Full Cost Recovery

Full cost recovery is a means by which you recover rent and other overhead costs. It replaces the old system of funding for core costs and funding for projects. Through full cost recovery, each project pays a bit towards core costs like rent and the chief executives salary. The government is encouraging all public sector funders and the Big Lottery to all for full cost recovery in funding applications. Many trusts are also following suit.

Riverside Elders provides advocacy, Minor home repairs and healthy eating/lifestyle advice to people aged over 60 living on an estate. The aim of the project is to enable people to live in their own homes rather than be taken into sheltered accommodation.

Manager 35 hours per week
Outreach Worker 35 hours per week
Total 70 hours per week

 

The manager spends half her time running the charity, including fund-raising and half her time running the advocacy project, which is an output. So 75% of staff time is spent on projects, that is all the Outreach Workers time and half the Managers time, leaving 25% to go on overheads.

Similarly, 25% of rent, office supplies and similar costs relate to the Managers role of running the charity.The other 75% related to the specific projects the outreach projects and the advocacy project.

Riverside Elders Budget 2007/08

Managers salary, ENI, pension £30,000
Outreach Workers salary, ENI, pension £25,000
Staff training £1,000
Staff travel £1,000
Materials (household repairs) £10,000
Rent, rates, heat, light, power £10,000
Office supplies £7,000
Independent examination & AGM £1,000
Total £85,000

 

The charity runs 3 projects

Project A: Advocacy 50% of Mangers time
Project B: Repair project 70% of Outreach Workers time
Project C: Healthy life styles 30% of Outreach Workers time
Total: 150%

 

Indirect costs or overheads or core costs:

Managers time (50% of Managers salary, ENI & Pension) £15,000
Staff training £1,000
Staff travel £1,000
Materials (household repairs) £10,000
Rent, rates, heat, light, power £10,000
Office supplies £7,000
Independent examination & AGM £1,000
Total £33,000

 

There is an argument that some of the travel or staff training could be allocated to specific projects, but we wanted to keep this example very simple.

Breakdown of costs by project.

  Salary Materials Indirect costs Total
Project A £15,000 £1,000 £11,000 £27,000
Project B £17,500 £10,000 £15,400 £42,900
Project  £7,500 £1,000 £6,600 £15,100
Total       £85,000

 

The salary is a straightforward proportion of the workers salary national insurance and pension based on the amount of time the person spends on that project.

Materials. We have calculated the household repairs / materials heading to project B and assumed that the materials of the other projects are £1,000 each and drawn from the office supplies heading.

We calculated above that the total indirect costs are £33,000.

 

There are various ways to allocate these costs to the different projects. For example, we are going to use staff time as the “cost driver by which indirect costs (core costs) are allocated.

We allocated the percentage of staff time to each project above.

 

Project A used 50/150 of the staff time spent on projects so gets charged 33% of the indirect costs.

(50/150) x 33,000 = 11,000

Project B uses 70/150 of the staff time spent on projects so gets charged 70/150 of the indirect costs.

(70/150) x 33,000 = 15,400

Project C uses 30/150 of the staff time spent on projects so gets charged 30/150 of the indirect costs.

(30/150) x 33,000 = 6,600 (see how the figures slot into the table above)

Unit costs. If the Manager handles 80 advocacy cases a year, the cost per case is £27,000/80 = £337.50

If she spends 550 hours on advocacy work a year, the cost per hour is £27,000/55049.09. You might price this at £50 per hour.

 

The full cost recovery process means the unit cost contains an element of core costs and is the modern way by which core costs are funded.

For more on full cost recovery visit www.cash-onlline.org.uk/content/1/56/

For a factsheet on unit costs visit www.cash-onlline.org.uk/content/1/6/

Price does not have to be the same as cost unless it states in a funding contract that the funder will only pay the cost incurred. In a market economy one charges what the market will pay. If you were providing a service for offenders in prison that meant they could be released early with no risk of the re-offending, then the Home Office would be likely to pay a very high fee, so long as it was cheaper than the alternative which would be the cost of keeping people in prison. Sometimes people charge less than the full cost because they are trying to get into the Market or prove the need for an innovative service which funders are not yet keen to buy. Of course you have to fund the loss from somewhere, which is typically from reserves or from a funder who is providing core costs, or even from a funder who is paying over the full cost for a service.

Full cost recovery can be used as the foundation for calculating unit costs. Once you know your unit cost, fundraising application can become very simple. If an advocacy service costs £49.09 per hour and you believe a funder might provide £5,000 then you know you can offer them 102 hours of advocacy (5,000/49.09) or 100 hours if you want to make a small surplus to build up reserves. You need to make an estimate of how many clients 100 hours would cover. If you reckon on an average of 5 hours per client, then 100 hours will cover 20 clients.

The managers time is allocated to specific projects and a bit to governance. This bit of governance then has to be allocated to the projects which some people find a little complicated. At the end of the day if the organisation recovers (is paid for) all its costs (plus a contribution towards reserves) then it has got through another year and every body should be happy.

When you write a budget you estimate how much stationery will be used, how much electricity and how big the phone bill will be, you cannot be sure the estimate will be exactly right. Similarly if you find the maths of full cost recovery a bit complicated either ask CASH to do it for you (if your organisation is in one of our funded boroughs) or estimate the answer.

Fraud

Theft and fraud continue to be a problem for voluntary organisations. People spend years building up small charities, putting in thousands of hours of unpaid time, then other people come and take the community assets that have been built up. As a result children are deprived of reading schemes, old people have poor quality lunches and carers are trapped in their own homes while posers gain from the short- term glory of their illegal wealth.

Many people have little fiddles that they see as perks of the job. The following are illegal:

  • Taking materials home for personal use including paper, pens and food
  • Using the phone for personal business
  • Paying relatives when there has not been an open selection process
  • Paying people for work they have not done
  • Using the charitys meeting rooms for family occasions and not paying for them
  • Providing false invoices for goods the charity has not received or claiming expenses with an inflated invoice, giving a price higher than was actually paid for the goods
  • Taking assets that belong to the charity, including computers
  • Ordering goods and services in the charitys name and having them delivered to your home (his includes getting a builder to refit your bathroom if they get a building contract with the charity).
  • There are grey areas which tend to be bad practice including:
  • Selling workshops that link to the charities activities
  • Taking commission for booking the charitys musicians to events.
  • There are codes of conduct for staff and trustees at www.cash-online.org.uk. There is a set of financial controls, an example of a fixed asset register and conflict of interest paper.

 

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CAP is committed to prioritising service delivery to under-resourced organisations. We are committed to;

Providing high quality, accessible, low cost services.
Equal opportunities - both in recognising diversity and in seeking to respond to meet these needs.
Encouraging organisations to be independent and enabling them to help themselves.
Providing our services on an independent and confidential basis.

 

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