Full cost: knowing and recovering the true cost of each project

1Direct, shared and indirect costs

Every organisation classifies its costs into three groups:

• Direct costs: clearly attributable to a project (project staff, inputs, distributions, dedicated vehicles).
• Shared costs (or common field costs): country office, security, shared logistics, finance, human resources, country IT. They serve several projects and can be allocated using a measurable key.
• Indirect costs (or headquarters costs): executive management, audit, compliance, global systems, fundraising. They are recovered through a percentage.

The principle of full cost: a project must bear its fair share of all the costs necessary to deliver it. If projects recover only their direct costs, someone else pays the rest: unrestricted funds, reserves or, worse, other donors (which is prohibited).

2Allocating shared costs: the keys

An allocation key must be measurable, reasonable, documented and consistently applied. The most commonly used keys:

• The project's direct costs (or direct costs excluding large inputs): simple, but penalises projects with high purchase volumes.
• Headcount or full-time equivalents: suited to rent, IT, HR.
• Floor space occupied: offices and warehouses.
• Number of transactions or purchases: finance and logistics.
• Kilometres or vehicle days: shared fleet.

Example. Country office, annual shared costs 600,000 USD, three projects:

Project B, of which 1,600,000 USD are cash transfers requiring little management, receives the largest share. With a "direct costs excluding transfers" key (A 1,500,000, B 400,000, C 500,000, total 2,400,000), the allocation becomes A 375,000, B 100,000, C 125,000. The choice of key strongly changes each project's full cost: it must be justified and accepted by donors.

3Indirect cost rates

Indirect costs are recovered through a rate applied to a base. The base matters as much as the rate:

• A rate of 7% on direct costs: most European humanitarian donors and United Nations agencies for their partners.
• A negotiated rate (NICRA in the United States) applied to a base of "modified total direct costs" excluding major equipment, sub-awards above a threshold, and rent.
• A "de minimis" rate of 15% on modified total direct costs for organisations without a negotiated rate (US rules since 2024).

Calculation. Direct costs 1,000,000 USD, of which 200,000 USD in equipment and 150,000 USD in sub-awards above the threshold. Modified base = 1,000,000 − 200,000 − 150,000 = 650,000 USD. At 15%: 97,500 USD. At 7% on total direct costs: 70,000 USD.

Rate "included" or "on top". If the total budget is capped at 1,070,000 USD with 7% indirect costs on top, direct costs are 1,070,000 / 1.07 = 1,000,000 USD and indirect costs 70,000. If, on the other hand, the rate is expressed on the total (7% of the total), indirect costs = 74,900 and direct costs = 995,100 USD.

4Calculating your true rate

Before negotiating, an organisation must know its true rate: actual indirect costs for the year / the base used for the same year.

Example. Headquarters: 1,800,000 USD of costs. An analysis shows that 300,000 USD are in fact direct project costs (billable technical advisers) and 150,000 USD are ineligible costs (public fundraising, entertainment expenses). Eligible indirect costs = 1,350,000 USD. Base (modified total direct costs of all projects) = 13,500,000 USD. True rate = 10%.

If donors pay only 7%, the shortfall is 3 points, or 405,000 USD a year. Three options: reclassify as direct costs whatever can justifiably be reclassified (technical advisers charged on time spent, shared field costs budgeted as direct lines), negotiate a higher rate where possible, and fund the rest with unrestricted funds decided in advance.

Never twice: the same cost cannot be both charged directly and included in the indirect cost pool. It is the first thing an auditor checks.

5Negotiating with a donor

A successful negotiation rests on figures, not principles:

• Show the method: allocation keys, calculation of the true rate, audited financial statements.
• Link costs to results: without a security manager, no access; without a beneficiary tracking system, no accountability; without internal audit, a higher risk of fraud on the donor's funds.
• Use what the donor allows: many accept shared field costs as direct lines, pro rata, while capping indirect costs.
• Anticipate the negotiation from the concept note stage, not at signature.

Donors are increasingly attentive to full cost and to the sustainability of organisations, particularly for national partners: several Grand Bargain commitments concern the fair sharing of indirect costs with them.

6National partners and indirect costs

National and local NGOs often receive their funds through an international NGO or an agency. Historically, the intermediary kept all of the indirect costs, and the national partner recovered only its direct costs, which prevented it from building reserves and strengthening its systems.

Current good practice (policies of several United Nations agencies and major donors) provides for sharing indirect costs: for example, out of 7% received, the intermediary passes half, i.e. 3.5 points, on to the partner, or applies a partner-specific rate on top of its own.

Example. A grant of 2,140,000 USD including 140,000 USD of indirect costs at 7% on 2,000,000 of direct costs. 1,200,000 USD of direct costs are implemented by a national partner. Sharing at 50% on the share implemented: 7% × 1,200,000 × 50% = 42,000 USD passed on to the partner. The intermediary keeps 140,000 − 42,000 = 98,000 USD.