FULL COST FULL COST RECOVERYRECOVERY

York Community Accounting York Community Accounting SchemeScheme

Key quotesKey quotes

In 2002, per govt. & third sector; In 2002, per govt. & third sector; “funders should “funders should recognise that it is legitimate for providers to include the recognise that it is legitimate for providers to include the relevant elements of overheads in their cost estimates”relevant elements of overheads in their cost estimates”

HM Treasury in 2003; “HM Treasury in 2003; “no activity can be undertaken no activity can be undertaken without the need for support functions” without the need for support functions” and recommends and recommends acevo’s cost allocation manual.acevo’s cost allocation manual.

But also “before criticising funders for a lack of But also “before criticising funders for a lack of understanding it is important that you have a clear view understanding it is important that you have a clear view of your costs and plans for recovering them”.of your costs and plans for recovering them”.

CIPFA guidance on best value accounting for local CIPFA guidance on best value accounting for local authorities; authorities; the total cost of a service should include an the total cost of a service should include an appropriate share of support services and other appropriate share of support services and other overheads.overheads.

Three Funding modelsThree Funding models

Full project funding; all reasonable Full project funding; all reasonable associated costs are met – the business associated costs are met – the business modelmodel

Development funding; infrastructure costs Development funding; infrastructure costs are met for a time to allow growth & are met for a time to allow growth & developmentdevelopment

Strategic funding; funder recognises need Strategic funding; funder recognises need for organisation to exist in order to meet its for organisation to exist in order to meet its own objectivesown objectives

Present situationPresent situation

Arbitrary fixed percentagesArbitrary fixed percentages RisksRisks

some overheads may not be recovered, and some overheads may not be recovered, and organisation doesn’t know size of shortfall, andorganisation doesn’t know size of shortfall, and

organisations may cut back on essential support to organisations may cut back on essential support to stay within limitsstay within limits

Organisation may accept more (underpaid) work Organisation may accept more (underpaid) work than it can properly manage in attempting to cover than it can properly manage in attempting to cover “core” costs“core” costs

taking work below full cost can only be justified on a taking work below full cost can only be justified on a short term basisshort term basis

Benefits of understanding full Benefits of understanding full costscosts

Improved management of costsImproved management of costs Full fundingFull funding Comparing costs with fundingComparing costs with funding Deciding how and whether to bidDeciding how and whether to bid Improved negotiating ability with fundersImproved negotiating ability with funders

Types of costsTypes of costs

Direct costsDirect costs OverheadsOverheads

Premises and office costsPremises and office costs Central function costsCentral function costs Governance and development costsGovernance and development costs General fundraising costsGeneral fundraising costs

Cost driversCost drivers

HeadcountHeadcount TimeTime Expenditure Expenditure Floor spaceFloor space etcetc

Step 1 Calculate direct costsStep 1 Calculate direct costs

Project AProject A

Project BProject B

Project CProject C

Project DProject D

Step 2 Calculate total overheadsStep 2 Calculate total overheads

Premises & office costsPremises & office costs Central function costsCentral function costs

DirectorDirector Support servicesSupport services

Governance & strategic developmentGovernance & strategic development General fundraisingGeneral fundraising

Step 3 Allocate premises Step 3 Allocate premises costscosts

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

Step 4 Allocate central Step 4 Allocate central functionsfunctions

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

Step 5 Allocate governance Step 5 Allocate governance costscosts

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

Step 6 Allocate general Step 6 Allocate general fundraising (if needed)fundraising (if needed)

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

Project A full costingProject A full costing

the project will now be fully costed to includethe project will now be fully costed to includedirect project costsdirect project costs

share of premises costsshare of premises costs

share of director costsshare of director costs

share of support services costsshare of support services costs

share of governance costsshare of governance costs

share of general fundraising costs (if share of general fundraising costs (if needed)needed)

All allocated on a defensible basisAll allocated on a defensible basis

SummarySummary

Up to date budget/forecast of all costsUp to date budget/forecast of all costs An understanding of the major types of An understanding of the major types of

cost (e.g. direct costs, premises costs)cost (e.g. direct costs, premises costs) Set of relevant cost driversSet of relevant cost drivers

Remember to allocate overheadsRemember to allocate overheadsprogressively until they are all allocated toprogressively until they are all allocated toprojects.projects.

Additional pointsAdditional points

Consider the payroll example:Consider the payroll example:We have costed out the payroll service as £x per annum, and: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 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).(so need to establish how far capacity is, and is likely to be, utilised). There are a lot of small clientsThere are a lot of small clients Some costs vary with the number of staff, some with the number of Some costs vary with the number of staff, some with the number of

clients, some with the number of leavers / starters, etcclients, some with the number of leavers / starters, etc There are significant costs at start – up and at tax year endsThere are significant costs at start – up and at tax year ends There are quite a few competitors providing similar, and in some There are quite a few competitors providing similar, and in some

cases, identical servicescases, identical services Some clients also use other services within the main charity Some clients also use other services within the main charity

(bookkeeping, community accounting)(bookkeeping, community accounting) There are a number of different ways of charging for the service.There are a number of different ways of charging for the service.

So price setting is not a simple task!.So price setting is not a simple task!.