A few weeks ago, an article published by a coalition of private foundations was discussing their responsibility in what is referred as the “starvation cycle” where non profit organisations (NPOs) are trapped. It refers to the inability for NPOs to get paid for their overheads/ indirect/ management costs as most of the funding they receive are project based and allow only for a very limited percentage of indirect costs.

The article describes a research that has been implemented among US grantees where “the funders learned that the verified indirect costs exceeded what the foundations actually paid by an average of 17 percentage points” while a research lead by Bridgespan in 2016 examined the financial records of 20 well-known nonprofits and NGOs and “found the group’s median indirect-cost rate was 40 percent, nearly three times the 15 percent rate that many foundations provide”.

While this discussion took place among US private foundations, there is no such debate at the EU level on the appropriateness of the percentage of indirect costs allowed in different European Funds.

In the frame of External Cooperation funding, indirect costs are capped at 7% of the direct costs by the Common Implementation Rules (CIR – REGULATION (EU) No 236/2014) which is way below the reality of the needs of non-profits operating on the ground. In many cases nowadays, in EU External Aid budgets, office renting costs for example are allowed to be integrated as part of the direct costs only if the offices are created specifically for the project purpose, restricting even more the ability of NPOs to cover some of their permanent running costs.

While the External Cooperation Funds requests grantees to work on the financial sustainability of their organisations, they – at the same time – force them into this starvation cycle which disables them to invest in long-term processes, staff training and well-being, or management and quality processes among others.

This 7% indirect cost rate is not a final frontier. Other EU funds allow much higher percentages such as Horizon 2020 funds where up to 20% of the direct project costs can be allocated as indirect costs, thus, it could certainly be increased also for External Cooperation funds if the European Commission wanted to enter the reflexion.
With the next Multi Annual Financial Framework terms and conditions still being discussed, now is a good time for opening that discussion. A minimum of a 20% rate for indirect costs, for all EU funds, could be a good starting point. What would you estimate to be a fair rate?