11. Budgeting
Module 11 of the GFMD MediaDev Fundraising Guide.
Introduction
This module is aimed at providing insight into common budget models used by donors as well as the challenges of ensuring that projects are both financially viable and offer good value for money. Budgeting is an inexact science.
The long lead-times for approving grant applications mean that the operating conditions which exist when a project is launched can be very different from those which existed when it was designed.
Shifts in exchange rates, inflation and other economic stresses also mean that the fiscal situation can change dramatically over a project’s lifecycle. And yet donor funding mechanisms rarely offer the flexibility for projects to adapt to changing circumstances.
Therefore, robust and future-proof budgets should try to accommodate these factors and err on the side of caution, even if this means reducing the range of activities or the project's overall ambition.
Under budgeting
Too often applicants make the assumption that their proposals will be more appealing to donors if they offer low prices or cram projects full of underfunded activities.
Some are nervous about including management costs even when they are essential to ensuring proper oversight and quality control.
To make matters worse, some donors enter into protracted budget negotiations after an application has been approved in principle, challenging multiple budget lines and requesting that significant economies are made, based on their perception of what represents cost-effectiveness in the given country or region.
Eager to please, would be grantees often submit to their demands.
The consequence of unworkable budgets
However, unworkable budgets undermine a project’s chances of success and increase the margin for risk.
They are also highly demotivating to implementing organisations who find themselves managing projects at a loss.
It is worth remembering that value for money (VfM) does not necessarily mean cheap.
The key pillars of VfM are economy, efficiency, effectiveness and equity. A project will be neither efficient nor effective if it lacks the financial means to deliver its outputs and achieve its desired outcomes. It cannot be equitable if financial constraints make it impossible to reach those communities that are most in need of support.
Flag financial challenges
There is no shame in flagging up financial challenges at any time during a project’s lifecycle.
It is highly unlikely that donors will increase the amount of the grant in order to absorb a perceived financial shortfall but it is usually possible to move funding from one part of a budget to another in order to compensate for underfunded budget lines. Make sure that any agreed changes are confirmed in writing or through a contract amendment (where necessary).
There may also be room for downgrading activities that have not met expectations in order to provide additional funding for workstreams that have over-performed.
Getting the price right
That said, it is, of course, possible to price yourself out of the market and applications for funding are often rejected because they are not seen to be economically advantageous.
This can be down to high unit rates or a perceived imbalance between expenditure in-country and expenditure on HQ staff. In competitive tenders, strong technical offers are beaten by weaker lower-priced offers.
Knowing how to pitch your bid at the right level takes experience. It can be a question of trial and error.
But there are certainly occasions when the budget being offered by the donor is simply too low to make a project financially viable. In these cases, the correct decision is not bid at all.
Types of budget
Most budgets follow the traditional model of combining direct costs (an itemised breakdown of actual expenditure) with indirect costs (a fixed allocation, usually in the form of a percentage of direct costs, which is aimed at covering institutional overheads).
This approach has the advantage of being straightforward and intuitive, however, organisations that derive their income exclusively from project funding will argue that it offers little room for covering their running costs and, in particular, for investing in institutional development.
Direct costs
Direct costs are usually presented under separate subject headings (personnel, travel, office, equipment etc) and each budget line is calculated by multiplying the number of units by the unit cost.
The type of unit will vary according to the item in question (e.g. months, days, flights etc).
Ratio of direct costs and indirect costs
It is worth noting that, when considering a budget, donors will look closely at the correlation between the different subject headings – for example, the proportion of costs which are allocated to staff, to equipment or to office overheads.
Budgets that appear to be very heavily weighted in favour of technical upgrades, for example, may not be perceived to offer good value for money as donors share a view that infrastructural support is unsustainable.
Ceilings and floors
In some cases, there may be ceilings for the percentage of costs that can be allocated to certain budget items (e.g. sub-contracted costs).
