FULL COST RECOVERY

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FULL COST RECOVERY

• York Community Accounting Scheme

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Key quotes

• In 2002, per govt. third sector funders
  should recognise that it is legitimate for
  providers to include the relevant elements of
  overheads in their cost estimates
• HM Treasury in 2003 no activity can be
  undertaken without the need for support
  functions and recommends acevos cost allocation
  manual.
• But also before criticising funders for a lack
  of understanding it is important that you have a
  clear view of your costs and plans for recovering
  them.
• CIPFA guidance on best value accounting for local
  authorities the total cost of a service should
  include an appropriate share of support services
  and other overheads.

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Three Funding models

• Full project funding all reasonable associated
  costs are met the business model
• Development funding infrastructure costs are met
  for a time to allow growth development
• Strategic funding funder recognises need for
  organisation to exist in order to meet its own
  objectives

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Present situation

• Arbitrary fixed percentages
• Risks
• some overheads may not be recovered, and
  organisation doesnt know size of shortfall, and
• organisations may cut back on essential support
  to stay within limits
• Organisation may accept more (underpaid) work
  than it can properly manage in attempting to
  cover core costs
• taking work below full cost can only be justified
  on a short term basis

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Benefits of understanding full costs

• Improved management of costs
• Full funding
• Comparing costs with funding
• Deciding how and whether to bid
• Improved negotiating ability with funders

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Types of costs

• Direct costs
• Overheads
• Premises and office costs
• Central function costs
• Governance and development costs
• General fundraising costs

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Cost drivers

• Headcount
• Time
• Expenditure
• Floor space
• etc

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Step 1 Calculate direct costs

• Project A
• Project B
• Project C
• Project D

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Step 2 Calculate total overheads

• Premises office costs
• Central function costs
• Director
• Support services
• Governance strategic development
• General fundraising

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Step 3 Allocate premises costs

• Allocate costs of the premises and other office
  costs (e.g. utilities, telephone, computers,
  stationery, insurance etc) to each central
  function and to the project, ( other projects)
  using an appropriate driver

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Step 4 Allocate central functions

• allocate the cost of each central function to
  governance, fundraising, the project to be
  costed, and the other projects. Use an
  appropriate driver

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Step 5 Allocate governance costs

• allocate a proportion of the total governance
  and strategic development costs to the project
  (and the other projects), again using an
  appropriate driver.

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Step 6 Allocate general fundraising (if needed)

• if you expect a shortfall in funding for project
  A, you may need to use some of your general
  fundraising to cover the shortfall.

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Project A full costing

• the project will now be fully costed to
  include direct project costs
• share of premises costs
• share of director costs
• share of support services costs
• share of governance costs
• share of general fundraising costs (if needed)
• All allocated on a defensible basis

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Summary

• Up to date budget/forecast of all costs
• An understanding of the major types of cost (e.g.
  direct costs, premises costs)
• Set of relevant cost drivers
• Remember to allocate overheads
• progressively until they are all allocated to
• projects.

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Additional points

• Consider the payroll example
• We have costed out the payroll service as x per
  annum, and
• Most, or all of these costs are fixed over a wide
  range of activities (so need to establish how far
  capacity is, and is likely to be, utilised).
• There are a lot of small clients
• Some costs vary with the number of staff, some
  with the number of clients, some with the number
  of leavers / starters, etc
• There are significant costs at start up and at
  tax year ends
• There are quite a few competitors providing
  similar, and in some cases, identical services
• Some clients also use other services within the
  main charity (bookkeeping, community accounting)
• There are a number of different ways of charging
  for the service.
• So price setting is not a simple task!.