A cost allocation plan explains how an organization assigns shared expenses across programs, grants or departments. It matters because many real costs—rent, finance staff, internet, vehicles and management—support more than one project.
Why NGOs need a consistent method
Without a documented method, teams may charge costs wherever budget remains rather than where the cost actually belongs. That can lead to double charging, inconsistent treatment and audit findings.
Common allocation bases
- Headcount: useful for some HR or office costs.
- Floor area: useful for rent or utilities.
- Staff time: useful for salaries supporting several projects.
- Direct-cost share: sometimes used for broader administrative costs.
- Actual usage: useful when consumption can be measured reliably.
Use the same logic consistently
The allocation basis should be reasonable, documented and applied consistently unless circumstances genuinely change. If a donor has a specific rule, that rule takes priority over your preferred method.
Example
If three projects use one office and project A occupies half the floor space, project B 30% and project C 20%, rent may be allocated on that basis if floor area is a reasonable driver. The organization should retain the calculation and update it when occupancy changes materially.
The Grant Budget Sanity Checker can help identify allocations that look inconsistent or unsupported before a proposal is submitted.
Audit-readiness rule
A reviewer should be able to understand how a shared cost moved from the general ledger into each grant. If the logic cannot be explained simply, improve the allocation method.
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Frequently Asked Questions
What is a cost allocation plan?
It is a documented method for distributing shared costs such as rent, utilities, management or common services across grants and other funding sources.
What makes an allocation method defensible?
The method should be reasonable, consistently applied, linked to a measurable cost driver and supported by records that explain how the allocation was calculated.
Can every shared cost be allocated the same way?
No. Different costs may need different drivers, such as headcount, floor space, direct labor hours or actual usage.
How often should the plan be reviewed?
Review it periodically and whenever staffing, office use, grant mix or organizational structure changes materially.
Do donors need to approve the allocation plan?
That depends on the donor and award terms. Some donors may require prior approval or specific indirect-cost treatment.
Conclusion
A cost allocation plan helps NGOs share common expenses without relying on arbitrary percentages. The strongest approach links each shared cost to a logical allocation basis, documents the calculation and applies the method consistently across reporting periods.
Put this guide into practice
Free resource: The Hidden Formula Funders Love. Use this free guide to apply the article’s advice to your next funding decision or application.
Optional paid resource: Nonprofit Grant Proposal Templates. Proposal, concept note, budget, logframe, M&E and donor-document starting points. Review the product details and current price before purchasing.
