Indirect Cost Recovery: A powerful tool for grantmakers to enable greater localization and equitable partnerships

Many donors want to fund organizations as close to the communities they are trying to help as possible. Locally-led humanitarian response is widely regarded as more effective, more efficient and more likely to improve accountability to, and the participation of, those most affected by crisis. For a variety of reasons, there may be instances when directly supporting local organizations isn’t feasible, practical or convenient, and providing grants through international intermediary organizations becomes a necessity. This is especially true when responding to international disasters and humanitarian crises.

There is broad consensus that local and national actors should be provided with overhead funding. The complexity is in how this should happen, and whether the onus for change is more on the intermediary organization or the donor.

How can donors ensure that overhead* costs, which directly affect institutional capacity, sustainability and effectiveness of intermediaries and local sub-grantee partners, are adequately covered? What role can indirect cost recovery rates (ICR) and guidelines play in helping to distribute power in a way that facilitates equitable partnership between an intermediary, which is often a large international organization, and its smaller, local partners?

ICR’s role in the decolonization and localization of aid

Despite commitments by donors and aid agencies as part of the World Humanitarian Summit’s Grand Bargain in 2016, direct funding to local actors as a share of international humanitarian assistance has decreased from a high of 3.3% in 2018 to a low of 1.2% in 2021. Funders looking to support the decolonization and localization of international aid in the global system, need to recognize the privilege and power we have to create an enabling environment for others to do the same. Many articles and reports document how local and national actors struggle to cover their overheads adequately and call on international donors and intermediaries to cover the full costs of delivering humanitarian programming. But how international actors share overheads with their local partners is ambiguous, contentious, often unfair and has not been prioritized, as recent research by Development Initiatives, Oxfam and UNICEF found.

I have been involved in many consortia throughout my career, both as the primary grant recipient and as a sub-grantee. In every instance, the thorniest issue is usually agreeing on how the limited and often insufficient ICR would be split between partners. In today’s humanitarian architecture, international nongovernmental organizations (INGOs) are almost always in the privileged, default position of being the primary grant recipients, automatically granting them power and the final say on how the grant’s ICR will be shared. As subgrantees, local implementing actors feel they have less or no agency in the discussions. These feelings are valid, as the Interagency Standing Committee (IASC)’s recent research discovered. An inherent power imbalance will always exist without policy or guidance specifying how to share ICR fairly. Donor funding policies provide litte incentive to ensure fairer funding practices and often disincentivize their international partners from partnering or sharing costs with their local partners on the ground.

Recent research and IASC guidance on the issue

The IASC recently commissioned research and produced Guidance on the Provision of Overheads to Local and National Partners, which outlines some of the current obstacles, the impacts on local actors, and practical solutions to address these issues to ensure that ICR doesn’t remain a barrier to localization and fair and equitable partnerships. I’ve highlighted the following key messages, which stood out as most relevant for funders:

• Not all UN agencies, and very few INGOs, have policies in place regarding their local and national partners’ overheads.
• Most ICR sharing is provided on a case-by-case basis and is not systematized.
• Organizations provide direct project support costs, sometimes in lieu of overheads.
• Donors do not generally grant sub-contracted partners additional ICR; INGOs must manage the loss of income involved in ICR sharing internally, if they decide to share at all.

How CDP’s ICR guidelines address some of the IASC’s findings and recommendations

These key takeaways from the IASC report inspired me to reflect on CDP’s ICR practices and how we may be helping or harming the localization agenda to which we are committed. We have documented ICR guidelines for all grantee partners, which we recently published on our website, to increase transparency and accountability.

Here is a brief summary of our guidelines and how we apply them:

• Our grantee partners can claim up to 15% ICR on direct project costs, higher than the average rate offered by many donors
• Our sub-grantee partners are encouraged to claim full ICR in addition to the primary recipient.
• We adopt a tiered approach to ICR:
  • Implementing partners can claim up to 15% on their directly implemented activities.
  • INGO/intermediaries can claim 10% on amounts subgranted to local partners, assuming they are working closely and the local partner is receiving technical support.
  • INGOs/intermediaries that primarily function as pass-through for a local partner can claim up to 5% on this sub-granted amount.

By providing funding for both the intermediary and the implementing partner and clearly outlining what each party is entitled to upfront, we aim to remove the inherent power imbalance in negotiations over splitting the ICR, thus creating a more enabling environment for equitable partnerships and equal agency in ICR discussions between international and local partners.

In addition, while not formally part of our ICR guidelines, we work with our local grantees and finance colleagues to find additional creative ways to ensure that local organizations are fully funded for their programs and the costs required to run their organization effectively and sustainably.

CDP’s commitment and call to other funders

CDP will review and potentially revise its ICR policy guidelines in the coming months, so IASC’s research and guidance are timely. We welcome reflections, feedback, thoughts and suggestions from our partners and peers on the same journey. Challenge us, and hold us to account.

In the meantime, CDP welcomes the IASC call to action with open arms and commits to the following actions. We invite our fellow funders to join us on this journey and:

1. Read the “Five key messages for humanitarian leaders” in the IASC Guidance on the Provision of Overheads to Local and National Partners. Review and act on the key advocacy messages to donors, recognizing the role funders play in actively incentivizing change.
2. Communicate directly with local actors to better understand the real-life challenges they face as a result of poor indirect cost coverage.
3. Have honest conversations with grantee partners that are intermediaries and do not have ICR policies for local partners about the barriers they face in covering these indirect costs.
4. Share whether and how you are using your inherent power and privilege as a funder to create an environment that supports both INGOs and local partners in their change journey.
5. Consider changing your ICR funding policies to influence and push your partners to establish and roll our fairer funding practices.
6. Publicize new or existing policies and learning around ICR to promote further change within the sector.

*Overheads, or indirect costs, refer to costs that are not related directly to a specific project, but that support the efficient, effective and safe running of an organization.