There may also be floors (e.g. a minimum of 5% of the direct costs must be allocated to M&E or 50% to sub-granting).
It is worth scouring the Terms of Reference to make sure that you pick up any constraints of this kind.
Justifying disproportionately high costs
For other budget lines, you will need to make a value judgement on whether disproportionately high costs in one or more areas can be adequately justified (e.g. high transport and security overheads to ensure that the project can reach remote communities in a conflict-affected area).
Activity-based budgets
Some donor templates link costs to activity strands rather than to chapter headings.
The so-called activity-based budget is a convenient way of budgeting since it gives a clear insight into the relative costs of a project’s various outputs.
Some budget authors will use this as a preliminary approach, even if the final presentation of the costs is very different.
Simplified Cost Options
Simplified Cost Options (SCOs) allow EU institutions to reimburse expenditure according to outputs or results rather than actual costs. SCOs can take the form of flat rate financing, standard scales of unit costs, and lump sums.
SCOs are a highly attractive option since they significantly reduce the administrative burden for both the donor and the grantee. According to EU guidance, they "allow administrations to shift the focus from collecting and verifying financial documents to achieving policy objectives, i.e. concentrating on achieving concrete outputs and results instead of verification and control of actually-incurred costs".
Indirect costs
In the case of indirect costs, the percentage is usually fixed by the donor (EC grant budgets, for example, offer a maximum of 7%).
For US grants, applicants may have a NICRA, an agreed percentage that they are permitted to charge to all projects (this can be well over 20%).
Indirect costs are highly prized since grantees are not required to account for how they are spent.
This means they can be used to cover costs that are difficult to justify on a project-by-project basis such as senior management salaries, office rental, IT support or legal services.
Note that some donors have rules on what can be considered an indirect cost, so it is worth checking their guidelines on this issue.
Fees-based budgets
Fees-based budgets offer far greater latitude for charging institutional costs to a project.
Effectively, the loaded rate for each working day comprises the actual costs of the activity and the management overheads associated with delivering the project.
Furthermore, the contractor is not asked to provide supporting documentation to demonstrate how the profit margin is spent.
This means that very significant contributions can be made to a contractor’s operating costs, particularly for those organisations which are able to keep actual costs low by deploying salaried staff for missions or negotiating advantageous rates with suppliers.
Global price contracts
One form of a fees-based budget is a global price contract, used predominantly by the European Commission.
Here the budget consists of a single figure and no financial reporting is required during the contract lifecycle.
These contracts can, of course, be audited, which means that records need to be kept according to the donor’s regulations but the overall administrative burden is usually very light since missions or incidental expenditure do not need to be approved prior to deployment.
Service contracts
Traditionally, large EU service contracts have been managed by international organisations working with a consortium of international and local partners.
The eligibility requirements for competitive tenders (particularly the value and scale of previous projects required to show an applicant’s technical capacity) put them out of the reach of smaller players, particularly those based in beneficiary countries.
However, this situation may change as local organisations build their portfolio and demonstrate that they have the systems and processes in place to disburse large amounts of funding in strict accordance with donor requirements.
Preparing a budget
Module 6 - The application process - offers a set of guidelines for developing and agreeing on a budget, both internally and with external partners.
How this is done in practice will depend to a large extent on the systems that implementing organisations have in place and the status of the project.
For projects which are continuations of previous programmes, much of the work may already have been done.
For new partnerships and new initiatives, the workload may be considerable.
As noted in Module 6, the best time to start drafting a budget is when the activities have been agreed in principle and the logframe has been created.
This allows the project design team to stress test the work plan and establish whether or not planned activities are financially viable. It is at this stage that the project’s ambition may need to be pared down in order to bring the budget under the funding ceiling.
Once the activities have been allocated to partners, these organisations should be asked to provide unit values or estimates for all cost lines. These will be the main building blocks of the budget and should be as accurate and as justifiable as possible.
