Sharing Indirect Costs with Local Partners

When It Matters

Sharing indirect costs means an international NGO passes part of the indirect cost recovery it receives to a local partner. That is a different thing from a separate partner overhead line, where the budget itself carries a distinct amount for the partner. In sharing, the money comes out of the intermediary's own recovery.

Overheads are the spending an organization needs to deliver its mission that falls outside normal program implementation costs. Local and national NGOs need them for the same reasons international ones do: to pay for essential non-project costs and to invest in institutional capacity. Overheads do more than keep the lights on. They let an organization invest in people, leaders, processes and systems, which is where sustainability and crisis preparedness come from.

Without them, local organizations make hard trade-offs. They may divert funds from programs, skip staff salaries, under-manage security and operational risk, or run poor cash management. The problem is made worse because cost categories have no standard definitions. What one organization calls direct, another calls indirect, so the partner and the intermediary can talk past each other unless they write down what they mean.

How It Works

Getting from no policy to an agreed share takes internal work first and negotiation second.

Check your own policy and the funder's rules. Country offices often find their policies say nothing on sharing, so a change may have to go through headquarters and regional offices. Then read the funder's terms. Funders can make room for partner overheads by raising the fixed rate, adding a budget line for local partner indirect costs, or rethinking how the intermediary role is funded. Some funders also require a written explanation when the full allowable indirect cost percentage is not passed on to a sub-grantee. Talk with auditors and finance early about rules that limit how flexible the money can be.
Agree what counts as direct, shared direct and indirect. A shared understanding of these categories builds trust in any sharing policy, so settle it with the partner before you argue about percentages.
Choose a sharing model. Put the options in front of the partner, and be open about the rate the intermediary received and who the original funder is, since partners want to know both. The next section compares the models.
Set conditions with the partner. Sector guidance recommends clear, transparent overhead policies that give overheads as unrestricted funding, on top of the direct budget lines that cover administration and project support. You can agree with the partner how the money will be used, for example capacity building, internal control or organizational development, and do due diligence on that use.
Record it and report it. Put the rate, its basis, the split and the conditions in the partnership agreement, and keep a record of why the split is what it is, since a written explanation can be required when the full allowable percentage is not passed on.

Key Components

The models differ in where the money comes from and how much room the partner has.

Model	How it works	What to watch
Proportional split	Recovery is divided in proportion to each member's budget	Each member's share follows its budget
Fixed share	A set part of the recovery rate is passed on	The intermediary's own costs and liabilities do not shrink in proportion to what it shares
Separate budget line	A line for partner indirect costs, one way funders can make room for it	Many funders do not allow local partners' overheads in the overall budget
Direct reclassification	Administrative and project support costs are budgeted as direct	Leaves the overhead free to strengthen the institution

Good practice points to:

A stated basis and model. Say which of the above you are using and on what base.
Unrestricted use. Requiring itemized direct budget lines undermines the flexibility that makes overheads worth having.
No time limit and no project-level audit. Fixed spending windows and proof of expenditure reduce the value, especially on short projects.
Calculation on the total budget. If overheads are calculated on only a small part of it, as can happen with in-kind or cash programming, the partner gets a limited sum.
Transparency on the rate. Partners want the same rate as others under the same funder, on the same terms as international organizations, without extra scrutiny.

Best Practices

Talk to partners first, and honestly. Partners want to know who the original funder is and how much recovery the intermediary received.

Share in proportion to implementation. One consortium platform receives 8% recovery, and its fund manager shares half of it, 4%, with implementing members in proportion to each one's budget, as unrestricted, unaudited funding. In another consortium, each partner applied 10% to the share of the grant it implemented, so the overhead split itself proportionally.

Bring finance and auditors in early. Finance, contracts and grants teams may not share the program team's view of localization, so cross-department sensitization, especially of finance, helps win senior management support. If auditors cannot accept fully flexible overhead, one pilot passed 100% of recovery to country offices and partners in proportion to funding, as approved budget lines spent within the project period and subject to external audit. It is less flexible, but it is still a share.

Frame it as an investment. Funders can read higher overheads as inefficiency, so present partner overhead as what makes locally led work possible. One multilateral agency described an extra 4% for national partners as helping them give greater assurance on safeguarding and other issues, and met little pushback.

Know that it can spread. Once a local organization wins overhead from one intermediary, it can have more leverage when it asks others for the same, and some local organizations found this created a snowballing effect.

Common Mistakes

Capping or shrinking the base. A small base means a limited sum for the partner, so calculate the share on the total budget.

Tying the share to itemized lines or time limits. Do not add scrutiny or spending windows you do not face yourself. If auditors will not accept fully flexible money, one pilot fell back on approved budget lines as a less flexible but still real share.

Letting co-funding eat the share. Co-funding requirements can consume the whole overhead a partner receives. Keep the two separate in the agreement.

Ignoring the intermediary's own costs. Some international NGOs say their overhead only just covers their own indirect costs, so sharing would leave them unable to meet compliance and risk duties. Raise this internally and settle it before you promise a rate.

Not telling partners the rate you received. Some local organizations do not know they are entitled to claim overheads at all. Tell them.

Example

One country fund shows the effect of a sharing policy. The split of indirect cost recovery between international members and local partners reached 73%:27% in 2019 to 2020, with more than 21,000 pounds going to local partners as their recovery, up from 0% in 2018.

Sharing indirect costs with local partners