The conversation around adequate funding models for NFPs and Charities, not only in Australia but globally, has been under the spotlight recently. A report tabled by Social Ventures Australia (SVA) and the Centre for Social Impact (CSI) Paying What It Takes outlines the sector’s financial concerns, particularly the funding of indirect costs. The report highlights barriers that create underinvestment in essential capabilities.
“Indirect costs aren’t overhead waste — they’re the foundation that allows every program to succeed.”
Indirect costs are invisible costs that are difficult to reconcile against a particular project. For example, a charity may host an event to raise awareness or funds. The costs of hosting the event are visible, such as venue hire, catering, etc., and they are easy to see and tangible. However, this is a one-off, and the charity must still operate in its mission. Indirect costs are financial commitments the organisation is required to meet on an ongoing basis, regardless of the number of projects and activities it is funded for, such as:
Administration costs
Facilities and utilities
IT and Communications
Insurances
Training and professional development
Shared services and finance fees
These costs can be a substantial outlay for the organisation. The average indirect cost (overhead) to an NFP or Charity is reported to be 33% of its total expenses.
Too many NFPs and charities underestimate or underreport the indirect or overhead costs incurred. There is a psychological barrier between funders and the organisations themselves that overhead costs are either too high or are seen as wasteful. There are examples, as highlighted in the Paying What It Takes report, that “Indirect costs have an image problem, to put it lightly. Funders (including the general public) sometimes choose not to fund NFPs with ‘high’ indirect costs.”
Within the report, there is an excellent paragraph from Jack Heath. “The funding of direct costs without indirect costs leads to the ‘volcano funding approach’, where program delivery is funded but core costs are not: It leads to organisations where the centre is hollowed out, but it’s built up around the edges. And, you know, volcanoes do two things: they blow up, or they go dormant”.
“When funders pay what it truly takes, NFPs can build stronger systems, stronger teams and stronger impact.”
The underlying message from the report is trust in the relationship and a commitment to transparency and honesty about the organisation’s indirect costs. Funders are becoming increasingly aware of the need to adequately fund NFPs and Charities, including indirect costs, and change the negative perception associated with them. Without robust resources attributed to indirect costs, NFPs and charities will struggle to fulfill their mission and provide the services and programs required to meet their objectives.
At Accounting For Good, we firmly believe that organisations and funders must shift their thinking around indirect costs. The regulatory and compliance frameworks require the sector to act within a set of standards, which we are fully invested in; however, organisations must be able to act safely and not fear judgement or losing their funding due to reasonable and accountable overheads. A healthy NFP is a sustainable one. Sustainability cannot be achieved when core (indirect) costs are not provided.
For example, audit costs are a valuable tool that provides an independent assessment of integrity, financial accuracy, and compliance; however, when they cannot be attributed to funded programs, they are typically indirect costs, which may compromise the program’s sustainability and impact.
We recommend that anyone involved directly or indirectly with the NFP or Charity sector read the Paying What It Takes report.
At Accounting For Good, we work with NFP organisations with a turnover of $1M or more.
Contact us for a free consultation if your organisation needs expert financial guidance. Let us handle your accounting needs so you can focus on what matters most—serving your community and driving positive change.
NFPs rely on overheads such as staffing, administration, compliance, IT and infrastructure to operate effectively — without them, programs simply can’t run.
A persistent stigma around “overheads” leads donors to prefer funding program costs only, which creates financial pressure and forces NFPs to under-report true expenses.
When organisations are funded only at the program level, their internal core becomes hollow — weakening governance, systems, and long-term capacity.
Funders and NFPs benefit when they openly communicate true operating costs. Covering indirect expenses ensures organisations can deliver reliable, lasting community outcomes.
For many years, WJN maintained all their accounting processes in-house, but when their finance manager left the organisation in 2019, they realised that they needed a new solution.
For many years, WJN maintained all their accounting processes in-house, but when their finance manager left the organisation in 2019, they realised that they needed a new solution.
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Indirect costs refer to the essential operating expenses that keep an organisation running but aren’t tied to one specific program. These include administration, finance, HR, IT, rent, utilities and compliance.
Without adequate indirect-cost funding, NFPs can’t maintain the backbone systems and professional staff needed to deliver services effectively and sustainably.
Yes — indirect costs are often referred to as “overheads,” which include all the behind-the-scenes expenses required to operate responsibly and legally.
Many donors mistakenly believe overheads are “wasteful,” preferring to fund programs only. This leads to chronic under-funding of essential infrastructure.
This describes funding that covers only program delivery while leaving the organisation hollow at its core — lacking strong systems, governance and capacity building.
Research shows NFPs often spend around 33% of expenses on indirect costs, yet many cap or under-represent these figures to satisfy funders’ expectations.
No — low overhead can actually signal underinvestment in vital systems like governance, quality assurance, training or technology. Strong organisations invest in these areas.
Funders should accept realistic overhead percentages, offer unrestricted support, and avoid arbitrary caps. This allows NFPs to operate ethically and sustainably.
We work with charities and not for profit organisations. Our specialty as an outsourced partner is with organisations of around $1-10million turnover. If your organisation is seeking professional, customised accounting support and services, we’d love to hear from you. Complete the contact form, and one of the experienced team members will contact you shortly.
If you want to establish a charity or NFP, please read our article “Thinking of starting a charity or NFP.” Accounting For Good cannot assist new entities or start-ups at this time.
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