7/27/2019 Financial Management - Sharing Costs Across Projects vs. Shared or Indirect

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Definitions

Direct Project Expenses -Goods andservices specifically purchased for theexclusive benefit of one project that arecharged to that project.

Shared Project Costs- Goods andservices used by multiple projects and forwhich a vendor cannot invoice each projectseparately that are charged to eachbenefiting project based on a pre-approvedformula.

Topic: Financial Management

Sharing Costs Across Projects vs.Shared or Indirect Project Costs

Q. We have multiple projects with different funders. How dowe account for shared office expenses?

A. An organization with more than one project incurs three categories ofexpenses:

Direct project costs Costs that can be clearly attributed to a specific

project, such as a dedicated staff person, office space used by projectstaff, or specific equipment and supplies used only by a single project.

Shared project costs Costs that are required to carry out a project,but are difficult to attribute to a specific project, such as electricity oradministrative support staff.

Non-project costs Legitimate organizational expenses, but costs notrelated to any specific project or costs that are not allowable.

Most of your expenses will easily fall into the direct cost category, while non-project costs are usually self-evident. Costs that may be shared, however,may be the biggest challenge.

Shared Resources vs. Shared CostsThere is an important difference between a resource that maybe shared bymore than one project and something that is a shared or indirect cost.

A resource that may be shared by more than one project typically falls into thedirect cost category. For example, lets think of a professional staff member asa resource that may devote time to more than one project. Since theindividuals time is tracked on a timesheet, you will know exactly how manyhours were spent working on Project A versus Project B. Therefore, you canallocate the exact number of hours and salary to each project as direct costs.

Another example: If your organization has a vehicle, it may be used for trips bymore than one project. However, every trip taken should be noted in thevehicle usage log book. Therefore, the expenses for each trip can be allocated

as direct costs to each project.

A shared or indirect cost, on the other hand, is one that is has been incurredfor common or joint project need. Examples of common shared office costsare utilities, Internet service charges, and expendable office supplies likepaper and paper clips. Unlike the examples above, it is not obvious howmuch should be charged directly to any one project.

-more

Issue No. 26 / August 2

References

NGOConnect Issue #16 - Procurement:Restricted & Prohibited Itemshttp://tinyurl.com/kk74nx

7/27/2019 Financial Management - Sharing Costs Across Projects vs. Shared or Indirect

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Issue No. 26 / August

For More information

For this or other issues of thiseNewsletter, please visitwww.NGOConnect.NET. The Website is a dynamic and interactiveportal dedicated to connecting andstrengthening NGOs, networks andNGO support organizations worldwide.

Funding for this publication wasprovided by the U.S. Agency forInternational Development, under theCapable Partners Program (CAP). Itscontents, managed by CAP, and donot necessarily reflect the views ofUSAID or the U.S. Government.

August 2009, FHI 360. Thispublication may be photocopied oradapted for noncommercial use onlywithout prior permission, providedcredit is given to FHI 360, CAP andUSAID.

Some organizations have gone through a process with USAID to establish aNegotiated Indirect Cost Rate Agreement (NICRA) and use that to addressthese kinds of costs. But most organization do not have a NICRA (or onlyhave a NICRA for headquarter expenses) and, therefore, need a method forfiguring out how to allocate these kinds of costs.

Sample Formula for Calculating Shared ExpensesCosts that cannot be attributed to one project or another as a direct cost will

need to be addressed by establishing a formula. One approach is to use apercentage based on the number of employees on one project vs. the totalnumber of employees or the allocation of dedicated office space.

To do this, first figure out what parts of your office are dedicated to a specificproject, such as space for dedicated project staff, and what parts are shared,such as meeting rooms or the reception area. Of the areas that are dedicatedto specific projects, calculate the square meters allocated to each project.You can even divide the office space of an individual who splits time basedon the percentage she or he allocates to each project. Add up the areadedicated to each project and calculate the percentage dedicated to eachproject.

For example, lets say a 1,000 square meter office houses two projects; eighthundred sq. meters of office space is dedicated to the projects, while the restis shared. Of the dedicated space, 600 sq. meters is for one project, while200 is for the other project. This means 75 percent of the overall space ischarged to the first project (750 square meters), and 25 percent for thesecond (250 square meters). These percentages may also be used as thebasis for allocating costs for other shared expenses.

There is no single correct method for allocating shared costs, but it should beclear how your organization handles these costs. This helps to ensure thatyour project funds are used wisely and that you are distributing costs fairly.And do not forget, as projects and funding streams change, you shouldadjust your policy accordingly.

Setand Keep Up to Datea Shared or Indirect Cost PolicyWith these guidelines in mind, set a policy that defines the following:

What specific costs and resources are considered shared;

How your organization will divide shared costs among differentprojects; and

When the policy will be revised.

Multiple OfficesIf your organization has offices in several different locations, you may want toset some general guidelines and have each office set its own specific policybased on the projects and expenses at that location. The policies should bein writing because during your annual audit, the auditors will review and

compare your policy with your practice. Some projects that share offices seta formal Memorandum of Understanding that includes detailed agreementson additional topics, such as shared assets, payroll and human resourcesissues. This is especially common when the separate project teams comefrom different operational units or are from completely different organizations

Items to Consider

Q: If we have a NICRA, do we stillneed to allocate shared costs?

It is tempting to think that having anestablished Negotiated Indirect CostRate Agreement (NICRA) will solve the

challenge of allocating shared projectcosts. A NICRA can simplify how youare reimbursed for your overhead costsin certain USG-funded projects.However, if you have projects fundedby other donors, if your NICRA onlycovers headquarters expenses or ifyou want to verify that your NICRAis accurately covering your sharedexpenses, you will still need to allocateyour shared costs. Thus, regardless ofwhether or not you have a NICRA, it isa good management practice toestablish a policy for allocatingshared project expenses.