Time to set some minimum funding standards?

Posted on 04 Dec 2024

By David Crosbie

Insufficient funding

Charity can make a difference in people's lives, but it doesn’t come cheap, says Community Council for Australia CEO David Crosbie.

Today I had a long conversation with a handful of key sector leaders.

What dominated our discussion was the same theme that has been dominating our sector for more than 20 years: the way charities are funded and the expectations associated with government and philanthropic funding contracts.

I should note at the outset that philanthropic giving is slowly getting better.

Philanthropists and their foundations are, in general, becoming a little more realistic about how best to support charities. I don’t believe we can say the same about government departments, where ‘risk management’ is still sometimes mistakenly transformed into ill-informed micro-management.

There are still many people in government departments and some private funders who see charities as a "cheap" option, the do-good amateurs who provide a convenient way to capitalise on community goodwill while reducing their own costs and expenditures and boosting their credibility.

This mindset is part of what informs the first and most important issue in sector funding; many government departments and some philanthropists still don’t pay what it actually takes to provide the services they fund. As the Paying What It Takes report highlighted:

Paying What it Takes report

“For years, funders in Australia have been reluctant to fully fund overhead costs. Low overhead rates are paid when funding various not-for-profit organisations, regardless of their actual needs. This leaves a sector starved of basic infrastructure – the infrastructure needed to run programs, help beneficiaries and deliver meaningful outcomes.”

The Paying What It Takes report was produced by Social Ventures Australia (SVA) and the Centre for Social Impact (CSI) and Philanthropy Australia in March 2022. It was funded by the Paul Ramsay Foundation and the Origin Energy Foundation.

The Paying What It Takes report identified that the core issue is the underfunding of indirect costs associated with program and service delivery. While studies in Australia and around the world have identified that charities generally operate with indirect costs of about 30% of total expenditure, government contracts generally allow only 15% or less for indirect costs.

I doubt any charity or not-for-profit would put in a submission or tender for a government contract and present its indirect costs as 30% of the total it was requesting, even though that is the most realistic figure based on the evidence.

Of course, the issues aren’t just about funding. Many funders, especially government departments, rarely allow enough time for programs and services to be sustained and achieve real outcomes. There is a view in some funding agencies that programs can be turned on and off again instantly and at will.

In fact, the average length of contract among the leaders I spoke to was two years or less. How realistic is that? By the time you recruit and train staff, establish a program with all the required infrastructure, and build the required collaborations and connections, you are already well into your contract period and having to think about what to do if the funding is not extended.

"Based on my discussions with many charity leaders, I believe the compliance costs for charities is increasing rather than decreasing in Australia."

Even given the money and time, some funders, again especially some government departments, believe that because they provided the funding and signed a multipage contract, they now own the program. Owning the program apparently entitles them to impose any demanding reporting and accountability requirements they choose.

Part of these imposed compliance costs can include monthly or quarterly reports and the requirement for separate independent reports from auditors.

Community Council for Australia CEO David Crosbie.

Based on my discussions with many charity leaders, I believe the compliance costs for charities are increasing rather than decreasing in Australia.

What all this tells us is that the typical government funding program runs for a couple of years with future funding uncertain, is costed and funded at a level that barely meets required staffing costs, and allows less than 15% additional indirect costs for other necessary expenditures including staff training and development, capital and finance requirements (like provisions for staff entitlements), and support for necessary infrastructure including transport, energy, accommodation, administration, supervision, consultant accountants' and lawyers' fees, data security, privacy and evaluation costs.

At least two of the leaders I spoke with said they had now got to the point where they would not tender for contracts that didn’t meet minimum funding requirements. The minimum requirements were a contract length of two years or more with a budget that covered all operational costs including at least 15% for indirect costs.

This minimum requirement decision meant both charities had already said no to programs and services they were expert in providing and would like to provide, but they had prioritised organisational viability and quality of programs and services over trying to cut corners to meet unrealistic funding or timing expectations.

Not every charity can afford to say no to a funding contract, even if the funding is inadequate and the timelines are impractical.

The unfortunate reality is that because over many years charities have accepted inadequate funding, it is now almost expected.

If we want to change the way we are funded, we may have to change the way we deal with funders rather than waiting for them to change.

Maybe it’s time to set some minimum requirements:

1. No contracts for less than two years

2. Indirect costs at least 20% of the total budget

3. A maximum of one or two program or project reports required per annum (no obligatory quarterly or monthly reporting requirements).

Imagine if our sector could agree to minimum standards in funding contracts and boycott any non-compliant funding rounds. We could never get 100% of organisations on board, but maybe it’s worth exploring?

David Crosbie has been CEO of the Community Council for Australia for the past decade and has spent more than a quarter of a century leading significant not-for-profit organisations, including the Mental Health Council of Australia, the Alcohol and Other Drugs Council of Australia, and Odyssey House Victoria.

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