Full cost recovery is promoted as a method by which charities can achieve sustainability from their primary sources of income. But under full cost recovery charities remain a soft option for outsourcing services, risk and pension costs on the cheap, and commissioning bodies will continue to take advantage.
Full cost recovery is effectively cost price. A business selling services at cost price would not survive in the long term because of poor cash flow and a lack of money for investing in new services. People think the not-for-profit status of charities means they have to run loss-making services.
An insidious problem with full cost recovery is the amount of detail that has to be provided and the imbalance of power it creates.
Funders take on a surrogate management role by tinkering with elements of a project or its overheads.
Charities should value their services fully by pricing them realistically and including running costs as well as other factors. Charities incur risk with government contracts, and that risk should be priced accordingly.
A premium should be charged to reflect the additional uncertainty of short-term contracts - this would act as an incentive for long-term contracts.
Partnerships between public and private sector bodies can act as a useful benchmark - the risk/reward relationship is recognised and contracts can last 25 years, with penalties for early termination.
The cost of volunteers is often negligible, whereas the value of their work is significant and should be priced accordingly. If charities priced services, this would help to redress the power imbalance inherent in many funding relationships - pricing methods are readily understood and easier than the convoluted calculations needed for full cost recovery.
Outcome funding, where charities get money based on outcomes, could be one way forward, but some funders think this means holding charities accountable to outcomes while funding only the costs. When paying for consultancy services, you pay for the value added - not merely salaries and an arbitrary percentage for overheads.
Charities need to be commercial in their dealings by demanding a going rate for services and by being ready to walk away. Those chosen for providing quality services should get sustainable levels of income instead of having to subsidise public services with voluntary donations.
If charities are subsidising the work of government, the ethos of charities and the essence of volunteering are at stake. Commercial pricing should help charities value themselves and their services more effectively.