When it comes to funding the work of not for profits, there's a critical yet often overlooked aspect: indirect costs. These ‘invisible’ expenses—ranging from IT and marketing to staff training—are essential for delivering impactful programs and enduring outcomes. And yet, they often go underfunded, leaving NFPs struggling to effectively achieve their purpose.
2022 research by Social Ventures Australia and Centre for Social Impact, ‘Paying what it takes: funding indirect costs to create long-term impact’ (PWIT Research), revealed that NFPs in Australia experience chronic underfunding of indirect costs, perpetually receiving less funding than what is required to deliver programs. There has also been a perception from funders, donors, and charities themselves, that lower overheads are markers of an efficient and effective organisation. All of this leads to lower capability and effectiveness across the sector, and a ‘starvation cycle’ where NFPs underinvest in their core operational and infrastructure needs to keep overheads low.
The Pay What It Takes (PWIT) initiative in Australia is a growing response to this research and comprises individuals, philanthropic funders and for-purpose organisations committed to understanding what it actually takes to create impact and paying for it. It aims to ensure that for-purpose partners have access to the resources, connections and support required to create impact now, and over the long term.
Inspired by the PWIT Research, in addition to implementing its own PWIT policy, PRF has been supporting a diverse team of experts to co-design PWIT principles and guidelines to translate the research into action. The team of experts soft-launched the suite of tools, which reflect the knowledge, experience and perspectives of diverse actors across the for-purpose sector, at the 2024 Philanthropy Australia Conference. Complementing this work, PRF also supported the ‘Reframe Overheads’ campaign, led by a committed group of NFP fundraisers who are supporting NFPs to apply PWIT insights with practical guides on reframing the narrative about indirect costs to communicate better about overheads with boards and funders.
Collaboration between these two groups, stewarded by PRF, has strengthened the work, enabling stronger sector alignment. The full set of tools, principles and guidelines will be launched early in 2025.
“Studies have shown no correlation between overhead ratio and cost-effectiveness,” says Jo Taylor, previous Chair of the PWIT Steering Committee.
“Indeed, there is clear evidence that insufficient spending on indirect costs can potentially reduce overall effectiveness.
“Our goal is to encourage a shift in mindset - to ignite conversations about how to ensure that the organisations we fund really do have a solid base from which they can contribute to change, and how we can plug some of those gaps that exist because of the way that funding is distributed, and the way organisations are viewed and judged.”
PRF’s Chief Alliances Officer Liz Yeo has firsthand experience managing a charitable organisation and understands the pressure from funders to underestimate indirect costs and continually do more with less.
“We need to stop praising charities for their ability to deliver impact on the smell of an oily rag,” says Liz, “and instead properly fund them to do the complex and innovative work required to create long-term social change.”
This story was originally published as a case study in PRF's 2024 Annual Review.
