Mike Bath, Director
Newbury Office Wilkins Kennedy
Feb. 12, 2020
An organisation needs to know what its overheads are in order to avoid running at a deficit. However, as Wilkins Kennedy Director Mike Bath discusses, research by the Centre for Charity Effectiveness at Cass Business School showed that only around 1 in 3 charities had a firm grasp of their overheads, were good at recovering them and at negotiating with funders to cover them.
Without a full understanding of how overheads relate to different services and activities, it is easy for a gap to open up between the actual costs incurred and the amount raised, either by charges to service users or contract/grant bids: a gap that will need to be covered either by diluting unrestricted funds or by additional third-party fundraising.
When a charity looks at the cost of a project, it needs to look at what support and resources it needs from the rest of the organisation as well as the direct costs of the project itself. Adding these two cost types together gives the full cost of the project, and full cost recovery is when funders pay for the relevant proportion of support costs (i.e. the charity recovers the full cost from them). This is what charities should aim for but is often far from easy in practice.
If a charity cannot recover the full cost of a project from funders, it needs to decide if the project is still something that it wants to do. There are often very good reasons for taking on projects that aren’t fully funded, but this decision needs to be taken carefully, and with an eye to what else might be done with whatever levels of unrestricted funds will be needed to ‘top up’ the full project cost. Where a project or service is only partially funded then the level of top up required needs to be kept under constant review.
Effective cost recovery means that a charity has confidence in its:
Mark Salway of Cass has recently released a cost recovery toolkit for charities, having worked in this area for many years, building on the framework put forward by the Association of Chief Executives of Voluntary Organisations as far back as 2004. The primary aims of the toolkit are:
The toolkit starts by splitting a charity’s entire cost base into three distinct categories:
Once the full costs have been identified the charity can make an informed decision on pricing. For grant awards, the amount of any grant is usually restricted to the full cost of providing the activity. In contrast, services delivered under contract may often allow an element of ‘profit’ and/or contingency. Contingency is particularly relevant if there is a significant risk that it may not be possible to deliver the contract in full due to factors which are outside of the charity’s hands: this might affect charities engaged in disaster relief or which operate in unstable regions. Pricing contingency into bids is common practice in commercial contracts and is an area that the charity sector should adopt more widely than it does currently.
The steps to full cost recovery can be summarised as:
The toolkit gives an example of a charity with a contract from a local authority worth £750,000 where the charity had originally calculated its overhead as being 7% of direct costs. Using the toolkit, the charity identified that its overhead was actually 20% - a typical figure for a charity and one which is far lower than for many commercial organisations. Armed with a robust and transparent analysis of its full cost position the charity was able to negotiate an additional £100,000 in funding.
For further information on the areas raised in this Insight, or to discuss in more detail, please speak with your usual Wilkins Kennedy contact or a member of our specialist Not for Profit team.
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