Imagine service company Serco justifying the price of a bid to run a local authority refuse collection service on the basis that it reflected a percentage of its chief executive's salary and the head office and support services costs, as well as the cost of the binmen's wages and vehicles.
Or imagine questioning your restaurant bill on the grounds that you weren't happy that it included part of the mortgage the owner had taken out to buy the restaurant.
This is not how people do business. Quality, price and comparison with others are what count - not how the price was arrived at. So why is it that the third sector is always going on about full cost recovery in contracts, rather than about getting the right price for the job?
Many third sector organisations still rely heavily on grants. Recently, many have found it difficult to get grants to cover the costs of running their organisations. Funders often seem interested only in funding projects.
Full cost recovery began as a response to the problem of covering 'core costs'. Quite rightly, some excellent work was carried out to develop ways of presenting the true costs of delivering projects, and the concept of full cost recovery was born out of this. Gradually, most major grant funders, including the Big Lottery Fund, have accepted the full cost recovery model as a basis for funding projects.
But it is wrong to try to transfer this model wholesale into a commissioning and procurement context. To do so immediately sets negotiations off on the wrong foot and inevitably leads to inappropriate questions from the purchaser about how costs are arrived at.
Whether third sector organisations are applying for grants or contracts, they should begin by analysing what it costs to deliver a service. The template developed by research and advice charity New Philanthropy Capital for chief executives body Acevo, which we give to all Futurebuilders investees, is helpful in this regard.
Having done this, however, those organisations applying for grants and those negotiating contracts should set off on different paths. If you're negotiating a contract, you must consider whether your price is competitive compared with others and whether you can demonstrate the added value your service brings. Your aim should be to recover at least your full costs and perhaps to generate a surplus, but in certain circumstances there may be a case for treating a particular contract as a loss-leader in order to get into a particular market.
There may also be some transitional issues to address if you are already receiving some core grant funding from the public sector. For example, you may have excessive overheads that compare unfavourably with other potential suppliers. In other cases, your best tactic may be to walk away if the purchaser is not prepared to meet your price.
There are some difficult issues to address, particularly in a transition from a grants culture to a contract culture. Nevertheless, you must approach purchasers in a businesslike way. If you use the language of full cost recovery in your contract negotiations, you will continue to be treated as grant applicants rather than as service suppliers.
Some third sector commentators give the impression that grants are a thing of the past and that the future lies with loans and the other new forms of social investment that have developed over the past five years. Nothing should be further from the truth.
One of the most important things Futurebuilders has highlighted in its first three years is just how important grants are for the third sector. But grants should only be used where grants will do. It is a waste of precious resources to use grants to fund expenditure that could equally easily be funded through loans. The more we can get this understood by funders and the sector alike, the better for the development and sustainability of the sector.
There are two situations in which grants are crucial. First, for activities undertaken by voluntary organisations that will never generate income and that therefore require voluntary income, volunteers or grants. These activities cover the major part of the voluntary sector's work and include most local and community action, awareness raising, policy campaigning, infrastructure support, piloting new services and providing services that the public sector is unable or unwilling to fund.
Second, and this is directly relevant to Futurebuilders, is the capacity building most third sector organisations need if they are to get to the point where they can generate income through contracts, fees or sales. This could include initial funding of key posts, such as a business manager or finance officer, or a consultant for business planning, financial management, marketing, pricing, negotiation, governance or any other aspect of organisational development.
Without this type of capacity building, many organisations never get to the starting line in terms of winning contracts. Consequently, their potential for delivering high-quality, sustainable and much-needed public services is never realised. This was one of the issues highlighted by the Treasury's 2002 cross-cutting review, which led to the launch of Futurebuilders in 2004.
Conversely, grants are often used to fund activities that could be funded through loans. Again, there are two main occasions when this occurs.
First, to fund services the public sector could or should be purchasing. Once this practice becomes established, as it has with hospices, it is difficult to reverse. Second, to pay for buildings that have the capacity to generate income - for example, through room hire, rent and direct sales to the public - and which could therefore be financed through loans.
The message, then, is to optimise the use of grants. Don't use grants where loans would do. Grants are a precious resource, and there is only so much to go round, so the Government's new £80m grant fund for community groups is a great bonus. However, by lending finance as well as by giving grants, funders can make their resources go further.
These and other issues will be explored at a conference called Is Futurebuilders Working? on 4 July in central London. For further details, visit www.futurebuilders-england.org.uk or call 020 7927 6364
WHAT IS FUTUREBUILDERS?
The Government established Futurebuilders England in 2004 to help third sector organisations deliver public services. It does this by offering loans and grants to projects that build the sector's capacity to deliver services. It has so far invested £101m in 225 schemes, the largest being £10.2m in grants and loans to Turning Point.
WHAT'S SO GREAT ABOUT THE THIRD SECTOR?
The third sector often claims to bring added or distinctive value to the services it provides. When pressed to explain why, people often resort to talking about the sector being value-driven and committed. They contrast it with the private sector, which is characterised as profit-driven, and the public sector, which is regarded as bureaucratic and disengaged.
This kind of moral superiority not only makes my blood boil, but is also an extremely bad negotiating tactic. Having worked in the public sector for 15 years, I know that most people it employs are also value-driven and committed. Furthermore, if you are seeking contracts from the public sector, the assertion that I have social values and you don't is hardly the best way to start the conversation.
What is true is that there are important structural differences between the sectors, which make it easier or more likely for the third sector to operate in particular ways. Third sector organisations come into being because people feel sufficiently strongly about an issue to want to do something about it. Their mission and objects are focused on this cause and consequently their activities will usually embrace service provision, as well as campaigning. This means they can engage in highlighting needs, influencing service specifications and monitoring services, as well as delivering them.
Third sector organisations are governed by people who subscribe to the organisation's mission and, depending on their structure, will attract members or supporters with a personal involvement in the cause. As a result, they are often able to involve service users as trustees/directors, staff or volunteers, and they can often reach people with whom statutory services find it difficult to connect.
Independence from government is another characteristic of third sector organisations. They are not set up by government and do not have their powers determined by statute. This means their services can focus on users' needs as a whole rather than having to conform to the departmental boundaries. Their independence can also mean they are trusted more than statutory agencies. They can take more risks than government and develop more innovative approaches.
Finally, third sector organisations invest any profit in the development of the organisation and its services, rather distributing it to shareholders or for personal gain. They can also mobilise resources through fundraising and volunteers, as well as earning income through contracts and sales, which gives them the freedom to pursue a wider range of activities.
The missions, governance, independence and resourcing of third sector organisations give them the potential to add value to their services, but they still have to realise that potential, and they still need to provide evidence of the added value they bring.
Their distinctiveness is no accident; it stems from the kind of organisations they are. The sector does not have a monopoly on virtue, but its structures do enable virtue to flourish more easily. That's what's so special about it.