Overheads and cost recovery
Introduction
1.
The meeting between the Finance Minister and Third Sector held on 14 May 2012
asked WCVA to prepare a paper on overheads and cost recovery in the context of
Welsh Government funding and the third sector. This paper has been subsequently
prepared to set out information and issues for the third sector relating to Full Cost
Recovery.
The principle of Full Cost Recovery
2.
The principle of Full Cost Recovery is widely accepted. The Welsh Government’s
Code of Practice for funding the third sector identifies Full Cost Recovery as one of
the guiding principles it applies to funding the third sector:

“Full Cost Recovery ‑ Levels of grant funding will be based on and reflect the
principles of Full Cost Recovery.”
3.
The Code goes on to that that it is expected that all applicants “use a Full Cost
Recovery model for project funding to ensure all costs associated with the project
are met”.
4.
This is consistent with guidance from the National Audit Office:


No activity can be undertaken without its provider incurring central administrative
costs;
Funders and commissioners have an interest in meeting their fair share of a
provider’s central administrative costs because that will help to ensure that the
provider can manage its activities and finances properly, and will contribute to
the organisation’s sustainability.
(See Appendix 1 for further details).
5.
WCVA and CVCs have published an information sheet for the sector explaining Full
Cost Recovery (see Appendix 2).
6.
It is recommended that the Welsh Government’s support for the principle of Full
Cost Recovery is re-emphasised in its internal guidance to grant officers as the
expected norm.
Scope of Full Cost Recovery
7.
The current edition of Welsh Government Code of Practice for funding the third
sector does not further define the scope of Full Cost Recovery.
8.
The Big Lottery Fund describes typical overheads as including:



Salaries of core staff such as managers, administrators, finance staff, cleaners
and caretakers
salaries of staff, including managers working on this project and a number of
other projects
meetings of the trustees or management committee and their expenses
1






audit, accountancy and legal fees associated with running your whole
organisation
rent, heating, lighting, maintenance and insurance for premises your project
shares with other projects
administration and office costs that support several projects including your
project. For example: stationery, phone bills, postage, photocopying and
computers
professional fees associated with strategic planning
fundraising for the costs of supporting the organisation as a whole
statutory redundancy payments
9.
It is recommended that BIG’s description of the scope of Full Cost Recovery is
adopted by the Welsh Government.
10.
At the end of a funding period Welsh Government will meet statutory redundancy
costs where alternative employment is unavailable and such costs are unavoidable.
Practical application of Full Cost Recovery
11.
The current edition of Welsh Government Code of Practice for funding the third
sector also does not provide guidance on appropriate models for calculating a fair
contribution to over heads.
12.
The method for calculating Full Cost Recovery may depend on the size of
organisation and the nature of its work. The Big Lottery Fund identifies a range of
options (see Appendix 2) and advises that “allocation of overheads to the project is
only an estimate. It does not have to be too detailed or time consuming. Just make
sure the allocation method is fair and reasonable based on the information you
have.”
13.
For projects where staffing is the main cost, overheads are most commonly
calculated by apportioning overheads on the basis of staff time or staff numbers.
14.
WCVA’s recharge methodology is attached as Appendix 3. This meets the
requirements of ERDF and ESF funding, and WEFO’s internal auditors. A recent
Welsh Government review of its funding arrangements with WCVA (June 2012)
concluded that WCVA’s methodology for apportioning re-charged overhead costs is
“sound and thoroughly applied”.
15.
It is recommended that:

WCVA’s methodology is endorsed by Welsh Government as a suitable model for
calculating costs
Value for money
16.
It is important that public sector funders recognise the cost of their own central
services and overheads in assessing the relative value for money of services
provided by the public sector and third sector. Officials responsible for specific
services may be unaware of the full cost of these, because central services and
overheads are accounted for elsewhere in their organisation.
17.
As a result third sector organisations have reported comparisons being drawn by
public sector funders between third sector costs (including overheads) and public
2
sector costs (direct delivery only, excluding overheads). This is of course
inappropriate, as all public sector overheads are met by public funding, and must be
factored in to the cost of any services.
18.
The Welsh Government review of its funding arrangements with WCVA in June
2012 undertook a benchmarking exercise comparing WCVA with similar third sector
organisations, as well as with a number of public bodies. It concluded that “the cost
of the re-charged overhead per staff member is broadly consistent with comparable
organisations, and in the majority of cases appears to be lower”. Details of the
benchmarking are attached as Appendix 5; for the purposes of this paper, estimated
central costs and overheads for the Wales Audit Office and the Welsh Government
have been added. The information indicates that third sector costs are lower than
public sector costs, and significantly lower in some cases.
Conclusion and summary
19.
As part of its remit to improve and ensure consistency, it would be help for the
Grants Management Centre of Excellence to consider the information and issues in
this paper with a view to providing guidance to grants officer on the scope and
application of Full Cost Recovery.
20.
It is therefore recommended that its guidance includes:




