This post explains how BERI thinks about per-project overhead rates, and how we raise funds to support our core operations.
What are “indirect” costs at BERI?
When you’re collaborating with BERI on a project, in our accounting we classify each of our expenses relating to your project as either “direct” or “indirect”. Direct expenses are for things you request (e.g. buying a plane ticket or paying a contractor). Indirect expenses are for “back-end” administration for your project (e.g. accounting, legal) and generally “keeping the lights on” at BERI: payroll, office space, etc.
Different objectives for different costs
Direct expenses are expenses you’d need to make irrespective of whether BERI was your sponsor. We generally do not try to keep those costs low, except insofar as our collaborators want us to, or if the expenses look particularly egregious for the non-profit sector. That’s because BERI’s role is to help by spending money in whatever ways are most directly helpful to you and the projects we collaborate on.
Indirect expenses, by contrast, are a function of how efficiently or inefficiently BERI can administer your project, so we like to hold ourselves accountable for keeping our indirect costs as low as we can while still functioning well as an organization.
How much of BERI’s expenses are “indirect”, on average?
In our first couple years of operation, BERI’s “indirect” expense rate on university collaborations was ~40% of our direct expenses. This is higher than we’d like it to be, but it’s still lower than many universities. One reason our overhead rate has historically been a bit high is that we spent a lot of time thinking about university-compatible policies for BERI to follow as a collaborating institution.
After settling on many of our policies, narrowing our focus, and downsizing, our average indirect expense rate decreased to ~14% of our direct expenses in 2020. In 2021 and years to come, we expect our overhead rate to fall further still, due to economies of scale and other efficiency gains.
How does BERI decide how much “overhead” funding to request for a specific project?
Suppose you have a project that will cost $100k, and BERI asks for an additional $20k of funding to help us administer it for you. How did BERI estimate that $20k figure?
We ask ourselves the following four questions:
- How much BERI staff time will be needed to manage this project? (And what is the corresponding cost of that staff time?)
- What external services, like accountants and lawyers, do we anticipate needing to make use of to support this project?
- How much buffer room do we want for unexpected indirect costs in case this project becomes more complicated than expected? (This happens a lot!)
- How much financial buffer do we need to account for the cost of preparing to execute projects like this when they don’t all pan out in terms of funding to BERI? And how much of that buffer is fair to allocate to this project?
Then, we add up (1)+(2)+(3)+(4), and ask for that much overhead, in dollars, up front. We try not to spend a lot of time haggling about our overhead rate, because the additional infrastructure needed to do that well would further increase our overhead rate! Instead, we ask for what we think is fair given our needs, and count on outsiders to say “no” if that’s not worth pursuing. This creates the following set of incentives for our admin team:
- If we find we’re often overestimating the overhead funds needed for the projects we take on, we note that we were more efficient than expected, and use that confidence (and the additional slack the money buys us, in staff time) to connect with more potential collaborators and projects.
- If we find we’re often underestimating the overhead funds we need, we don’t go to the individual project funders to ask them for more project-specific money. Instead, we take the hit, draw from our reserves, and try to adapt to become more efficient before taking on new responsibilities.
On average we don’t want to be drawing from our reserve funding to subsidize per-project overhead rates, as explained in the next section.
Why doesn’t BERI ask a third party to fund most or all of its overhead costs across projects, so BERI can operate for zero or reduced per-project overhead rates?
The short answer is that doing so would be asking that third party to evaluate the value of many projects that are already being evaluated for cost-effectiveness by better-informed funders, creating duplicated effort and wasting funder time and attention. Here’s the same answer, but in the form of a detailed example:
Suppose five funders—Funders 1 through 5—are looking to fund five projects—Projects 1 through 5, respectively. Each project will involve $100k of direct expense, for a total of $500k over a year. Now let’s say it takes the equivalent of one full-time BERI staff member to administer these projects, as well as taking care of the legal and accounting back-end that’s required. Altogether, let’s say those things cost $100k over the year. That would mean BERI really needs $600k to take on these projects. Who should pay for that?
The fair thing to do is distribute the $600k across the funders of Projects 1-5, by requiring $120k of funding for each one. Starting in 2020, this is how we’ve tried to operate. If Funder 1 looks at Project 1 and thinks “That’s not actually worth the opportunity cost of paying $120k to accomplish”, or “I can get that done for $105k somewhere else”, they are usually in a relatively good position to make that decision.
By comparison, what would happen if we went to a new funder, Funder 6, to provide all or part of the overhead funding for these projects? Funder 6 would wonder, “Hmm, what are these 5 projects doing? Are they of positive value? Are they worth the money that’s going to be spent on them? And why am I the one who has to figure out if they’re worth $120k each, rather than Funders 1-5 who have already put a bunch of effort into evaluating the value of these projects?”
In other words, Funders 1 through 5 will usually be in a better position than Funder 6 to evaluate whether it’s worth paying BERI’s overhead rate to take on each project, accounting both for the value of the project and the non-BERI alternatives available for hosting the project.
BERI tracks indirect costs separately from direct costs, because those are the costs that we feel (and are) most accountable for keeping low. We are continually working toward fundraising more of our total indirect costs from per-project overhead rates, because we think it creates good incentives for us to stay efficient, and because we think it distributes the burden of evaluating cost-effectiveness more fairly across funders.