The term “margin” is most often used in relation to fee-based contracts and is effectively the difference between the actual costs of a deployment and the agreed rate.
For example, if the daily rate for an expert is €800 but the expert charges €500 per day, then the margin would be €300. Contractors use the margin or “profit” to cover their management and operating expenses.
In EU service contracts, there is no obligation to account for how the margin is spent.
Overheads
Overheads are generally management costs which include the fixed costs incurred by organisations at their base of operations as well as project-specific expenses related to personnel in management, logistical or administrative positions.
Covering overheads from project income remains a major challenge, particularly for organisations which do not have unrestricted core funding, endowments or institutional support.
For the most part, overheads are covered partly from indirect cost allowances (see “indirect costs”) and partly from contributions to salaries which are presented as direct costs incurred by an action.
Direct costs
All costs relating to project-specific human resources, travel and subsistence, equipment, office expenditure, events, research, financial services etc are considered to be “direct costs”.
In other words, they are directly incurred by project activities and implementation. In most budget templates, direct costs are grouped under generic headings (personnel, travel, equipment etc) and include sub-contracts, sub-grants and partner allocations.
Supporting documentation is required for all direct costs in the form of payroll slips, receipts, invoices, itemised bills and direct debit payments. Where the input of salaried personnel is concerned, donors may require timesheets detailing days worked on the project.
Indirect costs
In acknowledgement of the fact that it is not possible to itemise all costs incurred by an implementing organisation, most donors provide an allowance for “indirect costs”.
In general, “indirect costs” are fixed operating costs including contributions to rent, communications, legal services, senior management, IT support etc.
This allowance is usually calculated as a percentage of the direct costs (EU grant contracts, for example, offer up to 7% while US government contracts allow applicants to use a Negotiated Indirect Cost Rate Agreement - NICRA).
Note that this is directly linked to project expenditure so, in order to receive the full value of the indirect costs, an implementing agency will need to disburse the totality of the direct costs.
Eligible costs
Terms of Reference will often provide explicit information on the nature of costs which are eligible for project funding.
Generally, these are determined by the generic headings presented in budget templates but further guidance may be provided for the avoidance of doubt.
In most contracts, eligible costs will cover all deployments, production overheads, research costs etc but there is often a grey area around contributions to the salaries of full-time staff (see “Direct costs” and “Margin”).
These may be renegotiated during the contracting stage.
Common examples of ineligible costs include debt service charges, currency exchange losses, credit to third parties and the salary costs of public servants.
Core funding
This is essentially funding that covers fixed overheads, including full-time personnel and office costs and which is allocated to ensure the beneficiaries can continue to operate in the long term without reliance on a consistent level of project income.
Institutional or core funding is the Holy Grail for most development organisations, be they charities, NGOs or foundations.
Core funding gives organisations greater space to invest in business development, research, policy-making, communications and other areas which are challenging to include in project budgets.
It insulates them from the economic impact of sea changes in the donor landscape or from the peaks and troughs which are an inevitable feature of not-for-profit operations.
Very few donors offer core funding opportunities; more often this kind of financial support is provided by governments, endowments or affiliated organisations.
Programmatic funding
This term is used to describe funding which is not project-based.
“Programmes” are often thematic or geographic and are defined as a set of interlinked sub-projects, unified by an overarching vision, common objectives and contribution to strategic goals, which will deliver sustained results and impact within a donor’s priority areas.
Programmes are often developed and negotiated in close cooperation with national governments and other donors, thereby
strengthening local ownership
promoting the integration of programme outputs into local decision-making
The approach is based on the premise that project-based activities provide beneficiary countries with very little leverage to influence sector-wide transformation, while a programmatic approach is more likely to deliver synergies and results that benefit all stakeholders.
Level of effort
Level of effort is a term used to describe the proportion of time that an individual member of staff is likely to devote to a project.
For example, if it is envisaged that a manager is likely to spend one day a week supporting proposed activities, then the level of effort (LoE) will be presented as 20%. This is then used to calculate the proportion of a person’s salary which can reasonably be charged to the project budget.
Contributions in kind
Definitions of “contributions in kind” tend to be hazy.
The common wisdom is that these contributions relate to any services provided to a project which have indeterminable costs and which, therefore, cannot be supported by specific financial evidence.
These contributions are generally unquantifiable and, while they may bring added value to a project, in accountancy terms they cannot be considered to be an eligible cost.
Contributions in kind are particularly relevant in programmes which require a percentage of co-funding.
Contributions by third parties
Implementing agencies may be able to call on contributions from third parties which do not have a financial value attached but which, nevertheless, enhance the perceived benefits of the intervention.
Support to third parties
This kind of support usually relates to funds which contractors can pass on to local beneficiaries as part of a sub-granting programme.
The proportion of the overall project budget which can be channelled through sub-granting is usually stipulated in the Terms of Reference which also define funding ceilings and eligibility criteria for grantees.
