Most charities have heard of full cost recovery and try to ensure that their bids are covering all their costs. But will the price they have agreed cover all the risks they are taking on?
This is most easily explained by examples. Let’s say you are a charity that has a tried-and-tested method of working with children who are behind in their reading ages. You train volunteers to listen to the children reading in after-school clubs.
It is not difficult to cost the model and you have a theory of change so that you can measure the difference the charity is making. You can sell this as a service to schools, communities and funders who want to buy these outcomes. You can commit to delivering specified outcomes for a known cost. You understand the risks involved because you have experience and can build in the costs of management and possible contingencies. As a charity you can feel comfortable accepting contract-based funding for this service.
Now let’s look at a different example. In this case, the charity wants to tackle the educational under-attainment of children in a particular area of your town, and one indicator is a lower reading age than the birth age. You first need to undertake research to find out more about the circumstances of the children and their families, then you might be able to suggest solutions, devise programmes and undertake activities.
At this stage you cannot say what the outcomes will be, let alone what activities might be needed to achieve some level of change. You need to be careful about signing a contract to deliver a set of outcomes because of the uncertainty and risks. The danger is that the funder is passing these risks on to you without providing enough funding to manage them.
You need a funding source that is comfortable with uncertainty. In this situation, a grant is more appropriate because the funder is joining you on the journey and funding inputs into something new. The funder is sharing risk: neither you nor the funder can be certain of the outcomes. Such a funder is more likely to take an interest in the approach, the people undertaking the research, how it will be evaluated and how decisions about next steps will be taken.
In the private sector entrepreneurs seek equity investment for new and innovative ventures, but we can’t issue shares in charities. However, we do need risk-taking investment. We used to have strategic funding, which was backing for an organisation, but there is now very little of this. Funders would need to bear all the risk and some of the funding might be lost. That is the nature of innovation and enterprise.
We are more comfortable with this type of risk when funding scientific research. If we want to get serious about finding solutions to old problems, we need to provide more funding for risk-taking in the social sector.
Kate Sayer is senior consultant at specialist auditors Sayer Vincent