Paying what it takes report
This collaborative report from SVA, CSI and Philanthropy Australia explores the true cost of creating change in our society and the need to remedy Australia’s grantmaking approach.
- Case study
3 min read
For years, funders in Australia have been reluctant to fully fund overhead costs. Low overhead rates are paid when funding various not-for-profit organisations, regardless of their actual needs. This leaves a sector starved of basic infrastructure – the infrastructure needed to run programs, help beneficiaries and deliver meaningful outcomes.
This report was written in collaboration with the Centre for Social Impact and Philanthropy Australia
About the report
Most funders in Australia do not provide funds for not-for-profit indirect costs, leading to lower capability and effectiveness across the sector.
The Paying What It Takes report by Social Ventures Australia (SVA) and the Centre for Social Impact (CSI) has shown that not-for-profits are underinvesting in critical capabilities, due to a pervasive belief that funders are reluctant to provide the full financial support needed to create impact. Solving this issue requires substantial shifts across not-for-profits, philanthropy, government, the public and the media to ask the question – are we paying what it takes?
Indirect costs to Australia
Indirect costs, or overhead costs, are a fraught topic in the not-for-profit world. Many people across philanthropy, government, the public and the media all expect them to be minimised, or not to pay for them at all. Yet they are essential to running a functioning, effective organisation.
In the context of a struggling not-for-profit sector, this is a crucial issue to ensure the long-term effectiveness of Australia’s charities. US research has shown that one of the key drivers of not-for-profit vulnerability is insufficient funding of indirect costs. This is called the ‘non-profit starvation cycle’, which starts with funders’ inaccurate expectations of the true costs needed to run not-for-profits. These expectations lead not-for-profits to underreport their costs to funders. In the end, they lead to a sector starved of the necessary core funding required to create resilient charities delivering long-term impact on complex social issues.
Our research
Three organisations – the Centre for Social Impact (CSI), Social Ventures Australia (SVA) and Philanthropy Australia – worked together to understand the extent of this issue in Australia and start to unpack what can be done.
Our research uncovered four key points:
Indirect costs are not a good way to assess charities
Not-for-profits that spend less on indirect costs are not more effective than those who do not. Evidence shows that spending insufficient resources on indirect costs can potentially reduce overall not-for-profit effectiveness.
True indirect costs are not being covered by funders
On average, the true indirect costs of each organisation were 33% of their overall costs. Yet many organisations believe, potentially incorrectly, that funders are mostly unwilling to fund above 20% or – even lower.
Low indirect costs reduce capability and effectiveness
The not-for-profits that participated in the study universally underinvested into their core capability. This increases risk, forces organisations to search for untied funding and introduces inefficiencies.
The drivers of indirect cost underfunding are complex
The complexity of measuring not-for-profit effectiveness, the power dynamics in the funder–fundee relationship, and a lack of consistency of measurement all contribute to this issue.
