Surely you have heard of the term overhead cost in the field of non-profits. But what does overhead cost actually mean and how should you treat it in a proposal? In this article we will take a detailed look at it.
The overhead cost refers to all costs in the organizational budget of an NGO that are not directly related to a project. This includes administrative costs and cost related to fundraising. Normally costs like rent, insurances and salaries of people concerned with the running of the organization (i.e. secretary, accountant etc.) would be considered overhead cost.
For many donors – institutional or private – the overhead ratio is an important indicator for the efficiency of an NGO. It Is calculated by dividing the overhead cost by the total expenses. If it is very high, it means that a lot of money is not spent in projects but rather in the administration or fundraising efforts.
While the overhead ratio can be an indicator, some say it is overrated and one should take other factors into consideration to judge the effectiveness of an NGO. Nevertheless, it is important to know the overhead cost and ratio to get a better idea of where money is spent within the organization. Sometimes it is really eye opening.
It is very difficult to recommend a specific overhead ratio. In the past, an overhead ratio of 15% has been quoted as desirable many times, but this is subject of a lot of criticism.
Generally speaking, overhead cost includes everything that is not directly related to fulfilling your project goals or activities. In some cases, this is very straight forward, in some cases more difficult. I.e. some staff might work for the project as well as for the functioning of the organization in general. In these cases, you need to estimate how much of the work is done for the project and calculate the percentage. The same applies for technology, goods and rent.
Not all donors accept overhead cost in a project proposal. Specifically, in the case of small grant applications, it is common that the donor does not want to include overhead. Make sure that you find out the donors’ specifications before writing your budget. Sometimes you are only allowed to include a specific percentage of the total as overhead cost. Your numbers need to be accurate and precise to make sure you meet the donor’s requirements.
If you want to learn more about budgets, also check out this article: All you need to know about budgets
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.
can I put overhead cost in my proposal? How?
Hello Ramesh,
it depends if the donor you want to apply to accepts overhead cost in the budget or not. If it is possible to include overhead, you can just include a specific percentage in your budget. If the guidelines do not specify, ask the donor before you include overhead cost in your proposal.
what % of total budget can be kept for over head budget?
Hello Ram,
it depends a lot on the organization you are writing a budget for. There is no one right number and if you are not clear, you should try to check back with your donor beforehand to be on the safe side.