Core costs – also referred to as overheads, indirect, central or support costs – are a fraught topic in the not-for-profit world. Research from the UK Civil Society Almanac 2022 shows it is a myth that most charitable donations go on administration costs – with 86% of the sector’s expenditure related to activities directly linked to a charity’s purpose. Still, many people across philanthropy, government, the public and the media all expect them to be minimised.

Contrarily to popular belief, organisations that spend less on indirect costs are not necessarily more effective than those who do not, and underfunding core costs can in fact reduce an organisation’s impact.

In this context, and with too many funders still preferring to give to specific projects, it’s therefore essential organisations know how to communicate the true cost of their work and build relevant overhead costs into their project/program costs. This is particularly important for smaller non profits, who typically have little access to unrestricted funding.

Definitions

Overheads are the costs which are necessary for the organisation to operate, but do not relate specifically to one project. They typically include administration and management staff costs, premises, IT, governance costs

In order to run projects and programs (both of which grantmakers are generally more happy to fund), community groups need to cover their core costs. The term ‘full cost recovery’ means securing funding for all your organisation’s costs, including the direct project costs and a proportionate share of your organisation’s overheads.

The full costs of your project are all the costs directly relating to the project plus the project’s share of the overheads.

How to calculate your project’s share of overheads

You need to find a method which effectively reflects your organisation’s situation

• Based on the number of direct project staff

When? f the number of direct project staff fairly reflects the relative sizes of your projects. If there are many volunteers working on projects it may be appropriate to include volunteer time in the calculations.

How? Identify the staff working on all your projects / programmes (excluding non-project staff). Add together all project staff hours. Divide each projects staff hours by the total number of staff hours for all your projects to come up with a percentage.

For example:
Your organisation runs 2 projects

Project 1: 4 staff, each work 30 hrs per week = 120
Project 2: 2 staff, each work 15 hrs per week = 30

Project 1 share of overheads: 120 / 150 = 80%

• Based on the number of beneficiaries

When? if beneficiaries across all your projects incur a similar level of costs. This method won’t work if you run a mixture of resource intensive projects (for example a mentoring programme) and much less costly projects (an open access youth club)

How? Add the number of beneficiaries across all your projects / programmes. Divide each projects beneficiaries by the total number of beneficiaries for all your projects to come up with a percentage.

For example:
Your organisation runs 2 projects

Project 1: 60 beneficiaries
Project 2: 30 beneficiaries

Project 1 share of overheads: 60 / 90 = 67%

• Based on premises usage

When? for venue-based organisations, where premises costs represent a substantial part of your overheads

How? Identify all the projects that use your space. Work out each project’s level of usage by multiplying the number of hours they use your space by the square meterage of the space. Divide it by the level of usage of all your projects.

If the projects used the rooms for different numbers of weeks in the year the percentages would be based on: floor area x hours occupied per week x weeks occupied per year.

For example:
Your organisation runs 2 projects

Project 1: uses your main hall (50 m2) for 2 hrs/week = 50 x 2 = 100
Project 2: uses your small hall (25 m2) for 5 hrs/week = 25 x 5 = 125

Project 1 share of overheads: 100 / 225 = 44%

Resources

The National Lottery has produced a spreadsheet to help you calculate the direct and overhead costs for your project and estimate your projects’ share of overheads

The Centre for Social Value, Philanthropy Australia and SVA conducted research on the impact of insufficient funding of charities indirect costs here

This article on the Stanford Social Innovation Review highlights “the nonprofit starvation cycle”