What does DFID’s new approach to cost transparency mean for the sector?

After three years of advocating for greater transparency from both DFID and CSOs about the true costs associated with development programming, last week marked a huge leap forward.

DFID has finally announced its new approach to cost transparency. The new guidance and templates went live for private sector suppliers on 1 September and we shared the documents for CSOs to view on the same day.

DFID’s emphasis on cost transparency – the true cost to deliver a development programme without supplementary funding either from foundations or from unrestricted – was signalled originally in the Civil Society Partnership Review (CSPR) and has now come to fruition as a policy, accompanied by templates and guidelines for the sector. This represents real progress and reflects years of collaborative work between DFID, Bond, Mango (now Humentum) and some of the larger INGOs.

Under the previous rules, CSOs were caught in what was known as a “non-profit starvation cycle”. They would eat into their own funds to cover the indirect costs of delivering donor-funded programmes aimed at reducing poverty and inequality. This situation became increasingly unsustainable for smaller CSOs. Those worst hit were forced to close down due to excessive reliance on institutional funding with insufficient cost recovery to pay for their organisation’s running costs. The lack of transparency contributed to the donors’ difficulty in understanding the true costs of delivering development programmes.

Previously, different practices applied to grants and contracts which suggested an unlevel playing field for CSOs and private sectors contractors. DFID has been clear that the new Cost Transparency Policy will ensure consistency between grants and contracts and align eligible costs. Aligning what counts as eligible costs across both grants and contracts will help reduce the disparity between CSOs and private sector contractors, with greater transparency about true costs required from all DFID’s suppliers and partners. DFID will be able to generate evidence on what approaches yield the best results for beneficiaries and achieve better value for money for the taxpayer.

By ensuring CSOs will no longer be trapped in a starvation cycle, DFID will be supporting the existence of a more diverse range and size of CSOs, each with their own areas of expertise and community reach. This will encourage the development programming process to be more innovative, accountable and transparent. It will be incumbent on CSOs to ensure they have the necessary financial systems and culture to understand the indirect costs of their programme work. This might be more complex for those organisations operating in consortia or with a wide range of partners.

It’s early days in terms of the policy and much will depend on how this change is implemented and communicated by DFID to their various stakeholders. DFID will need to adopt a clear and consistent approach when rolling out guidelines and templates and work hard with CSOs to road test the templates and be open to suggestions for change. This started last week at the Bond Funding Working Group meeting, where the DFID team came to discuss members’ feedback and views on the new guidance and budget template. Training for CSOs, DFID country offices and fund managers will be needed to ensure everyone understands and knows how to implement these changes. While, in the long term, the new system will lead to improvements, CSOs will need significant investment to set up and understand the new templates. Inevitably there will be teething issues. DFID is committed to testing the guidance and template thoroughly and is open to feedback and suggestions for improvements. Patience and support will be required from all sides.

There are also some areas that either need to be worked out or clarified. Details around whether an annual rate will be agreed for larger NGOs which take more than 5 contracts or £2m per year need to be clarified. The new approach is already underway for contract tenders since 1 September 2017. Following the testing with CSOs, which is currently taking place, DFID has indicated that the payment of true costs for new grants will be rolled out to all new Accountable Grants. This is expected to begin around January 2018.

DFID’s commitment to change in this area has been long awaited by the sector, and it is encouraging to see the CSPR commitments being enacted. If you want to know more about the emerging policy or to provide feedback (by end of October) on the templates go to Bond’s funding hub.