What is a shared cost?
A direct cost can be traced to one grant, such as a vehicle bought for one project. A shared cost serves more than one grant or the whole organisation. Common examples are office rent, electricity, internet, a shared vehicle, a finance officer and security staff.
You cannot charge the full amount to one grant, because that overcharges the donor. You also cannot leave it unallocated, because then the organisation absorbs the cost. A fair split solves both problems.
Why does fairness matter?
Donors pay only for costs that relate to their grant. Auditors test whether the split is reasonable and consistent. A method that is clear and applied the same way each month passes these tests more easily than one invented at report time.
How do you build an allocation method?
- List your shared costs. Go through the ledger and mark every cost that serves more than one grant.
- Group them into pools. One pool for office costs, one for shared vehicles, one for shared staff. Each pool uses one basis.
- Pick a basis for each pool. Choose the measure that best follows real use.
- Calculate each grant’s share. Divide the pool by the basis.
- Get approval. The finance lead approves the method and the monthly result.
- Record the entries. Post the split as journals that show the pool, the basis and the grants.
- Review. Test the method once a year.
Which basis should you use?
| Pool | Common basis | Why |
|---|---|---|
| Office rent and utilities | Staff headcount or floor space used | Cost follows people and space |
| Shared staff (finance, HR) | Time spent per grant | Cost follows effort |
| Shared vehicle | Kilometres or days used per grant | Cost follows use |
| IT and internet | Number of users | Cost follows users |
| General management | Share of direct costs | Used when no better measure exists |
Time-based splits need records. A short monthly timesheet is enough. A guess that never changes is weak evidence.
What about indirect cost rates?
Some donors allow an indirect cost rate, a fixed percentage on direct costs that covers management and support. This is different from splitting actual shared costs. Do not charge both for the same cost. Read the donor agreement, because rules differ between donors and countries.
How do you keep the evidence?
Keep a short file for each month with:
- the pool totals,
- the basis data (headcount, timesheets, usage logs),
- the percentages used,
- the journals posted, and
- the approver’s name and date.
If an auditor asks why a grant paid a given amount of rent, you can answer from the file in minutes. Our article on restricted and unrestricted funds explains where the unallocated part should go.
A worked example
An office in a regional town houses three grants. Monthly rent and utilities are 3,000. Staff time on the three grants, taken from timesheets, is 50 percent for Grant A, 30 percent for Grant B and 20 percent for Grant C.
The office applies headcount as the basis for the office pool. Grant A has five staff, Grant B three and Grant C two, so the shares are 50, 30 and 20 percent. Rent and utilities of 3,000 split into 1,500, 900 and 600.
The finance officer posts one entry that moves each share into its grant, with a note that names the pool, the basis and the month. The head of finance approves the entry and files the calculation. Next month, the same steps repeat with updated headcount. If a new grant starts, its share starts from the month it begins, and the other shares drop.
What can go wrong
- Stale percentages. A grant ended, but its share stays in the model. Check the basis each quarter.
- Costs split twice. A cost appears in an allocation pool and also in an indirect rate. Pick one route for each cost.
- Hidden caps. A donor limits one cost type, and the allocation pushes the grant over the cap. Check caps before you post.
- No evidence. The basis rests on a guess. Keep timesheets, headcount lists and usage logs.
- Late changes. Someone alters a closed month. Make changes going forward and explain them.
How to explain the method to donors
Keep a one-page note: the pools, the bases, why each basis fits, the date of approval and the person who owns it. Share it when you submit a report or when an auditor asks. A short, clear note answers most questions before they are asked. Rules about shared and indirect costs differ between donors and countries, so read each agreement.
Where EMPOBase fits
EMPOBase has Cost Centers and Cost Allocation in the Finance module. Allocation and indirect-cost recovery post as journals, so each split leaves an entry in the ledger. Each line can carry a project, a grant and budget line, and a fund. Your finance team still chooses the basis and the percentages, and you must check each donor’s cost rules yourself. See the platform page for the Finance module.