Full cost recovery

An introduction to the principle of full cost recovery, why it’s important and concludes with resources to help organisations apply the principle to budgets.

Full cost recovery is about:

1. Ensuring that the budgets for services include the real cost of managing and delivering each of those services. In other words:

The total cost of service or project = the direct costs associated with the project or service + a proportion of the organisation's overheads

2. Ensuring that funders and commissioners pay for it.

Direct costs are those expenditure items directly associated with the project or service. Examples include salaries for a project co-ordinator, a PC and desk for the project, and some money for recruitment, or printing costs for a flier to promote the project or service.

Indirect costs are the overheads of the organisation. This includes rent, the management salaries like finance worker and the director, and utilities, ICT, insurance, or legal costs.

Benefits

Full cost recovery helps the organisation decide on whether:

They would like to subsidise a project or service with another source of income and;
how much to subsidise that project or service

Example
TeenWorks, an organisation that works with 15-20 year olds, is submitting a bid to a local authority to run a tutoring programme for secondary students.
They also are applying to the Big Lottery Fund to run their after school fitness club, and they earn income from the TeenWorks online store.
All TeenWork services use the same premises. The organisation divides the rent between all three services based on usage, i.e. how long does each service use the premises for and how much space does each service take up.
What to consider:
The council or the Big Lottery might come back to them and say that they need to lower the costs.
TeenWorks can try to convince the council or Big Lottery that the cost is fair and accurate, or they can use earned income from trading to lower it. This is what we mean by subsidising one service with income from another.
Just to point out- the Big Lottery Fund is committed to paying the full costs, and have provided guidance and a workbook to help applicants.

Full cost recovery helps organisations manage overheads so that they are not excessive, and so they are fair and proportional to the services and projects of the organisation.

Example
You are looking to add a website and database to the organisation and it turns out that this would raise IT costs to £30K/year, increasing the core costs for your organisation to £65K/year.
Your organisation runs two projects that cost £120K/year together, to be funded by a combination of a grants.
What to consider:
Adding these IT functions almost doubles your core costs. Is this necessary? What value for money will the organisation get? IT is an expensive overhead that, if not managed, can get out of control fast. You might get a grant to develop and maintain a fancy website for three years, but when the grant runs out the maintenance costs will have to be apportioned across all your projects and services.

Full cost recovery contributes to financial stability. Applying full cost recovery when devising your budgets allows you to calculate other useful bits of information, such as unit costs, that can be used in marketing, fundraising and bidding on tenders.

What is a unit cost?
A unit cost is what it costs to produce a single output.
Examples
£7/student = cost of one person to attend band camp
£155/user = cost to provide a bed and three meals a day for one refugee client
Unit costs are effective in marketing your service and negotiating contracts. If a local authority or a funder who is commissioning calls up and asks “How much to support X amount of users?” then you can immediately calculate the cost and get back to them (Number of users X Unit Cost).

Support

The biggest challenge for organisations is deciding how to allocate core costs across projects and services. There are workbook templates and CD-ROMS that can help.

However these may not be appropriate for new or small community groups. Our advice is to go through your own core cost allocation exercise by following four steps:

1. Identify the direct costs for your projects and services

2. Identify the core costs for your organisation

3. For each core cost ask yourself: how does each project or service use the core cost?

In terms of time, usage and space? How does this fit in with short and long term developments?
In the example above about IT, the long term consideration is whether the organisation will be able to afford to pay for the IT infrastructure once the investment from the grant is finished.
What does the funding situation look like? Hopefully considering these questions will help you decide how much of the core cost in question you should allocate per project or service.

4. Allocate the portion of the core costs agreed to each of the projects and services.