You should agree on what is reasonable – and defensible – in terms of backstopping roles and, in particular, determine whether or not you or any of your partners will need to hire additional staff in order to shoulder the extra workload. Clearly, hiring new staff has additional costs and risks attached which should be factored into project planning.
The preparation stage is when the thorny question of indirect costs should be addressed. If working with partners, you will need to decide on a fair division of the available overhead. The simplest way to do this is to calculate the overall percentage of the budget allocated to each partner and divide the overhead according to these percentages.
Budget preparation should be a collaborative effort with all key personnel and partners inputting into the process. However, it is a process that needs to be led by the lead partner and/or by a financial manager.
Typical costs for media development budgets
The type of costs presented in budgets will depend largely on the project design and the operating environment.
Budgets with a high proportion of training and consultancy will look very different to budgets that focus predominantly on production and broadcasting. However, there are many common cost areas that are examined in the paragraphs below:
Make sure that you read all of the footnotes and instructions before completing a budget template. While they may look standard, templates may include modifications made for specific programmes or funding instruments.
Project management
These may be a combination of full-time staff and project-specific hires. Note that some donors (particularly the European Commission) make a distinction between local and international staff and will pay close attention to the rates being allocated to each.
Contributions to the salaries of staff can be included in the direct costs if it can be clearly demonstrated that a certain proportion of their time will be spent working on the project.
There are, of course, limits to the number of individuals who can be presented here but there is usually room for including at least one senior manager (director level) in the project management team.
Smaller organisations may be obliged to hire part-time managers to deal with specific elements of the programme (e.g. a training coordinator or production manager), although this has the disadvantage of losing institutional income.
Note that the European Commission has specific rules around including external contractors under Personnel Costs. In order for the costs of these contractors to be eligible, the individuals concerned must be working under conditions similar to those of an employee “in particular regarding the way the work is organised, the tasks that are performed and the premises where they are performed”.
For example, if your employees are contractually obliged to work in your office five days a week, then the same rule must apply to full-time contractors. If the externally hired staff cannot meet these requirements, then they will be considered sub-contractors which means that the procedure for hiring these individuals and reimbursing them will be very different.
Communications
The role of a communications officer is often omitted from budgets although most donors require projects to include a 'communications and visibility plan' which may entail a significant volume of regular activity (e.g. producing press releases, updating a website and social media).
It rarely makes much sense to hire a communications officer from outside the organisation since he/she should have an in-depth understanding of the way you work. Often, this role is included among the responsibilities of the project manager or project assistant but, in this case, efforts should be made to ensure that it is not eclipsed by other perceived priorities.
Consultant/trainer costs
These are usually calculated according to a day rate and the overall allocation of working days should include preparation time as well as any time required for writing or contributing to activity reports.
The issue of travel days for trainers and consultants is a contentious one.
Some donors are strict about offering a full day rate to experts who take short-haul flights while others do not allow experts to claim for travel days at all.
There may also be restrictions around paying consultants to work on weekends or public holidays, so it is worth checking with the donor before organising any such deployments.
M&E expert
It is good practice to include a dedicated monitoring and evaluation role in medium- to large-sized projects. This can be an individual hired for the specific purpose of implementing M&E activities or it can be an external company sub-contracted to deliver this component of the project.
This is rarely a full-time job but some donors may expect to see up to 10% of a budget dedicated to monitoring and evaluation activities.
The role is likely to include organising all research, collating results, contributing to reports and driving knowledge management processes.
Travel
This section usually relates to both international and local deployments.
Most donors have guidelines around acceptable travel costs and will want to see that measures are in place for keeping deployments – particularly international deployments – to a minimum (e.g. conference calls, use of local trainers wherever possible).
Per diems
Several donors have fixed per diem rates for different countries which cover the costs of accommodation, meals, local transport and airport transfers.
In the case of the European Commission, the range is very broad, from €87 per day in the Tokelau Islands to €425 in the Virgin Islands (2017 figures).
