Developing the Budget in Your Proposal

What is a budget?

A budget simply put, refers to a document which specifies how money will be allocated to implement the activities described in the proposal. Think of the budget as the proposal narrative explained in numbers.

The budget gives a clear picture of all expenditures involved in carrying out a project. In short, a budget is a description of the project in numbers.

The budget may well be the most important part of any proposal. It is necessary to focus on the budget early on in the proposal writing stage to ensure that it is clear and that all the expenditures proposed are justified.

A proper budget is required to convince donors to provide funding. In budgets, donors typically look for:

• Transparency
• Impact
• Cost effectiveness
• Value for money
• Capacity
• Competitiveness to others NGOs
• Following donor guidelines

Basic types of budgeting

While many organizations only list project costs in their application budgets, budgets should actually include both income and expenses.

Income includes all sources of project funding – grants, donations, value of in-kind gifts, value of volunteer hours, earned income, matching funds etc.

Providing income information in the project budget can assist in adding transparency to the project, showing sustainability and no dependency on one donor, and impressing the donor with the number of other groups involved in funding the project. It is also possible to include projected future income, for instance if earned income will supplement the second half of the project or a matching grant will be applied for in the coming months.

Expenses or expenditures enumerate how and where that money will be spent. Expenditures may be itemized, summarized by category, activity etc.

There are two basic means of organizing expenses: by activity and by line-item.

Activity budgets group costs by activity. Activity budgets tend to be the easiest to format when starting out, as it is easier to envision an activity and its needs.

Line-item budgets group costs by type of expenditure. Line-item budgets take the individual expenses underlying the activities and re-group them into separate categories.

Line-item budget sample

The Costs in the Budget of Your Grant Proposal

There are different types of costs that have to be covered in the budget. Most donors prefer to have the costs spread over different areas (line items) to get an overview of how the resources have been divided between different types of expenditures. Overall costs can be segmented into:

• Capital costs: Although donor agencies are typically averse to paying for capital expenditures, these costs are often essential. Capital costs include: computers, office furniture, vehicles, office building, etc. so they need to be reflected in the budget. Make sure that they are in line with the total        budget, otherwise the donor is apt to disallow them.
• Contingency: Contingency refers to the money set aside to cover any unforeseen expenses of the organization or the project. Contingency expenses may be required because a project can face contingencies where additional costs are incurred. However, most donors require an approval before contingency budget can be utilized and may request the money back if no contingencies occur. Therefore, it is generally preferable to integrate these amounts directly into the budget lines if at all possible. This will allow additional flexibility and leeway for the implementing organization.
• Core: Core costs are costs incurred that cover the expenses of running the organization. Most donor agencies would like to know how much money the NGO will spend on the administration and operation of the organization. Costs here can include: staff meetings, stationary, rent, utilities and other office maintenance expenses. In some cases, the expenses of hiring a receptionist or caretaker who is not directly contributing to the project can be listed here.
• Finding core funding can be very difficult, as most funding is project-based. Typically, past donors and donors with a strong relationship to the NGO are more likely to be willing to cover core costs.
• M&E: Monitoring and evaluation of the project can cost money, whether through staff time, purchasing M&E-related software or equipment or hiring an external evaluator. Some budget formats seek specific information about costs proposed by the NGO for monitoring and evaluation of the project.
• Operational costs: Operational costs include those expenses that are needed to implement activities for a project. Activities such as: organizing a village meeting, conducting a training workshop and running an awareness campaign involve certain expenses. These expenses are often listed under the Operational Costs in a budget.
• Overhead: Overhead costs are expenses that are required to run the organization. These expenses may not directly contribute towards project implementation but they are still essential to project success as they cover the day-to-day operation of an NGO. Many donors allow a percentage of the total project budget to be added as overhead, e.g. 10% of the total budget. They also often place a cap on the maximum percentage allowed. One good practice is to include overhead as budget lines in the budget (e.g. rent, utilities, accounting expenses etc.) while still including an overhead percentage at the end of the budget.
• R&D: Research and Development expenses refer to those expenses required in a project to undertake research, assessment and consultation for intervention. In some projects, it could just be part of the initial ground-work while in others it can be a continuous activity.
• Staff: Staff costs refer to the expenses towards paying salaries and consultancy fees. Staff costs include expenses right from the recruitment of the staff (interview, orientation etc.) to  payment of     their salaries. It is important to reflect how much time a particular staff will provide  for  the project and his/her salary has to be calculated accordingly. For example, the head of the organization may be able to give only 25% of his/her time to a particular project for which funds are being requested and budgeted. So, the budget will also be adjusted to reflect this by requesting for only 25% of his/her salary in the proposal.
• Start-up costs: Start-up costs relate to the expenses incurred by the organization in launching a project. For new projects, activities such as; office set-up, staff recruitment, orientation, pre-feasibility studies, etc. all fall under the start-up costs.
• Unit cost: Unit cost is the cost of a single item or a unit. It could be per day cost of a staff member or a consultant, or the cost to acquire one computer. Typical units are: per day, per month, per person, per item, per trip, etc.

