTIVENESS OF REGIONAL OPERATIONS: ANNEX 7
7.4. Indirect Cost Rates
A rate set up for indirect expenditure is used as a mechanism in order to determine the
proportional amount of administrative/management costs of different individual
programmes. Thus, it represents the ratio between the total indirect costs and benefiting
direct costs.7
In this regard, there are different possibilities on how to set up or negotiate indirect cost
rates, taking into account that funding agencies generally expect detailed budgetary
plans from BCRCs. These rates include:
1. Provisional Rate: This rate is a temporary rate for an assumed period of time
based on estimated costs. This rate is subject to adjustment as soon as an exact
calculation of the final overall costs exists.
2. Final Rate: The rate is set up at the end of a specific time period (e.g. at the end
of a year) when the actual costs are known, based on a financial report.
3. Predetermined Rate: When costs remain stable within a fixed period of time
and do not have to be further adjusted, this kind of rate is adequate.
4. Fixed Rate with Carry-Forward: This permanent fixed rate concerns a future
period of time, which means that a reimbursement is conducted on the basis of
the rate but the differences between fixed and actual costs according to financial
reports will be adjusted within funds of future activities.
5. Special Rate: In the context of specific situations special rates are appropriate in
order to deal with varying costs within one program.
6. Multiple Indirect Cost Rates: If an indirect cost pool within a large
organization is used disproportionately by different programs, departments etc. it
is necessary to set up several indirect cost rates – an organization-wide rate is
inadequate.8
Nevertheless, the most challenging task for BCRCs regarding budget planning and
setting up a rate is to clearly identify and allocate the expenditures comprising the
indirect cost pool. There are five steps which might help to handle this problem:
1. All arising expenditures within a programme need to be specified in detail.
2. Costs which are allocated through a central allocation plan must be identified.
3. Activitiies and costs have to be classified as direct or indirect.
4. Costs within the pool of indirect expenditure which are not accepted by progrom
legislation must be removed.
7
U.S. Department of Education; http://www.ed.gov/about/offices/list/ocfo/intro.html
Flood, H./Phelps, R.W.: Understanding Indirect Costs;
http://www.tgci.com/magazine/Understanding%20Indirect%20Costs.pdf; p.2-3
8
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BCRCs receive or will hopefully receive project funds in two ways, i.e. directly from
the financing agency and via the Technical Co-operation Trust Fund of the Convention.
The inset table above shows that indirect costs usually make up for 20% of the total
budget, however not including project preparation costs. If the project is managed
through the Trust Fund, UNEP’s management charge is 13% so that the total indirect
cost rises to 33%, not including project preparation or SBC’s involvement in the project
development and approval process, fundraising and maintenance of financial oversight
etc. which will be at least 4% of the total project cost.
7.5. Comunicating Project Activities
Whilst it is somewhat discouraging to see that indirect costs are so high, it is vital that
there is clarity on the issue and that indirect costs are appropriately calculated and
managed. Reducing these costs below certain levels is simply not possible in that if the
computer services or financial services are inadequate, the whole institution suffers and
the ultimate costs increase. In managing these costs however and in recognising that
donors will simply not finance levels that they believe are too high, it is clear that the
sooner that centres are able to demonstrate sound financial management and reporting,
the sooner agencies will feel comfortable with contracting directly with the centres,
rather than through the Trust Fund.
Before being ready to donate money, however, funding organisations seek to understand
the aims of project activities. Thus, it is not sufficient to only concentrate on rational
rate proposals but to explain programmes in detail. The centres should develop clear
strategies, explicitly explaining the aims and needs which the organization wants to
achieve. Besides, funding agencies need to understand which personal benefits they can
expect from the activities themselves. Programme proposals should further be
communicated through a collective commitment of staff members, including leading
officials and the board. This could add authority to the plan and clarify the need for
investment.9
7.6. Conlusion
Presenting indirect costs as a percentage of turnovers is very convenient but they can be
incorporated into programme and project budgets in a variety of different ways, the
most popular being through the day rate or fee at which staff and consultants are
charged to projects. Many NGOs charge their personnel out on a day-rate basis and
include in this rate both the payroll cost of the individual and the respective indirect
component. Thus, an individual staff member who costs the organisation say $50,000
per annum may be charged out at $100,000 per annum, spread over typically 200 days,
resulting in a day-rate of $500. If 225 days are worked, or billed, then there is a
corresponding surplus for the year. Alternatively, the extra days may be used for
programme development, training etc.
9
Bedsworth, W./Goggins Gregory, A./Howard, D.: Nonprofit Overhead Costs. Breaking the Vicious
Cycle of Misleading Reporting, Unrealistic Expectations, and Pressure to Conform;
http://www.bridgespan.org/learningcenter/resourcedetail.aspx?id=252&Resource=Articles; p.3
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It is important to recognise the existence of these two main alternative ways of charging
the indirect costs. Most NGOs opt for charging as a percentage of the total budget, but
charging as a component of the day rate for staff and consultants has many advantages,
particularly when indirect costs are high.
It is recommended that the term “overhead” be avoided in BCRCs’ budget presentations
and project proposals and that the term “Management Costs” or “Indirect Costs” be
used, and that this be included as a budget line in all proposals. Any additional indirect
costs that may need to be included should be built in through other existing budget
lines. In all instances a budget is presented to a potential financing agency, however,
there must be total transparency internally within BCRCs so that the necessary
accounting can be appropriately undertaken.
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