Per diems do not usually cover the cost of visas, so you should include this as a separate budget line.
When consulting the list of per diem rates for the donor concerned, check that you have the latest version. They are often updated.
Costs of events, including training workshops:
These will generally span a number of budget lines including venue hire, video recording, equipment rental, catering, materials and interpretation.
When calculating catering costs, don’t forget to include trainers, speakers, interpreters and administrative staff as well as participants.
There is a general expectation that all-day events will include two coffee breaks and a midday meal.
Translation and interpretation
These funds are often related to the cost of events but may also be needed to translate learning materials, subtitle media content or support management staff.
It is important to recognise the difference between simultaneous and consecutive interpretation and, indeed, what constitutes a reasonable workload for these services.
Provision for simultaneous translation at large events must include at least two interpreters per language working in 20-minute shifts. It is unreasonable to expect one consecutive interpreter to support a foreign-language trainer single-handedly over a sustained period of time, so a back-up is usually required.
Office costs
There is likely to be some crossover between eligible office costs and the overheads that donors will expect to be covered by the indirect costs (or management fee).
Contributions to utility bills, communications and office supplies are generally accepted since it is recognised that project activity is likely to ramp up these overheads.
However, some donors such as the EC will only cover the costs of office rent if you can demonstrate that you have rented additional premises during the project lifecycle. Others may accept a percentage contribution to office rental to reflect usage by project-dedicated staff.
Equipment
This is a highly contentious issue for media development projects since most local media outlets are desperate for equipment upgrades and some production activities may be unviable if producers are entirely reliant on the locally available kit.
However, donors are traditionally reluctant to allow a significant portion of costs to be spent on equipment.
Worse still, European donors may insist on rules of origin – i.e. that implementing agencies may only purchase equipment which is made in EU member states, thereby limiting the range of eligible brands and, in some cases, significantly increasing the costs.
Production costs
Donors are not media professionals and, therefore, they are rarely familiar with the detail of production budgets.
They may also be tempted to believe widely held myths that professional TV equipment has been supplanted by mobile phones and open source editing software.
Production budgets should be broken down into their component parts and fully explained.
Issues of quality and professional standards should also be discussed in budget narratives and expectations properly managed.
That said, production costs should also be tailored to the target medium – there is little justification for investing in Hollywood-quality videos which will only ever be published on YouTube.
IT costs
The costs of designing, setting up, administering and hosting websites are all eligible, although some donors may object to buying advertising – particularly on social media – to promote web platforms.
Air-time
Buying airtime at commercial rates can constitute a major chunk of any budget. Furthermore, such costs are hard to estimate during the project design phase since they are often the result of lengthy negotiations with strategic partners.
Don’t be too ready to pay for airtime, however. If your project is producing great content that can attract significant audiences, broadcasters should be motivated to air it free of charge.
Research studies
Most donors are more than willing to cover the full costs of research as well as broad dissemination of the findings.
Research that informs and shapes a project’s core activities is considered to be an essential expenditure and demonstrates your commitment to ensuring that activities properly reflect perceived needs and priorities.
If you need to sub-contract quantitative research (e.g. nationwide surveys and opinion polls), make sure that you have a good idea of market rates before compiling your budget, since prices can be very high. Conversely, there is little to be gained by buying cheap research that is based on a small and unrepresentative sample.
Sub-contracting
These are activities or services which your organisation or your partners do not have the resources, expertise or profile to deliver.
Examples include research, post-production, software development and external evaluation.
Donors often put a cap on the proportion of a budget that can be sub-contracted since they operate on the premise that implementing agencies should be able to deliver the lion’s share of activities using their own resources.
Sub-contracts over a certain amount (in the case of the EU, the threshold is €20,000) will need to go through a tendering process.
Other costs
This catch-all section is a feature of several budget templates and is widely open to interpretation, including by the donors themselves.