The aim of sub-granting is to pass some of the administrative burden from the donor to an intermediary, thereby making it possible for multiple small grants to be awarded.
The rules for reporting on the expenditure of sub-grants are usually as stringent as those for direct grants.
Contingency budget
Some donors allow for a set amount of contingency funding to be included in a project budget.
EU budgets, for example, allow for up to 5%.
Where this option exists, applicants are usually not under any obligation to include a contingency budget which cannot, in any case, be used without the permission of the Contracting Authority.
Recent templates suggest that many EU programmes have phased out the contingency allowance.
Sub-contracting
The proportion of costed activities which can be sub-contracted usually has a limit that is stipulated in the Terms of Reference (5% to 10% is common).
The idea is to ensure that the bulk of activities are delivered by implementing agencies drawing on their own trusted resources and networks.
In cases where contractors wish to involve third-party suppliers, the provision is usually presented in the project proposal and budget.
Nevertheless, in EU-funded programmes, sub-contracts are governed by procurement rules and contracts above a specified value need to be put out to tender.
Typical examples of activities which are sub-contracted include quantitative research, post-production and technical development.
Co-funding/co-financing
Some programmes – particularly EU grant contracts – include a requirement for a certain percentage of the budget to be contributed from another source.
The rules for what this source can be are defined in the Terms of Reference but, in general terms, co-funding is derived from other donors and/or from the implementing organisation’s own financial resources.
Contributions in kind are usually not acceptable forms of co-funding since all expenditure (whether it is covered by the grant or not) needs to conform to the accountancy standards set by the main donor.
In other words, if a donor is providing 80% of the funding, then the implementing organisation will need to demonstrate that it has spent 100% of the direct costs in order to receive the full amount of the 80% contribution.
Co-funding is a divisive issue since it presents a major challenge for those organisations which do not have their own financial resources or an institutional sponsor that it is willing to cover the shortfall.
Donors argue that co-funding reflects faith in a project and a commitment to shared responsibility.
Cost-share
Cost-share is a principle favoured by US donors and has similarities with the EU concept of co-funding. However, cost-share is more aspirational than co-funding.
At the proposal stage, applicants are asked to demonstrate a commitment to covering a percentage of the project’s costs from other sources.
In the case of US funding, these must be sources outside the Federal Government. The principles set out by the US Office of Management and Budget can be found here.
Such commitments are usually the subject of a cost-share plan which forms part of the application. The plan should provide “realistic, manageable, and allowable” estimates of direct contributions from participating organisations or leveraged funding from other donor sources.
The definition of allowed costs is much broader for US funding than for it is for, say, EU programmes. Cost-share might include volunteered time and facilities, donations of air-time or advertising space, or donations of commercial products and services.
A cost-share element is often included in sub-granting programmes, thereby passing on some of this responsibility to grantees.
Unit cost
Most budgets are based on unit costs whereby the applicant determines the relevant unit for each cost line (i.e. day, month, item) as well as the value of that unit and then calculates the number of units which will be required. Financial reports are expected to be linked to the same unit costs.
Lump sum
Where is it not possible to calculate the unit costs, some donors (particularly the EU) may allow for a lump sum, flat rate or apportionment to be presented in the budget.
These so-called “simplified” costs are reviewed on a case-by-case basis and often form the subject of negotiations after a contract has been awarded.
In general, the EU will not accept lump sums when an alternative is possible and may ask for lump sums to be broken down into unit costs during project implementation.
Fees-based budget
A fees-based budget presents a simplified approach to both budget design and financial reporting. The costs of a project are structured according to an agreed number of working days and each working day is given an agreed value.
The value (or rate) is usually determined by the bidder and varies according to categories of expert (e.g. Key, Senior, Junior etc).
The rate is “loaded” which means that it should cover the actual cost of the expert (i.e. the consultancy fee) and the management overhead.
During the implementation phase, contractors report against the delivery of these days by providing signed timesheets detailing the number of days worked by each expert over the course of a month.
Additional documentation such as evidence of travel and payments may also be required.
Incidental expenditure
EU service contracts also include a set allowance for incidental expenditure which relates to all costs outside the fees-based part of the budget.
The rules for incidental expenditure are usually detailed in the Terms of Reference and include areas such as travel, the cost of holding events, research studies, graphic design, technical development, translation and visibility materials.
It is not possible for contractors to charge a management fee against incidental expenditure and financial reports need to include detailed documentary evidence of the actual costs incurred.
A contract amendment is required to transfer funds from the incidental expenditure budget to the fees-based budget. It is not possible to transfer funds in the opposite direction.
Expenditure verification
In addition to the incidental expenditure budget, service contracts include an allowance for expenditure verification.
This is effectively the cost of the audit(s) which the implementing consortium is contractually obliged to conduct according to a specified schedule.
The release of further funds is often contingent on the results of the audit.
The amount allocated for expenditure verification is quoted in the Terms of Reference and may not be modified.