Ensuring that local and national actors can access overheads has become a key focus for humanitarian reform efforts over the past year. Locally-led humanitarian response is more effective, more efficient and improves accountability to, and participation of, those most affected by crisis. Overheads – also referred to in this paper as ‘indirect costs’ or indirect cost recovery (ICR) (see Appendix 2: What are ‘indirect costs’ or ‘overheads’?) – are critical for building the organisational capacity, sustainability and preparedness of frontline responders. By not providing overheads, the international aid system – including donors, UN agencies and international non-governmental organisations (INGOs) – is not adequately supporting local actors to meet the growing complexity of humanitarian response, including in situations of protracted crises where communities face intersecting risks.

Many international organisations with an intermediary role and donors are now in the process of reflecting critically on their own practice amid changing industry standards. To support this reform process, the Inter-Agency Standing Committee (IASC) published Guidance on the Provision of Overheads to Local and National Partners in November 2022. The Guidance was informed by research carried out by Development Initiatives (DI) with UNICEF and Oxfam, which mapped the current practices of intermediary organisations and identified examples of good practice from the perspective of local actors.Implementation of the Guidance is being supported by the IASC Task Force 5 on Localisation. Within the Grand Bargain, the caucus on funding for localisation is also addressing the issue of overheads for local actors in early 2023. This follows the outcome document of the caucus on the role of intermediaries (at the time for writing endorsed by 26 Grand Bargain signatories), which included a commitment from members to allocate overhead costs to local and national actors.

This paper, produced by DI in partnership with UNICEF, aims to support these ongoing discussions by summarising donors’ current indirect cost policies and perspectives on the issue of overhead allocation to local actors, as well as setting out various opportunities and barriers to change identified by donors. This builds on, and is designed to complement, the previous mapping of intermediary practices and is based on interviews with 12 government donor representatives. To benefit from learning from private philanthropy on this issue, representatives from three private foundations were also interviewed. Interviews took place between October 2022 and January 2023.