What is the real cost of managing a government service or contract?

Neil Pharaoh tackles the charity overhead debate and asks if you want money from government, what percentage you should be investing to get it and keep it.

Some years back there was a large discussion in the social purpose and not-for-profit space about what percentage of donated funds should be used for “administration, marketing and overhead” purposes. Numbers differ (and can be easily manipulated), but at the time they ranged from 10 per cent through to 50 per cent in some organisations. 

I spent many years working in director of fundraising roles, so I recognise the tensions that exist around raising money from donors – high net worth, foundations and corporate – as well as what is, or isn’t, considered “overhead”. I could spend an entire article discussing the merits of having low numbers, or high numbers, of being honest, or fudging the figures. 

Fortunately, these days many foundations, trusts and PAFs, as well as good corporates and donors, now realise that you need to have some overhead and management costs associated with acquiring, securing and renewing government contract funding. But the question still remains – for government services or contracts, what percentage of the contract value should be used for managing that contract and ensuring that it gets renewed? And what is the government line on what you should spend?

On that side of the equation, government policy departments and those negotiating the contracts are still very much of the mindset of the foundations and donors of years past – that there should be no overhead, no fat, and no management fee. This is completely unrealistic, for so many reasons, but having these discussions with them will not generally lead to any improvement of outcome. 

Most social purpose organisations build into their contracts a sufficient percentage for management and overheads – typically some form of evaluation or review – as well as for costs associated with communications in relation to the project. While these still do not reflect the full cost of project delivery, they go some way towards defraying these costs. 

So realistically, if you want money from government, what percentage should you be investing to get it and what percentage should you notionally use to keep or renew it? 

“Being honest on your internal books means that your board, management and team recognise that government money does not come free.”

From my experience, this sits around 10 per cent and it usually takes one to two years of investment to secure the government supporting funds. “Hold on,” I hear you shout, “there is no way I can invest that!” 

Then, being honest, if you aren’t prepared to invest this amount, you probably aren’t really prepared to secure the funding, or keep it into the longer term. 

What should that 10 per cent be spent on? Well, say you want to secure $3 million over three years from government, which is a $1 million per year contract. You should be spending $100,000 per annum to manage, secure, influence and shape that contract for the life of the contract, and also spending $100,000 per annum for two years to secure the funds. Yes, government funds do cost money, like all forms of fundraising and raising income do.

For those organisations out there who claim they are not spending the 10 per cent and yet are still securing government money, they are probably either fibbing or (more likely) not properly accounting for the time and effort they already spend. That one day per week spent by the CEO, those few hours of each board member’s time, those few trips to Canberra and those brochures and design all add up. And while you can try and bury the cost, being honest on your internal books means that your board, management and team recognise that government money does not come free. 

What if you want to secure new funds, where does the 10 per cent go then? In short, into building the campaign – whether that represents letters or meetings, events or social media engagement, the time taken by your team to prepare proposals, documents or the time invested by your management and board in supervising, considering risks and implementing strategies. Ten per cent is a good number to get around the board table and management team and shows the true, genuine cost of securing and then re-securing funds from government. 

Below is a short list of the type of things you should be considering part of this 10 per cent investment to secure, manage and renew desired funding:

• Engagement activities, meetings, flights and accommodation for political meetings/discussions and activities.
• Marketing, promotions, campaigns, advertising, communications, graphic design and materials required to prepare briefs, documents and informational leaflets.
• Specialist advice, support, and assistance – to build the capacity and capability in your organisation to engage more successfully with government and to build the skills and capacity of your team to work better with government.
• The program evaluation, logic, theory of change development and strategy work associated with government engagement and program delivery.
• Staff, management and board time spent on securing, engaging in or assisting with discussions around government contracts.

In short, you can’t measure what you can’t track. And the common approach of many NFP and social purpose organisations of either denying that they spend anything to secure or renew government funding or not attempting to capture and manage what they do spend, shows many boards are asleep at the wheel regarding this financial and non-financial risk. 

Government, for its part, continues to push the line of encouraging organisations to not allocate any costs – meaning we can’t measure comparative effectiveness against other fundraising options (donors, high net worth, trusts and foundations etc.). 

But there is no such thing as a free lunch, and we often forget this applies as much to government funding, contracts and services as it does any other source of money, donations or revenue. 

About the author: Neil Pharaoh has spent most of his voluntary and professional life in and around social purpose organisations, government, public policy and advocacy. Neil has been behind many leading social policy and advocacy campaigns on gender rights, equality, medical research and education, and ran for Parliament in Victoria in 2014 and 2018. He regularly runs workshops and advocacy sessions and advises leading social purpose organisations on their government engagement strategy and systems. @neilpharaoh on LinkedIn, Twitter, Instagram and Facebook. 

Happenings on the hill is a fortnightly column focusing on all things politics, policy, campaigns and advocacy. Stay tuned for updates around political trends and elections, lobbying and advocacy news, and hints, tips and ideas on government engagement that are specifically written for the social purpose/for purpose sector.

If you have any ideas, suggestions, tips or questions, please feel free to email Neil Pharaoh at neil@neilpharaoh.com.au or reach out to him via social media at LinkedIn, Twitter, Instagram and Facebook @neilpharaoh.