21.
Re-emphasis of the Welsh Government’s commitment to the principle of Full
Cost Recovery to re-emphasised to grant officers as the expected norm
An explanation of the scope of Full Cost Recovery, reflecting BIG’s description
Confirmation that accrued statutory redundancy costs be included where
alternatives are not possible.
Endorsement WCVA’s methodology as a suitable model for calculating costs
It is further recommended that:


The Welsh Government Code of Practice for funding the third sector is updated
to include this guidance
Welsh Government promotes the guidance as expected practice to local
government and other public bodies
3
Appendix 1: from National Audit Office website
Full Cost Recovery (FCR)
The government and the Compact recognises that:


No activity can be undertaken without its provider incurring central administrative costs;
Funders and commissioners have an interest in meeting their fair share of a provider’s
central administrative costs because that will help to ensure that the provider can
manage its activities and finances properly, and will contribute to the organisation’s
sustainability.
This means that your programme must finance its ‘fair share’ of all providers’
administrative costs. This principle is known as ‘full cost recovery’. In addition, if the
provider is a charity, you must not expect it to subsidise the cost of your programme from
donations that it receives.
Under procurement
Under procurement, it is up to:


The potential provider to bid at a price that it considers appropriate, taking account of
all its costs
You to accept (or not) that bid. In deciding this, you must consider whether the potential
provider’s proposed price is sustainable. You cannot give preferential treatment to
TSOs. However, as part of good risk management, you must check that any award will
provide the degree of continuity of service required by the objectives of the programme.
Under grant
There are two possible scenarios under grant.
The first is the one in which your organisation wishes to give money to a TSO to contribute
towards the TSO’s purpose. You must check that the proportion of the grant that will go
towards administrative costs is reasonable and provides value for money.
The second is the one in which your organisation wishes to give a grant to a TSO for
provision of a service. You and the provider must agree the full cost of the activities that
the provider will carry out on your behalf and the proportion of those that will go towards
administrative costs. Transparent costing, rather than pricing, based on a sound
methodology, is the best way of ensuring this. Treasury guidance says that, when making
grants, funders should assess in a simple, proportionate and equitable manner whether
third sector organisations have allocated relevant overhead costs and ensure that costs
are recovered only once.
Under grant-in-aid
Under grant-in-aid, your funding is not restricted to specific activities, so it can be harder to
establish the correct amounts of funding needed, including full cost recovery. However,
where the funding is intended, for example, to allow the TSO to develop its services in a
way that requires taking on additional staff, you and the provider must ensure that the
funding will be sufficient to cover at the very least the full costs of those staff and an
4
appropriate share of administrative costs. Transparent costing, based on a sound
methodology (rather than pricing) is the best way of ensuring this.
When a TSO delivers a service on behalf of a public body, that service will need to be
managed, and that management will have to be financed. FCR is an acknowledgement
that, if you fund a TSO to deliver a service, you must also fund your fair share of the
management cost.
Calculating Full Cost Recovery
The common principle is to:


Calculate the total management cost for the TSO, including elements such as
governance, strategy and policy, human resources, finance and quality assurance;
Apportion the total management costs across the TSO different programme’s of work in
proportion to the size of each of those programmes.
In doing this, make sure that the apportioned costs are fair and reasonable. For example,
a volunteer’s time should not be included but the cost of managing volunteers should be.
Putting it into practice
The methodology available for calculating the management cost varies between grants
and procurement. In a grant process, you and the TSO apply the principle set out above
working with openness and trust. This implies a relationship that is based on shared
values. It often works well if both parties are open about finances.
The method in procurement is somewhat different. Here, the provider will bid at a price
that it believes will win it the work. It is not your job to second guess the price offered,
whether the bidder is from the private sector or the third sector. But you should check that
the price offered is realistic. In particular, does it include a sufficient element for
management? If not, the proposal may not be sustainable and you may be faced with
dealing with a failure to deliver and the cost of another round of procurement. In the long
run, better value for money may be gained from choosing an alternative provider that has
more realistic costings.
Gifts
There is one case where FCR is not an issue. If your public body makes a gift towards the
cost of a TSO’s activities (typically in the form of a grant without significant conditions), that
is analogous to you personally making a donation to a charity of your choice. You are not
in that situation responsible for the cost of the TSO’s overheads.
5
Appendix 2: from WCVA/CVC information sheet
Full cost recovery
Why?
Historically, third sector organisations have struggled to secure funding for their overhead
costs, leading to under investment in management and leadership, internal and external
infrastructure, strategic development and governance. This difficulty has been exacerbated
by a trend on the part of the sector's funders towards funding the direct costs of projects
rather than overheads or ‘core funding’. Failure to secure funding for overhead costs
makes important services, including public services, and the organisations that deliver
them, unsustainable. Both government and the sector's representatives have agreed on a
solution: full cost recovery.
Under full cost recovery, organisations and their funders ensure that the price of contracts
and grants reflects the full costs of delivery, including the legitimate portion of overhead
costs. This commitment poses challenges for both organisations and their funders.
Third sector organisations must cost their projects and services on an accurate, defensible
and sustainable basis.
Government must ensure that all public bodies fund services sustainably, by permitting the
inclusion in prices of the relevant portion of overheads, and ensure that prices are
determined on a realistic basis.
HM Treasury first endorsed the principle of full cost recovery in its 2002 cross cutting
review, The role of the voluntary sector in service delivery. The review stated that ‘Funders
should recognise that it is legitimate for providers to include the relevant element of
overheads in their cost estimates for providing a given service under service agreement or
contract.’
What is full cost recovery?
Full cost recovery means recovering or funding the full costs of a project or service. In
addition to the costs directly associated with the project, such as staff and equipment,
projects will also draw on the rest of the organisation.
For example, adequate finance, human resources, management, and IT systems, are also
integral components of any project or service.
The full cost of any project therefore includes an element of each type of overhead cost,
which should be allocated on a comprehensive, robust, and defensible basis.
Implementation
All organisations have overhead costs, associated with:




Management and leadership.
Infrastructure and accommodation.
Finance, governance and controls.
Strategic development.
6
These overhead costs must be met in order for the organisation to survive, grow and
develop. They are therefore essential to all its outputs.
Under full cost recovery, organisations analyse their overhead costs and allocate them
across the outputs, projects and services they deliver. Under this system the cost of each
output includes an appropriate element of funding for overhead costs.
By implementing full cost recovery, third sector organisations develop a full understanding
of the true cost of their work. Such an understanding is essential for effective financial
management and strategic planning across any organisation. Understanding the true cost
of your work will enable you to have a more informed dialogue with funders in:



Grant-seeking
Competitive tendering, and
Fundraising
Full cost recovery will help organisations avoid the problems involved in:



Generating shortfalls in funding through the use of arbitrary percentages for
management costs.
Cost conversion: attempting to repackage overhead costs as projects; and
Cost donation: attempting to find scarce ‘core funding’ to cover your overhead costs.
Full cost recovery is standard practice across the commercial sector, and is rapidly
becoming standard practice in the third sector.
Example
Say for example you apply for a grant to deliver a particular project. In addition to the direct
costs of additional staff, extra computers, office supplies and so on, the project will also
occupy some of your Chief Executive's time, your Finance Manager's time, and your IT
support staff's time. To achieve full cost recovery, the amount of funding you request in
your grant application needs to reflect the amount of time devoted to the project by these
staff, as a proportion of overhead.
So, if the annual cost of employing your Chief Executive is £50,000 (including salary,
National Insurance, proportion of rent/utilities etc.), and they spend 10% of their time
working on the project, to recover your full costs you need to include a cost of £5,000 for
the Chief Executive in your funding request. The same would apply for the Finance
Manager and IT support time. All of these costs are necessary in order for the project to
run effectively and efficiently, and you are therefore justified in asking for them to be
funded.
If your organisation is not recovering the full costs of projects, it is at risk of creating a
deficit that has to be met by additional fundraising or by using unrestricted funds. This
means that the organisation as a whole is effectively subsidising the project, which may
jeopardise its ability to continue to provide its services in the future.
Further information
Full Cost Recovery - a guide and toolkit on cost allocation: Guide & Interactive CD-Rom
www.acevo.org.uk
Big Lottery Fund – useful guidance www.biglotteryfund.org.uk
7
Appendix 3: apportioning overheads: Big Lottery Fund
Direct project expenditure
One of the simplest methods for sharing overheads is based on direct project expenditure.
This method is only appropriate if the overheads are small compared to the total direct
project costs and the direct project costs in each project are of a similar type. For example,
if one project is staffed entirely by volunteers and another by paid staff, the apportionment
to the volunteer led project may be too low if this method is used.
Number of users or beneficiaries
The number of service users or beneficiaries may be an appropriate basis for sharing
overheads if each beneficiary incurs a similar level of costs or if you will receive funding
based on the number of beneficiaries.
Staff time based methods
If you have one or more managers who each manage several projects, and the
management costs are substantial, it may be appropriate to share these costs based on
the managers’ time spent on each project. Projects sometimes require more management
time in the start up and close down phases, so this can be an effective way of allowing for
this.
Sharing overheads in different ways
Sharing different types of overhead in different ways is often unnecessary and may not
improve the accuracy of your estimates. However there are times when using more than
one basis is appropriate. If some projects do not incur one category of overhead then it
may be necessary to use a different basis for sharing the different overheads.
Accuracy
The allocation of overheads to the project is only an estimate. It does not have to be too
detailed or time consuming. Just make sure the allocation method is fair and reasonable
based on the information you have.
Checking your results
After calculating your project’s share of the overheads you should consider if the results
make sense. Ask yourself:



Do the results appear reasonable from your knowledge of the project?
are the projects’ overhead costs compared to the project’s direct costs fair and how
does this compare to other projects?
is the project’s share of the organisation’s entire overheads fair and how does this
compare to other projects’ shares
8
Appendix 4: WCVA Overhead Recovery
The principal cost driver within WCVA is recognised to be staff. After allowing for payments
of grants and contractual payments to ILM providers, staff costs represent nearly 46% of
our total costs.
Experience has indicated that this ratio is fairly constant across all projects that WCVA
operates. This has allowed us to develop an overhead recovery model that does not
involve substantial expenditure on the capture of trivial data (pages photocopied,
envelopes used, letters sent) nor on an overly complicated method of somehow allocating
indeterminate costs as though they were determinable, yet allows an end-of-year accuracy
check.
The entire process is based on an analysis kept by all project staff of the time that they
spend during each month on each project for which they undertake work. This amount of
time, per project, is expressed as a percentage of the total time spent on all projects over
the month; this has the benefit of removing variations arising from periods of holiday,
periods of sickness etc. all of which are payable under the employee’s contract of
employment. The percentages are accumulated on a monthly basis for all members of staff
thereby resulting in a full-time equivalent number of staff working on the project during that
month.
To this resulting number we then apply three factors, which currently are:



A monthly charge to represent the cost of providing office accommodation
A monthly charge to represent the cost of providing office consumables
A monthly charge to represent the cost of providing a corporate infrastructure
The level of each of the factors is initially set in accord with the Budget for the forthcoming
year but is then verified at the end of the year to ensure that the recharge was reasonable.
Office Accommodation
Accommodation costs comprise:






Business rates
Light, heat and power
Insurance
Security and cleaning
Depreciation
Property repairs and maintenance
We add the budgeted property costs of all WCVA properties and divide by the budgeted
total number of WCVA employees thereby arriving at a cost per employee for office space.
At the end of the year the actual cost of all WCVA properties is determined and divided by
the actual number of employees throughout the year to ascertain that the actual outturn is
compatible with the budget. Any significant variation is adjusted in the budget setting for
the coming year.
9
Office Consumables
Consumable costs comprise:







Postage
Telephone
Stationery
Printing
Photocopying
Office equipment
Equipment Repairs
We add the budgeted consumable costs at all WCVA properties and divide by the
budgeted total number of WCVA employees thereby arriving at a cost per employee for
consumable usage. At the end of the year the actual consumable cost at all WCVA
properties is determined and divided by the actual number of employees throughout the
year to ascertain that the actual outturn is compatible with the budget. Any significant
variation is adjusted in the budget setting for the coming year.
Corporate Infrastructure
Corporate Infrastructure costs comprise:

Chief Executive’s Office
- Governance
- Leadership
- Risk and audit

Strategy Directorate
- Finance
- HR
- ICT
- Performance
- Quality assurance
- Health and safety.
- Data protection
We add the budgeted costs at all WCVA infrastructure and divide by the budgeted total
number of WCVA employees (other than those included within corporate infrastructure)
thereby arriving at a cost per employee for corporate infrastructure. At the end of the year
the actual cost at all WCVA infrastructure is determined and divided by the actual number
of employees (other than those included within corporate infrastructure) throughout the
year to ascertain that the actual outturn is compatible with the budget. Any significant
variation is adjusted in the budget setting for the coming year.
Acceptability
The methodology outlined above, which was agreed with WEFO in 2001 and has been
used consistently on all European projects administered by WCVA since that date, has
also been found acceptable by three sets of external auditors to WCVA (KPMG, Deloittes
and Grant Thornton) when auditing ESF and ERDF claims as well as by WEFO’s own inhouse auditors.
10
A recent Welsh Government review of its funding arrangements with WCVA (June 2012)
concluded:


WCVA’s methodology for apportioning re-charged overhead costs is sound and
thoroughly applied; and
The cost of the re-charged overhead per staff member is broadly consistent with
comparable organisations, and in the majority of cases appears to be lower.
11
Appendix 5: Value for money: benchmarking
information
WCVA carried out a benchmarking exercise to identify the overheads of comparable
national third sector organisations, and some smaller public bodies, to contribute to the
Welsh Government review of its funding arrangements with WCVA (June 2012). Its table
of comparisons is overleaf.
The exercise indicated that overheads for other national third sector organisations in
England per full time equivalent employee ranged from around £11,200 to over £14,000.
Overheads for public sector organisations ranged from just under £12,000 to at least over
£17,000.
WCVA’s costs, based on its 2011/12 accounts, were just under £10,000 per full-time
employee. For its Full Cost Recovery methodology, the charge for individual project staff
would be slightly higher as the total support cost is apportioned to employees excluding
those directly providing the support concerned.
Based on the Welsh Government 2012/13 budget and June 2012 employee headcount, it
is estimated that the overhead cost per full-time equivalent employee is £17,395. However
this excludes an apportionment of salaries and on-costs of support staff (management,
HR, finance, IT etc.) included in other comparisons; real costs will therefore be higher
when this is included.
12
Number
of staff
(FTE)
Support cost
per staff
member
Information source
Total support
cost
Association of Chief Executives of
Voluntary Organisations (ACEVO)
2010/11 accounts
(Charity Commission)
489,827.00
Support staff costs, office expenses, staff and board expenses, legal
and accounting, depreciation, and delivery costs.
40
12,246
Arts Council for Wales
2010/11 accounts
(Charity Commission)
and direct information
from ACW
Staff related costs, infrastructure, office running costs, professional
fees, irrecoverable VAT, amortisation and depreciation, grant making
797,000.00 and arts development, arts strategy and research, international,
services, and advocacy. General activity costs included only - as
lottery distribution is charged a different rate.
68
11,721
Care Council for Wales
2010/11 accounts
(Care Council for
Wales website)
Chair, members and staff expenses, other staff costs, rental under
operating leases - accommodation, other premises costs, workshops,
seminars, promotions, publications, equipment and software, rental
under operating leases - photocopiers, administration,
85
14,965
Premises costs, office costs, IT, professional fees, management,
587,000.00 support and training, depreciation, welfare and travel, recruitment and
auditors remuneration.
52
11,288
The costs of generating funds, governance, representing members to
government, learning and development of members, support services
to members, assessing members' performance, specialist advice
services to members and consultancy costs.
37
13,401
115
12,256
27.04
14,904
93
13,729
56.1
13,647
Organisation
Locality UK (DTA/BASSAC)
2010/11 accounts
(Charity Commission)
National Association for Voluntary and
2010/11 accounts
Community Action (NAVCA)
(Charity Commission)
1,272,000.00
495,851.00
Areas Included
Chief executives office's, deputy Chief executives office's expenses,
the costs of generating funds, advisory services and information,
campaigns and communications, education, policy, research,
consumables, governance and premises costs.
The National Council for Voluntary
Organisation (NCVO)
2010/11 accounts
(Charity Commission)
1,409,401.00
Older People's Commissioner Wales
2010/11 accounts
(Older People Wales
website)
403,000.00
Scottish Council for Voluntary
Organisation (SCVO)
SCVO information via
WCVA
1,276,800.00 Accommodation, finance, human resources and ICT support costs.
Volunteering England
2010/11 accounts
(Charity Commission)
765,594.00 Chief executive office's, governance and corporate services costs.
Welsh Government
2012/13 budgetJune 2012 headcounts
91,377,000
Rents under operating lease, other accommodation costs, ICT,
professional fees, training and development, travel subsistence, audit
fees, provision for property redecoration, and other administrative
expenses.
Central running costs (general administration, capital charges, IT
revenue costs and Enabling Government)
5,253
17,395
It should be noted that the majority of the information is based on the annual accounts of
organisations. The exact definitions of what constitutes an overhead may vary from
organisation to organisation.
13