Who should develop the budget?

A proper budget that reflects the realities of the project, capacity of the implementing organization, accounting regulations and other considerations requires that developing the budget be a team activity.

• The project officer(s) should take a leading role, as they often have the best understanding of the field realities and costs.
• Service providers and others should be consulted for specific cost estimates (consultants, trainers, contractors etc.)
• An accountant can provide valuable insights and ensure proper fiscal standards are met.
• The finance officer should advise on any other expenses or overheads missing.
• Senior management should review and approve the budget. Management may also include other administrative expenses if required, such as salaries and capital expenditures for any new purchases.

It is important for all the staff to be aware of both the needs of the project and the organization, as well as policies of the donor agency. NGOs should discuss internally the costs involved in implementing various project activities. What kind of manpower and material support is required for these activities? Can they be done within the organization or will external consultants/service providers from be needed? Who will be involved in the project and how much staff time will be allocated? Where will the activity take place? What might be some hidden costs?

Budgets myths clarified

There are a lot of commonly held misconceptions and misinformation surrounding budgets. Here are just a few:

“Budgets all have the same format”          

FALSE: All budgets do not have the same format. Different budgets are developed for different purposes. A proposal budget is different from an organizational budget. Budget requirements for one donor will be different from another. There are different ways of organizing budgets to better suit different projects.

“Budgets can be developed overnight”

FALSE: Accurate budgets are not developed overnight. Rushing to create a budget ends up in poor planning and even rejection of proposals. Always take time to research and build a budget.

“Budgets do not have a basis”        

FALSE: Budgets should always be developed on a solid basis. They cannot be developed by guesswork. In most cases, the basis should be the previous year’s income and expenditures of the organization as funding limitations should also be considered.

“Budgets can be developed by a single person”

FALSE: Budget development is a joint exercise. Involving the entire team is important in producing an effective and realistic budget. Persons to invite include: accountants, program implementers, project planners, fundraisers and if possible, donors.

“Budgets cannot be changed”        

FALSE: Budgets can be modified to some extent after they are submitted. Of course, changes may require prior permission from the donor. Sometimes reallocating donor funding can be tricky, but donors typically do not have issues with diversifying resources and cutting costs.

“Budgets are non- negotiable”

FALSE: Once a donor has indicated an interest in funding a project, there is typically a window of opportunity to negotiate details in the budget. Once the final terms are agreed on, it is possible in some cases to re-negotiate, but it is more difficult.

Final tips on creating the Budget

Key ideas to keep in mind while creating a budget:

• Make sure the budget is presented in the required donor format if available.
• The budget should clearly be in line with the project activities.
• The budget should clearly fit into the given timeframe.
• If an activity is concrete and specific, then it is easy to budget.
• If there is any recurring income from project activities, it needs to be clearly reflected in the budget section.
• Income – including in-kind donations, community contributions, earned income, other grants and amount requested from the donor – should also be included in the budget.
• If the proposed donor is only being asked to pay for part of the cost, include the entire project budget but also make it clear separately what the request is.
• The budget should also include a proper overhead rate (a percentage of the total) that covers overheads not reflected in the budget.
• Overhead negotiations can be a stressful topic, but NGOs should accurately explain to donors why the overhead is necessary and advocate for its inclusion.
• The budget should be reflected in the currency of the donor (or US$). If the local currency amount is also used, include the exchange rate.
• While budgets can be made just on pen and paper, Microsoft Excel is one of the best tools to use for calculating budgets.
• Get help from a good accountant.
• Remember to double and triple check the math!

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