June 1st, 2020 / Insight posted in

Why cost recovery is about more than money

As the post-Coronavirus world takes shape, many charities have seen their income fall and are looking for ways to improve their bottom line.  Equally, many charities have been subsidising core services for years from unrestricted funds without fully understanding this. In both cases, better cost recovery is a relatively ‘straightforward’ way to get more money from grants and contracts and secure effective funding for their work.

Improving on your cost recovery will also help multiple aspects of your organisation. There is the obvious point that it improves your income, but it can also enhance your management information and strategic decision making capability – as well as your relationships and negotiating potential with funders. These areas are not new issues that have arisen during the Coronavirus crisis but have been endemic in the charity sector for a number of years.

Know your costs
In order to be able to recover costs in a grant or contract bid, you must first know what your costs are. This may sound obvious but our work at Moore Kingston Smith has found that around a third of all charities don’t accurately know what their services cost. Studies, such as one completed by Cass Business School, have shown that there is a typical shortfall of between five to nine percent on all bid submissions and we think similarly. This funding gap then needs to be paid for from somewhere and often ends up being funded from unrestricted reserves or fundraising.

Simply, by knowing all of your costs and not missing any out when costing for bids, you can get more money for your organisation. Using something as simple as a standardised template with lines for all of your organisation’s different costs can help ensure that you don’t leave any costs out. We have found that a template, and an effective sign-off process, are the two most effective ways to improve your cost recovery.

Once know your costs you can start to allocate and apportion them. We have seen numerous charities including costs in their overheads that actually relate to their services and this makes their overheads look unnecessarily large. For example, building costs are often included in overheads when part of the building is actually used to deliver services. This is a real cost of that service and should be counted as such. Something as simple as this could reduce your overheads by a substantial amount.

Be transparent
The key message with costing your services and cost recovery is transparency. This applies both internally and externally. If management don’t know how much a service costs, including that service’s portion of overheads and what the surplus or deficit on that service is, then how can they be expected to make informed decisions about the service’s financial viability or sustainability? Good management information is crucial at trying times such as these and management information should include accurate service breakdowns. If a funder is unwilling to cover all of a service’s costs then management are able to measure this funding gap and sign off on whether or not they are willing to subsidise that service and how.

Externally, how are you supposed to have transparent and open conversations with a funder if you aren’t telling the true story of what your services really cost? It may be that you want your services to appear cheaper to funders but this will create a funding gap to be subsidised from other means if you underprice your services. Additionally, if you then need to go back to the funder in the future and negotiate to close the funding gap, that lack of initial transparency will hinder any subsequent negotiations. We have had clients in the past who have underpriced their services and then found themselves in real financial difficulty when they couldn’t fill that funding gap from other sources and the funder was unwilling to increase their funding.

If funders are unwilling to pay for our services in a sustainable way then we need to be able to transparently sign off on that gap and how it will be paid. Alternatively, we may need to sometimes make the difficult choice of saying no to unsustainable grants and contracts where we are unable or unwilling to subsidise the delivery of that service.

More and more funders are realising that overheads are an important part of charities’ ability to deliver their services and that not having a ‘fair proportion’ of overheads can severely impact on the quality of charities’ work and its long-term viability. With this comes a pledge from those funders to pay for a fair portion of overheads to ensure that charities are able to deliver their services in a sustainable way.

Charities need to start being open about the true cost of doing their work, and that includes claiming a reasonable portion of overheads on grants and contracts. The work that we do changes lives and so deserves to be funded in a sustainable manner so that we are able to keep doing that work in the future.