Some EC institutions, for example, will insist that all freelance consultants or production staff should be presented under “Other costs”; other EC stakeholders will ask them to be featured under “Personnel”.
Other costs may also include sub-granting programmes, airtime and production services that do not easily fit into other sections.
Aide memoire
Have you remembered to include the following items in your budget?
This is a selection of potential costs which are often forgotten when compiling budgets.
Margin for inflation, annual pay rises
Employment costs (including pension contributions)
Insurance, including insurance of equipment and assets
Advertising costs for recruitment
Software for office computers
Costs for stationery (for training as well as the project office)
Communications (landline and mobile)
Petrol (car and generator)
M&E activities including the cost of focus groups, key informant interviews and external evaluations
Visas
Translation and interpretation
Visibility materials (e.g. banners, branded stationery etc)
Cost of filming permits
Local transport for getting participants to venues
Audit – check whether or not (and how often) an audit is required during the project lifecycle
Marketing and promotion of content
Website hosting costs and other technical upgrades
Offering value for money
When considering bids for funding, donors are making a value judgment on whether the expected development results justify the proposed costs.
It is, therefore, incumbent on implementing organisations to demonstrate that they have the right systems and behaviours in place to achieve VfM across a project lifecycle.
The paragraphs below present some of the issues that you might consider under the four key VfM markers (economy, efficiency, effectiveness and equity).
Economy
Are you buying inputs of the appropriate quality at the right price?
Outline the measures that you have taken to minimise personnel costs, including benchmarking salaries with industry standards or avoiding using international staff when local staff can do the same job
Show that you are exploring synergies with other programmes and, therefore, identifying areas in which economies can be made by pooling resources or organising joint actions
Highlight procurement processes aimed at getting the right service at the right price. Note that prompt payment is a good way of negotiating better deals with suppliers
Cite any measures aimed at reducing the costs of travel and accommodation including holding remote meetings and eliminating the costs associated with unnecessary deployments
Efficiency
How well are you converting inputs into outputs? (Known as ‘spending well’)
Describe the management and financial controls that you have in place to reduce the margin for error and limit variances between budget lines
Explain how careful budgeting with detailed workplans and activity-based milestones promotes efficiencies during the implementation period
Highlight how costs per output/beneficiary are captured with a view to ensuring efficient resource allocation over the project lifecycle
Describe any internal training courses or technical enhancements that are aimed at improving efficiencies and introducing more streamlined approaches
Effectiveness
How well are the outputs delivered by an intervention having the intended effect? (Known as ‘spending wisely’)
Explain how a robust theory of change or logframe allows you to accurately measure the outcomes and impact of your work
Explain how sustained engagement with all stakeholders (including the donor) ensures that projects can swiftly respond to changing circumstances and mitigate risk, thereby ensuring that funding is effectively disbursed
Describe how indicators and targets are used to track progress; outline the systems that are in place to ensure timely data collection
Highlight ways in which data is proactively shared with relevant stakeholders; articulate how lessons learned are used to improve internal processes
Equity
How fairly are the benefits distributed?
To what extent will you reach marginalised groups? (Known as ‘spending fairly’)
Describe how your project will overcome any perceived cultural, social or physical barriers that might prevent beneficiaries from accessing key services
Explain how services are adapted to reflect specific needs, including language requirements and disability
Outline ways in which data is disaggregated to ensure that projects are fully reaching different identity groups
Co-funding
Some donors, particularly EU institutions, require that a certain proportion of any budget is derived from other sources.
In the case of the EU, this can range from 5% to as much as 30%.
Other funders, such as USAID, may not insist on a specific percentage of co-funding but may encourage applicants to present a cost-share plan that demonstrates other sources of financing.
Applications with a strong cost-share element will have a competitive advantage.
Rationale for a co-funding
The rationale for a co-funding requirement is rarely articulated.
The common wisdom is that donors want to see that applicants have sufficient belief in their projects to either cover a portion of the project costs themselves or to seek additional funding from other sources.
