Increased pressures on public sector budgets are likely to mean more opportunities for voluntary sector service providers. But getting the full costs paid for, including a portion of general overheads, is not always easy. Many charities are still funding part of the public services they provide under contract from other sources, such as voluntary income.
Orli Gorenski, head of the full cost recovery team at charity chief executives' association Acevo, says she is still surprised at how many voluntary organisations have never really worked out the true costs, including overheads, of what it costs them to provide services. "Many have just been adding on, say, 10 per cent to their contract prices, but when they actually work out the full costs, they turn out to be much higher," she says.
Hugh Thornberry, director of children's services at Action for Children, acknowledges it has been a problem: "Overall, we're still not fully recovering all our costs, but we're nearly there."
He says the situation is likely to get even more difficult because of the public spending squeeze on local authorities and other commissioners of services. "We've experienced zero inflation increases on some of our contracts, even though our costs have gone up because of salary increases," he says.
Barry Roberts, director for new business and contracts at Turning Point, says it is important that third sector organisations insist on full cost recovery from service commissioners and have the systems in place to back up their claims. "It's all about providers having the right financial controls and a clear pricing strategy for services, so that you know exactly what it costs to deliver the service and what you need on top to make sure your organisation is sustainable," he says.
HOW TO SET UP A FULL COST RECOVERY STRATEGY
1. Set up a team to develop a simple full cost recovery model that clearly identifies the various costs, including overheads, that make up the overall cost of delivery. One source of help is Acevo's www.fullcostrecovery.org.uk website. Acevo's Gorenski says: "Our website has a template for a full cost recovery model, frequently asked questions from funders and a list of people in CVSs and other organisations we have trained in full cost recovery, so that voluntary organisations know where they can get help from."
2. Make sure the full cost recovery model is practical and enables the organisation to identify the various costs and present them to potential funders with confidence. "The key to the success of the model is using an up-to-date cost base," says Wendy Ellis, finance director at conservation charity BTCV. She says users of the model should be trained and supported by the finance department.
3. Consider carefully the cash flow requirements of providing the service. A grant will generally be paid up front, reducing the need for cash flow during delivery of the service. Income from a contract, however, might not be paid until much later. John Maddocks, policy manager for the third sector at the Chartered Institute of Public Finance and Accountancy, says charities must examine the cash flow they will need and where it will come from. He says it is important to be clear on whether the service will be treated as a business activity and thus as liable for VAT.
4. Talk to funders about value, rather than just the price. "Too often the discussion with funders about full cost recovery is based purely on the costs," says Thornberry.
Other factors, such as the risk that is being transferred from the local authority to the charity, should also be taken into account, he says. Action for Children, for example, carries out child protection work, which can be a risky area, and also bears financial risks if there are recruitment difficulties and more expensive agency staff need to be used. "Service providers should be talking to funders about how to include the costs of those risks," he says.
5. Make sure your operations are as efficient as possible. Commissioners of services will be more likely to fund the full costs if they believe the voluntary organisation is efficiently run. "We've brought down our management overheads in recent years and will be looking at the direct costs of our projects to see if there is any waste," says Thornberry. In some cases, he adds, it might become evident that the charity is providing more than is required by the contract, so there will be scope for efficiency savings.