Project Grants Need Not Be the Enemy—A Three-Part Series: Part 2
This is the second of a series of three articles that share the work of a community of practice among 12 large private funders, known as Funders for Real Cost, Real Change (FRC)1. This article introduces results of a new research report from Humentum commissioned by FRC. It focuses on the impact of funders’ indirect cost recovery practices on international NGOs in ten countries across five regions of the globe.
New Humentum report shows how international funders can break the nonprofit “starvation cycle”
Twaweza means “we can make it happen” in Swahili, so it’s a fitting name for an NGO that works to bring citizens and governments together to solve problems in Tanzania, Kenya and Uganda. This work takes many forms, and the organization prizes flexibility. To simplify its operations and remain nimble, Twaweza worked with its funders on a more strategic approach to giving that it calls “basket funding.” Funders are asked to contribute to the organization’s entire mission, rather than to distinct programs. The result is “one strategy, one plan, one budget and one set of reports.”
Basket funding has worked so well for Twaweza that last year, it turned down an important multi-year funding commitment because the donor insisted on the traditional program-funding model, with customized reports using separate budget codes on the funder’s own templates.
Organizations standing their ground like this is risky, and understandably rare. But Twaweza should serve as an example to funders, according to research from Humentum, the leading global nonprofit working with humanitarian and development organizations to make the community more equitable, accountable, and resilient.
In its new report Breaking the Starvation Cycle, Humentum reveals the unsettling findings from surveys, interviews and financial reviews with more than 80 national NGOs in ten countries in Africa, Asia, Latin America and Europe. The key findings were:
1. Most funders provide inadequate coverage of their grantees’ administration costs, contributing to a starvation cycle with significant negative organizational impacts.
2. Inadequate cost coverage and limited access to unrestricted income is making it extremely challenging for many NGOs to achieve stable financial health.
3. To stop trapping grantees in the starvation cycle and start building resilience, funders will need to provide: a) full cost coverage; b) means by which grantees can contribute to unrestricted reserves; and c) support to strengthen grantees’ financial planning and management capabilities.
“There’s a real burning platform kind of problem here,” says Tim Boyes-Watson, Humentum’s Global Director, Influence and Initiatives. “Funders are asking these nonprofits to do really challenging jobs, often in difficult places, but are underfunding them and are not investing in their long-term capacity. There is widespread awareness of this problem, but there hasn’t been any consensus on solutions. We believe the data we’ve collected is a big step in that direction.”
Inadequate coverage of administration costs
The Bridgespan Group coined the term “starvation cycle” in 2009, writing: “The first step in the cycle is funders’ unrealistic expectations about how much it costs to run a nonprofit. At the second step, nonprofits feel pressure to conform to funders’ unrealistic expectations. … Over time, funders expect grantees to do more and more with less and less — a cycle that slowly starves nonprofits.”
Humentum’s recent research revealed the extent of the damage. The report states that among the surveyed NGOs, “no group of funders was consistently providing a full and fair share of administration costs related to the project activities that they were funding.”
Core functions go under-resourced as a result, including:
- Safeguarding, which refers to efforts to prevent sexual exploitation and abuse in programs (54% of respondents)
- Fundraising/business development (53%)
- Premises (43%)
- Human resources (38%)
- Management information/technology systems (36%)
Two-thirds of respondents also described difficulties attracting and retaining qualified staff.
“In the worst cases,” adds Boyes-Watson, “we found people were forgoing salary — still working, but forgoing salary, so that they can carry on achieving their mission. I had not seen that before. Our interviewers said it was a hard thing, emotionally, to respond to.”
What drives people to such measures? Humentum points to the power imbalance between donors and nonprofits. Just 12 percent of respondents agreed with the statement, “The organization’s management practices include turning down or not applying for funding opportunities that do not give adequate cost recovery.”
“A lot of organizations have one or two major funders,” Boyes-Watson explains. “That’s quite common and it creates a power dynamic. If those funders are not providing full cost coverage, people feel very intimidated to raise that as a problem. Instead, they try to work around it, and the cycle continues.”