Co-funding may also provide a reassurance that applicants have diverse funding streams and are not, therefore, reliant on a single donor.
Whether the reason is explicit or implicit, co-funding is a headache for all implementing organisations, large or small, and often discourages applicants from applying at all.
Financial risks
With rare exceptions, the requirement presents a very serious financial risk.
The EC, for example, does not ask applicants to demonstrate that co-funding is in place before a project starts.
This means that grantees may be obliged to expend considerable efforts during the project’s start-up phase to secure the necessary co-funding.
If they are unable to cover the shortfall, they may end up delivering the project at a loss which will ultimately force them to compromise on the quality of delivery.
Common strategies to cover co-funding
There are three common strategies used to cover co-funding:
There are many grey areas around what actually constitutes co-funding.
The EC insists that “contributions in kind” are not eligible since they cannot be quantified or supported by proof of payment.
For EU-funded projects, the rule of thumb is as follows:
The downsides for implementing agencies
From the perspective of implementing agencies, there is nothing good about co-funding.
The task of seeking additional financial resources draws down personnel whose time would be better spent managing the project and ensuring the best possible results.
It leads to uncertainties and delays as well as putting greater pressure on finance teams who may find themselves reporting to multiple donors.
Co-funding also creates branding problems for projects which need to acknowledge the contribution of different funders and satisfy various visibility requirements.
Budget narratives
Both European Commission and DRL funding applications require organisations to present a budget narrative which is effectively a detailed justification of the direct costs.
The explanation of each budget line should go beyond explaining how the amount was calculated – this is implicit in the budget itself.
Costs for full-time staff should include the estimated level of effort (e.g. how much time will be spent on the project per month as a percentage of the overall number of days in the month) as well as a brief description of the tasks.
Costs for part-time or freelance staff should reference existing rate cards and explain if/where taxes or other contributions will be paid. US grants often make an allowance for inflation and pay rises over the project lifecycle.
Justifying management staff
Given the wariness shared by most donors around contributing to internal staffing costs, it is important to provide a robust argument explaining why key personnel are included in the direct costs rather than the indirect costs (where many donors expect them to sit). The key is to highlight their role and responsibilities, emphasising the essential nature of ensuring oversight, support and compliance. You need to stress that the estimated level of effort is project-specific (i.e. that it represents the time they will spend on this project alone and that this will be reflected by timesheets or other forms of internal record-keeping).
Justifications for travel, subsistence and accommodation costs are generally straightforward, since they are often directly linked to the donor’s own rules and regulations (e.g. economy flights only, standard comfort hotels, country-specific per diem rates). You will need to justify travel for management staff, explaining why trips are necessary and how they will improve project oversight.
Justifying office costs can be more problematic since, as noted above, donors are reluctant to make significant contributions to fixed institutional overheads which, in their view, should be covered through the indirect costs. However, they also recognise that managing a complex project can draw down a large proportion of an organisation’s resources as well as increasing costs such as communications and office supplies. Contributions to rent are harder to justify, except in cases where the hiring of project-specific staff entails a physical expansion of the grantee’s operating base.
The purchase of equipment, as noted above, is a divisive issue. The donor’s argument is that equipment quickly becomes obsolete, so any infrastructural investment is unsustainable. They are also concerned about legacy issues and perceptions of the image of donor funding in general. Equipment purchases can be justified when it is clear that, without equipping beneficiaries with the necessary tools to do their job, efforts to build capacity may be wasted. As highlighted by one experienced consultant, “training people to use new equipment without investing in that equipment is like teaching them to run, then tying their legs together.” Justifications should also explain how the equipment will be procured and maintained during the project lifecycle.
The need for sub-granting is generally implicit in a programme’s Terms of Reference and, therefore, applicants can simply reference the project rationale. It is also worth mentioning the systems that you will put in place to ensure that grants are properly allocated and monitored, thereby providing reassurances that you will be able to offer full accountability and oversight.
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