Donor Capacity Assessment of an NGO: What Is Checked Before a Grant Is Signed

Before signing an agreement a donor wants to know not only that an organisation can deliver projects, but that it can handle money properly. This is what a capacity assessment, or due diligence, is for: a review of governance, finance, procurement and human resources systems.

The outcome is rarely a simple yes or no. Most often it is a risk rating that determines the working conditions: the size of tranches, the frequency of reporting, whether procurement needs prior approval and how many checks take place during the project. Preparing for the assessment is therefore an investment that pays back over the whole partnership.

Who carries out the assessment and when

Formats differ by donor. UN agencies use a micro-assessment within the HACT framework, described in our article on UN project audits under HACT. European programmes use an operational and financial capacity check. Private foundations and embassies most often use their own questionnaire with a request for supporting documents.

The assessment is carried out either by the donor itself or by an independent audit firm on the donor’s behalf. It is usually repeated every few years, and again whenever funding volumes rise significantly or the leadership changes.

What is actually examined

Governance and constitutional documents

The charter, the composition of the board, minutes of meetings, the division of powers between the director and the supervisory body, and how spending decisions are made. The donor is looking for evidence that the director is subject to oversight rather than deciding everything alone.

The financial system

Accounting policy, software, a chart of accounts with project analytics, period-close procedures, and the availability of financial statements and audit reports for previous years. This is also where the donor checks whether grants are accounted for by project, as described in our article on project-based grant accounting.

Internal control

Segregation of duties: one person should not prepare a payment, authorise it and record it in the accounts. Authority limits, expense approval, cash handling and control over advances are all reviewed.

Procurement

An internal procurement policy with thresholds and procedures, examples of completed procurements, and documentation of supplier selection. The requirements are covered in our article on procurement in a grant project.

Human resources and payroll

The staffing table, employment contracts, remuneration policy, timesheets, how salaries are allocated between projects, and compliance with tax law.

Policies and ethics

Conflict of interest policy, anti-corruption policy, protection from sexual exploitation and abuse, a complaints mechanism, and data protection. For many donors the absence of these documents is a separate risk factor regardless of how sound the finances are.

Documents worth having ready

Area	Documents
Legal	Charter, register extract, non-profit register extract, board minutes
Financial	Statements for 2-3 years, audit reports, accounting policy, trial balances
Projects	List of projects with budgets and donors, sample reports, reference letters
Procedures	Procurement policy, remuneration policy, travel policy, authority limits
Policies	Conflict of interest, anti-corruption, protection from abuse, complaints, data protection
HR	Staffing table, job descriptions for key roles, team CVs

How the risk rating is formed

The assessor completes a structured questionnaire and scores each area, after which the organisation receives a rating: low, moderate, significant or high. The consequences are direct:

• low risk: larger tranches, less frequent reporting, fewer checks;
• moderate: standard conditions and scheduled reviews;
• significant: smaller tranches, frequent reports, prior approval of procurement, mandatory spot checks;
• high: direct payment to suppliers by the donor, or no direct funding at all.

Importantly, the risk rating is not a judgement about the organisation’s honesty. It is a judgement about systems. A small organisation with an impeccable reputation but no written procedures will score worse than one of the same size with documented processes.

The most common reasons for a poor rating

• no written procedures: procurement, spending and pay are governed by verbal agreements;
• no segregation of duties: the director initiates, approves and controls payments alone;
• accounts kept in spreadsheets without project analytics;
• no audited statements for previous years;
• basic policies required by the donor are missing;
• no project files, documents stored without a system;
• key processes depend on one person with no back-up.

How to prepare in two months

A realistic plan: the first month is a review of your own processes and documents, drafting the accounting policy, the procurement policy and the basic policies, and having the board approve them. The second month is tidying the accounts: project analytics, reconciliation of targeted financing balances, and building a file for each project.

If the organisation has never been audited, commissioning an annual financial statement audit is worthwhile: an audit report for the last year removes part of the assessor’s questions and provides a written list of what to fix.

MK Audit has worked with non-profit organisations and donor-funded projects since 2000, is listed in the Ukrainian register of auditors (No. 4624) and is a member of DFK International. We audit financial statements, verify project expenditure and prepare organisations for capacity assessments. If a donor due diligence is coming up, send us a request: commercial proposal after reviewing the assignment, response within 1 day.