DFID grants: A new model for cost transparency

What is the true cost of delivering DFID grants? This is a question we have been working on closely with DFID for several years now.

A lack of transparency or inadequate cost recovery on these grants has not been in the interests of the donor, DFID, nor the NGOs delivering the work. Nor has it best served the people living in poverty, facing conflict or climate change for whom the grant was originally designed to help.

Last October, we discussed the need for a good solution to this problem to avoid the “non-profit” starvation cycle where NGOs would eat into their own funds to cover indirect costs of delivering donor-funded work. At this time, DFID developed and presented draft models and templates to help NGOs ensure transparency and fairness in the cost of delivery of grants.

Since then, a small group of UK-based CSOs has been working with DFID to co-create a model for cost transparency and cost recovery that would provide a more transparent and fair future in the delivery of grants.

A more transparent and fair model

We developed seven principles to test whether the new model would be fit for purpose and usable for even the smallest NGO. These principles include:

• Simplicity
• Transparency
• Fairness
• Scalable
• Predictable
• Value for money
• Substantive

Eight months later colleagues from across the sector, who have dedicated a huge amount of time to this, are finally in a place where we can pilot a new model which has been tested against the above principles and will hopefully mean good cost recovery and transparency.

The main features of the model are:

• The starting point for calculating Non-Project Attributable Costs (NPAC) will be each organisation’s historic cost structure. This will be derived from an average of the last three years’ audited accounts. This was the simplest, fairest, most transparent and easily scalable method identified.
• The organisation will exclude costs from the NPAC calculation, which are not applicable, or DFID would deem ineligible, e.g. fundraising. This ability to adjust the historic audited costs, enables value for money considerations to be addressed.
• The organisation can include adjustments to the historic cost structure to reflect known future planned changes, such as changes in staffing. This will be especially useful to smaller organisations making significant changes to their organisation support structure to deal with changes in programme activity. This allows a more holistic organisational-level approach to value for money and enables organisations to make a case for required investments in their support cost structure, like an additional new post in the finance team or investing in a monitoring and evaluation system.
• The default basis on which the NPAC is apportioned will be a fair share of project expenditure (not staffing levels as was at one point being considered). However, organisations can propose to use a different basis if that better reflects their cost drivers for the proposed project. This again appeared the simple and fairest option, which best reflected the most typical cost factors for NGOs.
• The application of the ratios determined in the NPAC calculation will lead to DFID agreeing a lump-sum of NPAC payable for each year of the grant. This provides much greater predictability for both DFID and NGO. It is not anticipated that the lump-sums of NPAC that are agreed for each year will be amended based on actual activity and project spend (unless there are exceptional circumstances).

Next steps

Overall DFID’s new approach to the NPAC calculation will lead to a substantive change in the level and transparency of indirect costs that DFID grants will cover.

There are still things to be worked out by the sector and DFID continuing to work together, especially in the way we apply equivalent rules to government contracts (and not just grants). There are also challenges in ensuring that those who are sub-grantees can make the case for their own NPAC costs and that the same method and principles are applied for them.

As for next steps, DFID is not planning to make these templates mandatory for all teams immediately. Instead, DFID’s initial intention is to make the new templates and guidance part of their guidelines with the instructions that the new model should be the default for all grants after October 2018. The aim will then be to capture learning and further develop the templates and guidance before they become mandatory for all teams, including country offices, from spring 2019.

This model will need to be tested over the next couple of months, and even years, and will be formally presented to finance directors and the Bond Funding Working Group on 25 September. The more organisations try this new model, the more we can continue to learn and improve it.