October 31, 2017

Opinion

Donors’ best financial practice in granting to think tanks

Simply put, the full cost of a research project rightfully includes a share of the overall non–project specific costs needed to operate the organization as a sustainable going concern. Knowing the full cost of a research project sets a baseline for financial analysis of the project (within the organization) and provides a basis for requesting reimbursement from sponsors.+

Think tanks incur costs that either are not attributable to specific research projects or can only be attributed to specific projects with great administrative difficulty. Such costs are typically referred to as fringe benefits when they relate to certain costs associated with support staff, e.g., health insurance,+ and as overhead for the cost of facilities, administration, business development and fund-raising. All these costs taken together, typically referred to as indirect costs, are vital inputs to an organization’s long-term sustainability. Without proper accounting for and payment of such costs, the following difficulties can be expected:

  • If the organization cannot offer a competitive package of compensation and benefits, it will be difficult to retain and motivate staff.
  • Without adequate facilities and equipment, staff will not be able to conduct their research efficiently and effectively.
  • Without training and opportunities for professional development, staff will not maintain a level of technical knowledge necessary to remain competitive.
  • Without funds to support business development and fund-raising, the organization will be unable to continue obtaining new project work necessary to provide continuing support to the organization and its researchers.

Despite the importance of indirect costs to think tanks’ vitality and sustainability, sponsors are often reluctant to pay for them as part of their grant funding.

From the narrower perspective of the supporter of a particular project with limited funds, the sponsor naturally wishes to limit its support only to costs that can be most directly related to the research project.   

Given limited funds, the sponsor desires the greatest result for a given investment and, therefore, wishes to be assured that indirect costs are being limited to those reasonably necessary for the think tank to continue to survive and develop.

Sponsors, being the ones with the funding, obviously have the upper hand here. One response on their part is imposition of limitations on the amounts of indirect cost they will pay. +

 However, as is more fully discussed below, the definition of what constitutes an indirect cost is subject to interpretation—depending on the nature of the organization, the activities it carries out, and the administrative ease or difficulty of allocating costs to individual projects. The issue is further complicated by the methods available for charging indirect costs to projects, which can validly use different bases of direct project costs over which indirect costs can be fairly allocated (usually expressed as a percentage of the base direct project costs). Thus, any limitation on indirect cost that seeks to describe an overhead rate of 30 percent as “too high” runs the danger of inadvertently penalizing organizations whose cost structures do not match those implied by the rate limitation.

Many funders want to both avoid spending time assessing the reasonableness of a grantee’s indirect costs and focus their spending on the topic in which they are interested.  Their solution is to set an arbitrary and often low indirect rate they will pay.  As this practice has become common, many think tanks increasingly find themselves with no funding for vital administrative tasks and institutional development.  There is no alternative funder, however beneficent, who will pay unallowed overhead costs.

This problem is often compounded by strict rules against the think tank transferring expenses between budget lines during the project’s life (e.g., less research staff time vs. more on a planned event).  Frequently, shifts among hours allocated to staff are prohibited without explicit permission from the financial officer at the donor institution.  These officers are said on occasion to make it clear that they do not want to entertain such requests.  The result is that approved budgets are cast in concrete, and all parties pretend they are meaningful when they are not.

Donors who provide core support (unrestricted funds that can be used for institutional development and research projects) are aware that their funds are being diverted in part to cover overhead expenses associated with communications, computers, and other needs for which think tanks have no other funding.   Goran Buldioski, director of the Open Society Foundation’s Think Tank Fund, which provides core funding, says it plainly: “…fellow donors who award project funding have been ‘free riding’ on our support.”+

The balance of this post first explores indirect cost rates, how donors limit them, and the highly questionable practices the limitations induce think tanks to adopt in response.  It then argues for donors to work together in an “association” and with think tanks to approve technically valid indirect rates for think tanks with whom they work when it is the first participating think tank to make a grant to a given think tank.  Other donors in the association, and perhaps others, would then use this “approved rate” in making their grants. Of course, donors could still reject a proposal as being too costly.  A think tank could then decide if could cut a project’s resource requirements sufficiently to satisfy the donor.  The gain is that the games of financial dishonesty now engaged in by both parties would be ended, and think tanks would be able to track their actual expenditures with reasonable effort.

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This document is a part of the new OTT Best Practices Series. If you would like to submit a piece on best practices for research and policy institutes, please get in touch.

About the author:

Raymond Struyk:  Senior manager and policy analyst in the fields of social assistance, housing policy and mortgage finance and has extensive policy formulation and program evaluation experience.

Read more from: Raymond Struyk

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