Building budgets: project, shared costs and organisational budget

1The project budget: from activity to amount

A project budget translates the workplan into money. Each line follows the formula quantity × unit cost × duration or frequency × share charged, with a justification note (quotation, salary scale, history, market price). A budget without a basis of calculation is the first reason for rejecting a proposal and the first source of overspending.

The usual headings: staff (salaries, employer contributions, insurance, allowances, with the percentage of time on the project); activities (transfers, inputs, training, works); equipment (vehicles, IT, often subject to rules on ownership and disposal); travel; office and running costs (rent, communications, supplies); monitoring and evaluation; audit; indirect costs.

Example of a staff line. A project manager paid 2,400 USD a month, with 22% employer contributions, at 60% on the project for 12 months: 2,400 × 1.22 × 0.6 × 12 = 21,082 USD. You also need to plan for scheduled annual increases, end-of-contract indemnities due by law and the cost of recruitment.

The most expensive mistakes: forgetting social charges, inflation on a project lasting more than a year, the exchange rate, bank charges, the final audit and closure costs (indemnities, asset transfer).

2Direct costs, shared costs, indirect costs

Three categories, whose definitions vary slightly from donor to donor:

• Direct costs: clearly linked to a single project (the project's transfers, staff working 100% on it).
• Shared costs (or direct support costs): country office costs that serve several projects (rent, guarding, logistician, accountant, shared vehicles). They can be charged directly to projects, provided they are allocated using a fair and documented method.
• Indirect costs: costs of headquarters and central functions that cannot be attributed to a project (executive management, central finance, IT systems, audit of the organisation's accounts). They are covered by a flat percentage or a negotiated rate.

Common flat rates: often 7% with several European institutional donors, up to 15% as the minimum (de minimis) rate in the US federal rules since their 2024 revision (10% previously), higher negotiated rates for some organisations, and very low rates, sometimes zero, with some funds or foundations. The difference between these rates and the real cost of headquarters is a gap the organisation must fill with unrestricted funds.

The cardinal rule: no double charging. A cost covered by the indirect cost rate cannot also be charged as a direct cost to the same project.

3Allocating shared costs

The allocation key must reflect actual use of resources, be applied consistently to all projects and all donors, and be verifiable. The usual keys:

Example. Office shared costs: 30,000 USD a month. Direct expenditure for the month: project A 120,000 USD, project B 60,000 USD, project C 20,000 USD (total 200,000). With the direct expenditure key: A 18,000, B 9,000, C 3,000 USD. If project A includes 90,000 USD of cash transfers that hardly use the office, a key excluding transfers is fairer: base A 30,000, B 60,000, C 20,000 (total 110,000), giving A 8,182, B 16,364, C 5,455 USD.

The common problem is not the method, it is the gap: if a donor caps its share of shared costs or refuses a line, the uncovered share must be funded by another project (if its contract allows it and the key justifies it) or by unrestricted funds. It is never charged to another donor beyond that donor's actual share.

4The organisational budget

The organisation's annual budget brings together three layers:

• Secured funding: signed contracts, with their share of expenditure planned for the year (a 24-month project started in July only brings part of its budget to the current year).
• Probable funding: proposals in advanced negotiation, weighted by their probability.
• The organisation's fixed costs: headquarters, country offices, core staff, systems, governance.

The key question is fixed cost coverage: do the shared and indirect costs recovered from projects, plus unrestricted funds, cover the fixed costs? Example. Headquarters fixed costs: 1,200,000 USD. Direct costs of secured projects: 9,000,000 USD, with an average indirect cost rate of 7.5%: 675,000 USD recovered. Expected unrestricted donations: 300,000 USD. Gap: 1,200,000 − 675,000 − 300,000 = 225,000 USD. The budget must show how to fill it (new contracts, cost reductions, fundraising) or decide to draw on reserves, and say so to the board.

The organisational budget is built in scenarios: base (secured contracts only), probable, and downside (loss of a major donor). For each scenario, the decisions to be taken and their deadline are identified: a cost reduction plan is decided months before the money runs out.

5The budget in the donor proposal

The proposal budget is both a management tool and an argument. Donor reviewers look at:

• Consistency with the logical framework: each activity has its cost, each significant line serves an activity.
• Realism of unit costs (compared with market prices and other proposals).
• Proportion of staff and running costs relative to activity costs, which should be explained rather than hidden (a protection project has a lot of staff; a cash project a lot of transfers).
• Compliance with the rules (headings, ineligible costs excluded, indirect rate respected, co-financing if required).
• Value for money: cost per person and per result, economy measures.

The budget narrative explains the significant lines, the assumptions (exchange rate, inflation), the method for allocating shared costs and the co-financing. A good narrative avoids weeks of questions and later serves as a reference in the event of an audit.

Never "inflate" a budget in anticipation of a cut by the donor: if the cut does not happen, you end up with overestimated lines that will be underspent, which damages credibility and can be interpreted as a lack of honesty.

6Exchange rates and inflation in the budget

Most projects are funded in one currency (euro, dollar) and spent in another (local currency). The exchange rate risk is twofold: a depreciation of the local currency creates exchange gains (more local currency per dollar); an appreciation, or a rise in the contract currency against the accounting currency, creates losses.

Example. Budget of 500,000 EUR, accounts kept in USD. At the proposal rate (1 EUR = 1.10 USD): 550,000 USD. If the euro falls to 1.02 USD when the instalments are paid, the organisation receives 510,000 USD: 40,000 USD is missing to deliver the same programme. Many donors do not accept exchange losses as an eligible expense; you need to build in a prudent margin, monitor the rate and, if the gap becomes significant, renegotiate activities.

Inflation must be built in for any project lasting more than 12 months and in high-inflation contexts: year 2 prices are budgeted with a realistic rate (data from the central bank, the IMF or the cash working group). In countries with very high inflation, you can budget in a hard currency and plan a mid-term revision of unit costs.

The conversion rules (rate to be used for reporting: rate of the transfer received, weighted average rate, the donor's official monthly rate) are set by the contract. Ignoring them creates differences that become ineligible costs.