Admin Allocation - 10% is a Myth
This week I am revisiting how Administrative Costs are allocated to the various programs of a nonprofit organization, and this is where the science versus art of accounting collide.
Most program funders articulate a maximum percentage for administrative services typically at 10%. What can vary is what they consider as Administration versus Program Delivery. For example some will consider Information Technology as administrative costs where others consider it program delivery. Liability Insurance is another example. Some will allow 12% versus 10% but consider certain costs to be included in administration where others consider the same as program costs. Then there is accommodation costs: some are power users of office, service, and reception space, where others are not. This leads me to accounting school where we covered what are called Cost Drivers.
Cost Drivers are factors which drive costs: for example square feet may drive janitorial cost where cubic feet may drive heating costs. Number of full time staff may drive human resource management costs where the number of transactions processed may drive accounting Costs.
Now, lets put this to a test. Program X provides a 10% Administrative allocation but is a power user of the accounting department for client invoicing and receipt of payments, where Program Y who also provides 10% for Administration uses minimal accounting intervention as there is one direct deposited payment per month from the funder. Program X is a $100k per year program where Program X is $1,000,000… both allowing a 10% Administration charge. Sound out of balance? Let’s spin it around because Program Y is a power user of office, classroom, and reception time and space where Program Y is minimal.
So, now what when some consider Accommodations inside Administration and others not? An example is counseling services where not only is their offices for staff which must be of adequate size to accommodate the clients as well, but also a reception and waiting area; contrast this to seniorˋs outreach workers who perform their work in the field and only require a small office space to return home to, and even that could be shared with a coworker. For counseling services, accommodations are program delivery, where for seniorˋs outreach it could be considered administrative. But where on your Income Statement do you include accommodation costs?
Finally, there is the thought as your organization gets bigger you achieve efficiencies through economies of scale. Not necessarily; one program with two delivery officers can be managed out of a home office with a contract bookkeeper to handle payments and payroll; 100 staff operating 30 different programs requires a building, Executive Director, various levels of management depending on the diversity of programs and numbers of staff in each, a human resources and payroll officer, a finance director and bookkeeper, a receptionist, and a property manager.
The answer to all of this? Go back to your cost drivers to determine what it costs to deliver your program and have the dialogue with the funder. From there, consider one size does not fit all and ‘10%’ is a myth.