As funding scrutiny increases, are your NFP’s administrative costs defensible?
As funding scrutiny increases, are your NFP’s administrative costs defensible?
For many not-for-profit (NFP) organisations, government funding is essential to delivering important community services. With that funding comes greater accountability and closer scrutiny of how funds are used, particularly administrative and overhead costs.
Government departments are using more targeted, data-driven reviews to assess whether funding is being applied appropriately and in line with contractual obligations. For NFPs, this highlights the need for strong governance, clear and auditable cost-allocation methods, and well-documented policies and controls.
An evolving oversight environment
Oversight is not new, but recent reviews have become more detailed, data-driven, and risk-based. Government departments are seeking assurance that:
- Funds are used for their intended purpose
- Administrative and overhead costs are reasonable and properly allocated
- Reporting aligns with funding agreements and contractual requirements.
Where concerns arise, departments may initiate detailed reviews or forensic investigations to assess compliance and financial integrity. Triggers may include unexplained increases in overhead or travel costs, unusually high vehicle expenses, or administrative cost ratios that appear inconsistent with sector expectations. In some cases, findings of non-compliance may lead to further action, including further targeted forensic audits, recovery or clawback of funding, or consideration of future funding eligibility.
What a recent investigation highlighted
In a recent engagement, BDO was engaged by a government department to conduct an independent forensic financial investigation into a key service provider. The engagement was prompted by concerns relating to compliance with funding agreements, financial management practices, and the delivery of contracted services.
As part of the investigation, BDO undertook a policy and contractual review, transaction-level financial testing, scrutiny of unspent funds reporting, and advice on instances of contract non-compliance.
BDO delivered an evidence-based report identifying non-compliance with funding arrangements and weaknesses in financial controls, reporting, and governance. Recommendations included enhancements to financial reporting, cost allocation methodologies, asset management, and governance framework.
Why administrative costs attract scrutiny
Administrative costs are often a focus because they can be more subjective and harder to link directly to service outcomes. Common challenges include:
- Allocating shared costs across multiple programs
- Justifying overhead allocations to grant-funded activities, for example, clearly evidencing how vehicle, travel, or head office costs are allocated.
- Demonstrating that costs are reasonable, supportable, and consistent with agreements.
Without clear documentation and a defensible allocation method, these costs can quickly become disputed during a review. We often see overhead charges applied across programs without a clear rationale, leading to allocations that appear disproportionate to the support provided.
Practical steps to strengthen your position
To reduce risk and respond confidently to scrutiny, NFPs should assess whether their current frameworks remain appropriate and effective.
Five key areas of focus |
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Clear and consistent cost-allocation policies Cost-allocation methods should be documented, logical, consistent, and aligned with contractual requirements. They should reflect actual resources used, be supported by a clear rationale, and be reviewed regularly. |
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Robust financial controls and documentation Clear audit trails are critical. This includes applying approvals and delegations consistently, retaining supporting records, and documenting the basis for key judgements and allocations. For higher-risk items, such as vehicles and travel, organisations should maintain detailed records showing how those costs relate to program delivery. |
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Alignment with funding agreements Financial practices should be regularly reviewed against funding terms, including eligible and ineligible expenditures, reporting requirements, and conditions relating to unspent funds or reallocations. |
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Governance and oversight Boards and committees should provide appropriate oversight of financial management, including regular reviews of high-risk areas and clear escalation processes for potential compliance issues. |
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Proactive review and assurance Rather than waiting for external scrutiny, organisations should take a proactive approach. Independent reviews of cost-allocation methods, internal audits focused on compliance risks, and scenario testing can help assess whether current practices would withstand external review. |
Building confidence through compliance and governance
Increased scrutiny can be challenging, but it also creates an opportunity for organisations to strengthen their governance and financial discipline. Organisations that invest in clear reporting, sound controls, and defensible allocation methods are better placed to:
- Demonstrate accountability to funders and stakeholders
- Strengthen trust and credibility
- Reduce the risk of adverse findings, funding impacts, and reputational damage.
The objective is not only compliance, but confidence. Confidence that your organisation can clearly explain and support how funds have been used, including administrative and overhead costs, if its practices are closely examined.
How BDO can help
We support NFP organisations to strengthen financial governance, improve compliance frameworks, and respond to regulatory scrutiny. Our forensic and advisory teams provide practical support and help organisations assess risk, review cost-allocation approaches, and strengthen their control environment.
Independent reviews and targeted forensic analysis of high-risk cost areas can help organisations identify issues early, address weaknesses, and respond more confidently to scrutiny.
Whether you are reviewing current practices or responding to specific concerns, we can help you assess risk, implement improvements, and strengthen your operating model. Contact our team today.
