In our last article, we explained the term overhead cost and how you can include it in a proposal. Today we want to talk a little bit more about the overhead ratio because it has become somehow controversial in the last few years. The overhead ratio is the overhead cost divided by the total cost of the organization.
With many scandals in the non-profit world about money waste and too high overhead costs, for a while, it seemed like every NGO should aim for the lowest overhead ratio possible. In annual reports and articles, many organizations boasted about very low overhead ratios. This is changing again though because organizations and donors realized that overhead is necessary to run a professional organization. If the overhead ratio drops too low, mistakes start happening.
In most cases, a very low overhead ratio means that many tasks that benefit the organization as a whole are distributed to the project staff as a way to disguise this cost. A project officer is not an accountant, and if project staff needs to fulfill more administrative tasks than project-related tasks, their quality of work will suffer. Normally, the time a project officer works for the organization functioning should count towards the overhead cost, but some organizations have started hiding their cost this way.
There is no easy answer to this question. First of all, if the donor does not require you to reveal financial information about your organization as a whole, don’t do it. Not because you want to hide something, but because the donor does not seem to be interested in this information if it is not requested. You will want to use the space you have wisely.
If a donor asks for your overhead ratio, be honest. Calculate how much time project staff designates to tasks that are not only project-related and display the ratio as it is.
You can also research the donor before you start writing and see if you can find more information about their stance on the overhead ratio. Maybe they are looking for a specific percentage of their grantees, maybe they are not a fan – many donors have a position on this issue. Make sure that you are transparent and share all the information – this way you can make sure that everything is in the open and the donor can understand how your overhead ratio was calculated and what it consists of.
Eva is based in Germany and has worked for nearly a decade with NGOs on the grassroots level in Nepal in the field of capacity development and promotion of sustainable agricultural practices. Before that, she worked in South America and Europe with different organizations. She holds a Ph.D. in geography and her field of research was sustainability and inclusion in development projects.
You just writing abstract words not given concrete formats
Hello Ram,
this article is just meant to explain the overhead ratio. Maybe we will have more concrete templates in the future, so stay tuned.