NEWS IN FOCUS: Charities need to charge for true cost of services

PATRICK MCCURRY

Funders are now more willing to pay towards core costs. But charities need to do more to help themselves.

Statutory funders and grant-makers financing charity projects have usually jibbed at paying towards the infrastructure overheads of those organisations, and that has been a major headache for many years.

Small charities with few resources, such as the Bat Conservation Trust, have found it a particular problem. Amy Coyte, joint chief executive at the Bat Conservation Trust, says: "We're a small charity and it's very difficult for us when we have to struggle with government agencies or charitable trusts to get core funding included in contracts or grants."

Although getting grant-makers to accept they must pay for core costs is difficult, campaigning by groups including ACEVO has helped push the problem up the agenda. The Treasury's cross-cutting review of charities supported "full cost recovery" for government contracts with voluntary organisations.

One of the problems has been that many charities have been undercharging for services and not calculating the full cost of the services they provide.

Martin Brookes, of charity New Philanthropy Capital, says: "In the past, many charities have just added an arbitrary fixed percentage, say 10-15 per cent, to the overall project cost but they haven't been able to clearly show the basis for this," he says.

Brookes has recently written a report, published by ACEVO, to try and help charities understand the true costs of providing projects and offer a template that enables them to allocate proportions of support functions, such as the chief executive's office and IT and human resources. The manual follows an earlier report by ACEVO, Who pays for core costs?.

"Since the first report there's been an acceptance by many funders, including government, that charity core costs should be paid," says ACEVO's chief executive Stephen Bubb.

The manual aims to enable charities to understand the true costs of the services they provide and provide a common framework for both charities and funders.

John Graham, finance director at NSPCC, says that many charities have expanded services on the basis of "marginal" cost, which ignores growing strains on overheads, rather than "fully absorbed costing", which takes into account the true picture.

Gerry Beldon, a fundraising consultant, says that it is a mistake for charities to present core costs as separate from the service provided.

"If I buy a car, I don't then negotiate how much extra I should pay for the salesman and it's the same with core costs - they should be included in the bid," he says.

There has been some progress among grant-makers. For example, the Community Fund said earlier this year that it would contribute to some core costs.

Some argue if charities present a more credible and transparent picture of their internal finances and cost base, the pressure on funders will certainly increase.

Toby Johns, director of the Baring Foundation, which has a core costs funding programme, says: "ACEVO's first report put the onus on charities in some areas, such as improving internal accounting, and I think this manual will help achieve more transparency."

But in the public sector, where much of the debate has centred, the picture is mixed. "Some local authorities are more willing to pay core costs than others," says David Evans, a project officer at the Local Government Association.

But to what extent a council pays core costs will be down to local negotiations, says Evans.

Brian Lamb, head of communications at RNID, says the charity has been moving towards "full cost recovery" when bidding for project funding.

"Why should we use our free income to effectively subsidise state services?" he asks.

But he accepts that there is a major challenge if funders are suddenly asked to cough up more money for the same service.

To some extent the voluntary sector has itself to blame for the current situation.

In the past, many voluntary organisations providing services under contract have undersold themselves when bidding and as a result, if they include core costs in a bid, a funder may feel that they are being asked to pay more for the same services.

Others have tried to "hide" core costs in the overall project bid. "That may have worked in the past but today accountants in councils or health authorities are more clued up," says Paul Palmer of South Bank University.

The template the ACEVO manual provides may assist many organisations in working out the true cost of projects but there are also some concerns that financial formulas included may be too technical for smaller charities.

Bubb, however, denies such claims: "It's fairly straightforward for a small charity to use the template and strip out bits that may not apply."

He adds that the manual could also play a key role in helping charities review the costs of various bits of the organisation.

Bubb says: "Using the template, a group of charities could compare what they spend on different elements and conclude that one, for instance, was paying too much in insurance or too little on professional development."

He also stresses that it will be up to charities to decide whether they want to ask funders to pay 100 per cent of the true costs of a project.

"They may feel that they can fund a small proportion from other sources but the key thing is that they understand what the true costs of a project are."

Funding our Future II: Understand and Allocate Costs is available from ACEVO priced £19.99. For information, visit: www.acevo.org.uk

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