3.6 Financial Planning and Budgeting

When seeking funding, it is essential to provide a project budget detailing all the project components and their expected costs in a format aligned with the donor’s guidelines. Proper financial planning and budgeting are key success factors for securing project funds and for successful project implementation. While developing the project budget, it is important to differentiate between the capital expenditure (CAPEX) and the operating expenditure (OPEX) of the envisioned sanitation system or service to inform the selection of technology options and to assess the system’s sustainability.

A project budget is an estimate of how much money will be required to achieve the project’s (or programme’s) objectives. It lists all the project components and their expected costs. All donors have their own budget templates and guidelines. An example of budget guidance can be found in UN OCHA Somalia Humanitarian Fund 2020. The guidance provides a common framework to facilitate the appropriate preparation, review and clearance of project budgets.

It defines eligible direct and indirect costs:

Eligible costs: are costs with the following attributes:

• • Necessary and reasonable for delivery of the project objectives

• • Complying with the principles of sound financial management, in particular, the principles of economy, efficiency, effectiveness, transparency and accountability

• • Identifiable in the accounting records and backed by original supporting evidence

• • Included in the project budget, incurred in accordance with the approved project proposal and within the project period

Eligible costs typically include:

• • Staff Costs: including salaries, social security contributions, medical insurance and hazard pay (for high-risk locations) for staff involved in the management and implementation of the project

• • Consultancies: included in the project’s implementation

• • Travel and subsistence costs: directly linked to the project’s implementation for project staff, consultants and other personnel who may be eligible (for example government staff engaged in project monitoring)

• • Financial support to beneficiaries: e.g. a cash or voucher-based distribution of sanitation and hygiene-related non-food items

• • Purchase costs for goods and services: to the project or the beneficiaries of the project

• • Non-expendable items (assets): such as pipes, pumps, concrete or IT equipment

• • Other costs: for contracting, monitoring, reporting, evaluation, dissemination of information, translation, insurance and financial service costs (in particular, bank fees for transfers)

Direct costs include staff, consultancies, supplies, equipment, travel, transfer grants and general operating costs (e.g. security expenses, telecommunications, internet, water, electricity or office rent). Other direct costs include costs, for example, of monitoring, evaluation and reporting.

Indirect Costs (sometimes called Programme Support Costs) include costs incurred by the implementing organisation regardless of the scope and level of its activities and which cannot be traced unequivocally to specific activities. An example is corporate costs (headquarters costs, legal services, general procurement, or recruitment) that are not related to a particular project.

A project budget is usually classified into several categories (the example below is from the OCHA SHF which has seven categories):

Staff and other personnel costs: costs and entitlements of directly contracted national and international staff involved in the management and implementation of the project. Staff costs may be broadly categorised into (1) direct staff costs: salaries and entitlements for staff working directly on the project e.g. programme personnel like WASH engineers and (2) support staff costs: salaries and entitlements of staff engaged in management, support and administrative activities (e.g. Country Director, Finance Coordinator, Human Resource Manager, Logistics Officer)

Supplies, commodities and materials: input costs related to project activities including the procurement of consumables or supplies for project implementation (e.g. hygiene kits, soap), construction/rehabilitation works (e.g. construction of toilets or rehabilitation of existing sanitation infrastructure) or cash for work or unconditional cash transfers. The category may also include the transportation of supplies by road or air, training (of project staff, community members or beneficiaries of the project), communication materials (used to raise awareness and project visibility) or incentives for staff seconded by the ministry or government to support the project such as teachers or nurses (i.e. staff not on the organisation’s payroll)

Equipment: tools and assets for project implementation such as pipes, pumps, concrete, generators, trucks and IT equipment

Contractual services: works or services contracted under the project such as the construction of toilets or treatment plants and contracts for consulting services

Travel costs of staff, consultants and other project personnel. This may include daily subsistence, local flights, travel entitlements, fuel and vehicle rental for staff

Transfers and grants to counterparts: to, for example, local partners, other NGOs and community-based organisations

General operating costs: costs directly linked to project implementation including office running costs, office rent, utilities, security services costs, bank charges, office stationary and communication costs

Indirect costs: a certain percentage (often fixed by the donor) for indirect costs

When budgeting for an emergency sanitation project, it is important to differentiate between capital expenditures (CAPEX) and operational expenditures (OPEX) to support decision-making by accurately assessing the costs and affordability of different technology options and to assess its financial sustainability in the long term. CAPEX includes all costs associated with the construction and acquisition of sanitation infrastructure (such as pit latrines, emptying trucks and faecal sludge treatment plants including their corresponding land costs), the potential rehabilitation, expansion or upgrading of sanitation systems as well as accompanying software measures. OPEX costs are ongoing expenditures for the operation and maintenance of sanitation systems and services (such as salaries for regular operation, maintenance and repairs, fuel, consumables and supplies) that are necessary to keep the sanitation system functioning in the long term (see also How to Estimate Costs of a Sanitation System).

CAPEX and OPEX are key decision criteria when Identifying and Selecting Appropriate Technologies.