An ongoing conversation we have with many charity managers surrounds the area of funding and full cost recovery.
Considered a slightly grey area, we can’t stress enough how important it is to build full cost recovery into your projects, ensuring your charity is more financially secure, you get the most out of your funding grants, and you avoid the need to dip into those all-important unrestricted reserves to cover the additional costs.
However, we know that due to workloads, a lack of time, and limited experience and knowledge in this area, working out full cost bases and apportioning costs for set projects can be challenging.
We also understand that there is a lack of clarity and understanding across entire organisations when it comes to full-cost recovery and what you can and should include.
At Beyond Profit, we want to help.
We want to provide you with the right information, so you have the confidence to submit funding bids, ensuring ALL costs are covered.
Helping you to plan for the future and continue to develop and deliver vital services to your users.
So, what is full cost recovery?
Full cost recovery means you include all costs, both direct and a proportionate share of indirect costs (your charity overheads), that it will take to run a project/deliver a service.
For example:
Direct costs – you can include and cost out all expenses directly related to the project. This may include project staff, employer costs such as National Insurance contributions, employer pension, and any pay raises. You are also entitled to include any recruitment costs you incur, employee assistance costs, and even activity costs such as room hire/rent, postage, IT equipment, etc.
Indirect costs – these are costs that are not directly attributable to the project but should still be included in costing proposals. For example, other staff, i.e., admin or finance teams, your building rent, utilities, rates, repair and maintenance, insurance, administration costs, etc. There’s also the possibility to include a proportion of legal and professional fees, bank charges, accountancy fees, government costs, IT support costs, and more.
Overcoming the main challenges
Some of the main challenges charities have spoken to our team about when we look at full-cost recovery include:
…funders and donors don’t understand the full costs involved in the project or service delivery and therefore are only willing to fund the direct costs they can see.
Another…
…submitting an application for project funding is complex, and it’s disheartening, to say the least, when you find out when the project was delivered, it didn’t cover all of the costs.
And finally…
…the process almost seems too complicated to feel worthwhile.
So how do you allocate indirect costs correctly to ensure full cost recovery and overcome some of these key challenges?
There are three different methods:
1 – Headcount – base made on the total number of staff and the total staff working directly on the specific project.
2 – Floor space – calculations are based on the floor space that is taken by the project.
3 – % of expenditure – from your total costs, what percentage can be apportioned to the project?
How to apportion costs
To keep things simple and straightforward, we would advise you to break costs into specific steps:
- Review all of your organisation’s costs – and we mean ALL of them.
- Then, identify and note the specific costs of the project – both direct (i.e., venue hire charges, sessional worker, project coordinator, etc.) and indirect costs (i.e., manager, administrator, finance officer, rent, printing costs, stationery, postage, telephones, etc.)
- From this starting point, calculate and separate the direct costs out. For example, how long will you have the venue hire for? Sessional worker? Etc and how much in total will this cost?
- Then move on to calculating the indirect costs similar to those above by apportioning and allocating, i.e., apportion costs based on the number of anticipated hours spent, how much floor space is taken up, how often will the project coordinator be working on the project, etc.
- Finally, add your costings up, and check and double-check they make sense and seem reasonable in comparison to the funding bid criteria.
We may have simplified this process slightly, however, the power is in the detail. The key is showing your apportionment, as transparency is vital, and helps to provide clarity and a better understanding of all costs involved – meeting the first and even second challenges mentioned above.
Working through funding criteria
What if, after all of the breakdowns, analysis, apportions, etc., the funder doesn’t allow you to put in indirect costs?
Show them anyway.
In this instance, we advise you to show your indirect costs as either match funding or an in-kind contribution.
This is not to go against funding criteria but to make funders aware of the TRUE costs of delivering a certain project or service, not just the outline.
Benefits of full cost recovery
- It helps you establish appropriate costs for your service(s).
- You have a better and much clearer understanding of ALL of your costs, and you can compare costs with the funding available, allowing you….
- To make better and more informed decisions on which projects you run and if you want to bid for funding.
- You become more sustainable in your business operations.
- If required, you will be aware of the level of subsidy needed from your charity’s unrestricted funds while also protecting reserves.
- Justifies costs to stakeholders, making long-term planning more manageable.
Full cost recovery is so much more than achieving more funding resources.
It’s about ensuring ALL project costs are accounted for so your charity doesn’t have to use other resources and your limited reserves to subsidise the shortfall, but if they do, you and your board of Trustees are fully aware of this and prepared.
Running and managing a charity is hard, and with competition for funding high, at Beyond Profit, we want to promote funding confidence through full cost recovery knowledge and understanding.
We currently run workshops specific to this area of charity management, and we can also provide expert accounting and further financial support in this area if required. Contact us to learn more and see how we can help you today.
