Costing a Service Level Agreement

1
Costing a Service Level Agreement

• Douglas Westwater
• 4th September 2008
• Welcome

2
Welcome and Introductions
3
Course Summary

• Putting a price on the services that you deliver
  can be very difficult.  The session takes you
  through some of the key principles of costing
  your services, including
• Full cost recovery - what does this mean and how
  can I calculate it for my organisation?
• Unit cost - how do I calculate the unit cost of
  my service?
• What is the best way to present our costs in the
  SLA?

4
Context Service Level Agreement

• A Service Level Agreement (SLA) is a service
  contract where the level of service is formally
  defined. In practice, the term SLA is used to
  refer to the contracted delivery time (of the
  service) or performance
• Everything is negotiated

5
Service Level Agreement

• Definition of service to be delivered
• Cost
• How is service measured, and outcomes analysed
  and monitored
• Problem management (what systems do you have in
  place)
• Customer (ie Midlothian Council, NHS etc)
  responsibility SLA is a 2 way process
• Warranties and insurances
• Termination of contract - why

6
Context of costing

• How fully you cost your recovery depends on
• How much you need this contract
• Your relationship with the purchaser
• Begging or selling

7
Full Cost Recovery
Profit margin and surplus
Project B
Core Costs CEO / Admin staff Rent etc
Project A
Project C
8
Break Even Point
Break Even Point
9
Working out your price

• Assumptions
• All costs are fixed or variable
• Fixed costs remain constant
• Variable costs vary in proportion to activity
• The only factor affecting costs and revenue is
  activity

10
Forumla - dont worry yet!!!

• Fixed Costs
• Break Even point -------------------------
• Selling price Variable cost
• per unit per unit

11
Explanation Dont worry yet!!

• Sales revenue per unit less the variable costs
  per unit equals a financial contribution to fixed
  costs
• Eventually a given number of contributions will
  cover the fixed costs
• Each contribution per sale after this point is no
  longer required to cover fixed costs and is
  therefore profit

12
Example

• A social enterprise training org (MVA?) markets
  workshops openly. The maximum number of
  participants is 20. Lesley wants to be able to
  offer other social enterprises or vol orgs free
  or subsidised places.

13
Information we have
14
Solution

• Fixed Costs
• Break Even point -------------------------
• Selling price Variable cost
• per unit per unit
• 250 410 250 910
• -------------------- -----
• 80 10 70
• Break even point is 13 participants per course.
  Once there are 13 paying places on the course all
  costs are covered.
• Therefore 7 places can be free or subsidised

15
Exercise 1
16
Solution

• Fixed Costs (divided where appropriate by 200
  to get a per intervention cost
• - same applies if yearly costs are used)
• Break Even point -------------------------
• Selling price Variable cost
• per unit per unit
• 37.5 100 137.50
• -------------------- -----
• 300 175 12.5 112.50
• Break even point is 1.2 interventions. He needs
  to do 1.2 interventions to break even. This
  represents a loss. He therefore needs 1.2 x300
  360 per job to break even or 1.2 x 200 240
  interventions to break even.
• 0.2 is the loss each intervention. He makes an
  income of 125 each time. 125 x 0.2 25 loss x
  200 interventions yearly loss of 5000

17
Fully costing your product or service

• There is no right or wrong answer and it will be
  an estimate.
• Direct costs should be attributed to each
  activity
• Consistent and logical method to apportion
  remaining costs related to Drivers
• Space allocated to the project
• Numbers of beneficiaries
• Numbers of employees involved (usually the
  largest cost)

18
Allocating costs
Individual Project costs with apportioned
overheads Though no precise answer ALL costs must
be allocated
Direct Premises Management Other Project costs
19
One solution?

• Admin space is 20 of rental (6000). Rest is a
  direct costs for the café. Rental costs according
  to space occupied is 80 café (4800) and 20
  outreach (1200)
• Admin salary costs is 51,000 apportioned by
  number of employees. Café is 15 (7650) and
  outreach programme is 85 (43,350)
• Full overhead therefore is 57,000

20
Apportionment

• Café - 12,450
• Outreach - 44,550
• Total allocated is 57,000
• To allocate by employee only would be
• Café 57,000 x 15 8550
• Outreach 57,000 x 85 48,450

21
Presenting Cost

• Present in the way the SLA requests
• Present direct costs overtly
• Present contingency fee clearly
• Present core cost contribution as a management
  fee. This should include contingency

22
(No Transcript)
23
Resources

• http//www.philanthropycapital.org/tools_for_chari
  ties/available_tools/full_cost_recovery.aspx
• http//www.fullcostrecovery.org.uk/main/index.php?
  contenthome
• http//www.biglotteryfund.org.uk/full_cost_recover
  y
• http//www.scotland.gov.uk/Publications/2007/02/14
  110906/0