“This is groundbreaking and important research, and the funders who worked closely with Humentum to design this project have learned a great deal,” says Kathy Reich, Director of the Building Institutions and Networks (BUILD) initiative at the Ford Foundation and a member of the Funders for Real Cost, Real Change (FRC) collaborative which funded the project. “For example, when we commissioned the research we assumed that most of the project grants made by the funders in FRC were covering our grantees’ full cost of doing business. The Humentum research debunked that assumption—there’s actually room for improvement for many of us.”
Stability is always out of reach
One of the most startling findings in Humentum’s research is how little most organizations have in unrestricted reserves. An analysis of 38 of the NGOs analyzed showed that for half of them, unrestricted reserves equaled just three weeks of annual expenditure or less. The average, 56 days, was inflated by the few NGOs with relatively high reserve levels, which tended to be concentrated among larger organizations.
“The research developed an objective set of criteria to assess financial health and found that 66% of these 38 NGOs have low or medium-low financial health,” the report states. “The income for most of the NGOs was concentrated on a few funding agreements, with the single largest funding agreement making up an average of 40% of total income.
“Humentum’s prior research showed that an undiversified funding base leading to funding gaps between agreements can be one of the main causes of irrecoverable costs; this typically contributes to under-recovery of fixed program-related costs as well as administration costs.”
Change must begin with funders
In an interview with Humentum’s researchers, the leader of an NGO described a meeting with a funder with rigid views about administrative costs. The NGO leader offered ideas and tried to negotiate, but was told that if they didn’t appreciate the offer, the funder could easily find a grantee that would. The leader felt they had no choice but to accept the terms.
Humentum’s research suggests that, Twaweza’s example notwithstanding, little will change unless funders take responsibility for how their funding arrangements can negatively affect grantee financial health.
“Given the unequal power dynamic, it is funders that most need to change their practices,” the report states. Interviews revealed that most NGO leaders’ expectations for improvement are low, and that “low expectations are an integral feature of the starvation cycle and how it operates.”
The report offers three key recommendations:
1. Funders should commit to consistently covering a full and fair share of all associated administration costs.
2. Funders should directly fund grantees to strengthen their financial management, cost recovery and fundraising capabilities, and provide unrestricted funding to build reserves.
3. Funders should systematically collect data on the extent of adequate cost coverage. This data should be used to drive accountability within and between funders regarding the provision of full and fair share of administration costs in restricted funding agreements.
These recommendations are fleshed out in the report.
“Our work provides clear evidence of what many NGOs have been saying for years: that current funding practices are unsustainable,” says Boyes-Watson. “Our data-driven recommendations give funders practical ways to move from being part of the problem, to part of the solution. This requires funders to proactively address how the power dynamic in the funding relationship affects the negotiating position of grantees. We’re excited to see funders responding to this research by looking for ways to hold themselves accountable for using their power more equitably.”
“We are hopeful that these findings and recommendations will get the attention they deserve,” says Reich, “and that all funders take on the urgent task of adequately resourcing nonprofits. These organizations are doing work that is critical to a functioning civil society around the world.”
Additional Articles in This Series and The Future of This Work
The first article in this series, published in February 2022, synopsized FRC’s overall work and lessons about the importance of adequate indirect cost coverage to equitable grantmaking. The third and final piece will lay out four options for improving indirect cost recovery being explored by the members of the collaborative and worthy of consideration among their philanthropic peers.
The funders have resourced a partnership of philanthropy-serving organizations (PSOs) to further engage the philanthropic, nonprofit, and NGO communities globally on the work developed by FRC. Those PSOs are Ariadne, a European network of funders, and EDGE Funders Alliance, a global philanthropy network. To sign up for a mailing list to learn more about engagement efforts starting later this spring, click here.
 Funders for Real Cost, Real Change (FRC) was a collaborative of 40+ staff from 12 private philanthropic institutions that from 2019 – 2021 explored ways to improve indirect cost recovery in project grants. Members included Arnold Ventures, Conrad N. Hilton Foundation, David and Lucile Packard Foundation, Ford Foundation, James Irvine Foundation, John D. and Catherine T. MacArthur Foundation, Oak Foundation, Open Society Foundations, Robert Wood Johnson Foundation, Rockefeller Foundation, W.K. Kellogg Foundation, and William and Flora Hewlett Foundation. FRC was facilitated by BDO FMA.