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Is it time up for

Full Cost Recovery?


Looking at Full Cost Recovery two years on

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Summary
The third sector is changing. Our increasing role in service delivery is transforming the
sector. This change has led to new dialogue within the third sector regarding cost
recovery and has led some to challenge that the sector must modernise and talk in
terms of ‘price’ rather than ‘cost’. Yet as this report will illustrate, the fundamental
principles of cost allocation remain the same: for successful public service delivery, third
sector organisations must fully cost their products and services.
The impact of full cost recovery within the third sector has been substantial and it looks
set to remain an integral part of the future of a successful and progressive third sector.
However, to fully realise the potential of the third sector in terms of service delivery, we
must address new challenges – the behaviour of both the third sector and the funding
organisations they interact with.

Recommendations
Third sector leaders should:
쮿 Be pragmatic but prudent – the need for pragmatism in some situations does not
undermine the need for third sector organisations to employ full cost recovery in
their planning processes. Whatever the funding arrangements, third sector
organisations must fully cost their products and services for a sustainable future.
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쮿 Be inspired – good practice in cost recovery should be highlighted and
acknowledged across the sector.
쮿 Be confident – skill sets and attitudes within the third sector need to be improved in
order to facilitate full cost recovery.
Commissioners should:
쮿 Engage – commissioners need to achieve new theoretical and practical
understanding of their roles in relation to commissioning services from the
third sector.
쮿 Upskill – successful engagement will only be facilitated by upskilling commissioners in
full cost recovery principles.

acevo Association of Chief Executives of Voluntary Organisations


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Thanks to:
Angela Kerry, Voluntary Sector Liaison Officer, Southern Derbyshire Voluntary Sector
Mental Health Forum: This provides a platform for voluntary agencies delivering mental
health services to come together to discuss matters of common interest and to inform
and influence strategic planning in mental health.
Tracey Moore, Senior Consultant, Voluntary Support Team, Project North East: From
their inception in 1980, Project North East have been designing, building and managing
innovative projects that help enterprising people and communities develop their ideas,
and create wealth and employment.
Marcus Ward, Manucci Consortium: Manucci Consortium were commissioned by acevo
and NAVCA to implement Full Cost Recovery training programmes in each region and
are currently producing in partnership with acevo a practical workshop for statutory
commissioners for IDeA: ‘The Benefits and Challenges of Best Value and Sustainable
Funding’. They are highly-skilled and widely-accredited trainers and consultants, with
extensive experience of financial strategy, full cost recovery, statutory commissioning and
tender negotiation, social enterprise, business planning, organisational & management
development, and capacity building.
Jackie Wheeler, Community Accountant, Newcastle CVS: Newcastle CVS (NCVS)
supports voluntary organisations and voluntary action in Newcastle upon Tyne by
providing a range of services and projects.
Nicola Youern, CEO, Southern Focus Trust: Southern Focus Trust are a charity and a
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business which provides care support and advice services across Hampshire, Portsmouth
and Dorset. Their services include those for young homeless people, domestic violence,
learning disabilities, mental health and ex-offenders.

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Introduction
It has now been ten years since acevo launched its promotion and awareness campaign
for full cost recovery and over two years since it began its Full Cost Recovery training
programme, with the support of the Big Lottery Fund.
Commemorating this occasion, this anniversary briefing will review current practice in the
third sector in relation to the implementing and obtaining of full cost recovery. Using
feedback collected from training programmes and interviews of third sector front-line
practitioners and funders, the briefing will look at the impact of full cost recovery so far
and provide recommendations for the future of full cost recovery in today’s third sector.

Full Cost Recovery


Securing funding or ‘recovering’ both the direct costs of all your projects and services
and all your overheads.
In any service delivery scenario - whether provided by a voluntary, public or private
organisation – it is sound economic practice for an organisation to recover its full costs
and ideally generate a surplus in order to have a sustainable future.

Direct costs

Overhead costs

Full cost of your organisation

Failure to ensure that the full costs of providing a service are met can have a significant
negative impact on an organisation. In the short term, organisations risk affecting the
quality and deliverability of services and projects, for example being unable to pay
salaries. In the long term, this can not only affect the organisation but may also affect the
public service market in which it partakes, through the reduction of choice and
competition. Meeting their full costs poses a significant challenge for both an organisation
and its funders. Most of all it has significant implications on the quality of services
provided to the people and the communities who use them.

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Public service delivery and the third sector:


the challenge
The last two decades have seen a significant shift in the outsourcing of public services.
Now the vast majority of social housing is provided by not-for-profit housing associations.
The independent sectors handle the majority of provision of personal social services.
Increasingly, disability services are being outsourced from central and local government. The
government’s emphasis on contestability and choice within public services has encouraged
this growing role of the third sector. Public service delivery has become the third sector’s
largest single source of income. In 2003-4 central government funding of the sector was
estimated at £2.8 billion; local government funding was estimated at £4.3 billion; when
including the funding of housing associations the total figure came to in excess of £9.4
billion. In addition to that, spending by NHS bodies on third sector organisations in 2004-5
was estimated at £1.6 billion. The third sector continues to grow, employing 1.5 million full-
time equivalent staff and benefiting from the work of 20 million volunteers.
Organisations being able to meet their full costs when providing a service – ‘full cost
recovery’ – has become an increasingly critical issue for third sector organisations.
Historically, the practice of full cost recovery within the third sector has been inconsistent,
with third sector organisations only recovering the direct costs of their projects or only a
small percentage of overheads. This underinvestment in costs is often subsidised by the use
of voluntary donations, challenging the inherent premise of public services . This also
impacts upon the development of many third sector organisations, especially in areas such
4 as management and leadership, internal and external infrastructure and strategic
development.
It has been recognised that the commissioning environment has helped to develop this
underestimation of costs by the third sector. Historically, funders have favoured projects
with tangible outcomes over long-term investment in overheads and organisational
development. Partnerships are typically insecure, inefficient and subject to continual
revision. In many cases, low capacity organisations have found themselves struggling to
support a plethora of underfunded projects. In 2004 the acevo Commission of Inquiry
produced the Surer Funding report, which showed how the commissioning environment
has created a climate of uncertainty in which the third sector cannot properly consider
long-term and sustainable planning.
Within the sector, unfulfilled cost recovery has particularly impacted on smaller
organisations and their ability to deliver public services. Many smaller voluntary
organisations struggle to compete for contracts. In 2007, 37 per cent of government
funding went to organisations with incomes of over £10 million, yet only 0.4 per cent to
organisations with incomes up to £10,000. Many large charities have grown rapidly in
recent years – currently eighteen charities generate one eighth of the sector’s income.
However, small or medium size charities have seen their incomes decline, with the total
amount generated by organisations with incomes less than £10 million falling in 2004-5.
The development of the public services market and the consequent opportunities for the
third sector with public service delivery mean little if there is no capacity or opportunity
for the third sector to respond. This is a triple loss for the sector, government, and most
importantly, the service users themselves.

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From past to present


In 2002 the HM Treasury review, The role of the voluntary sector in service delivery,
acknowledged the need for organisations to meet their full costs and committed all
government departments to fund accordingly by April 2006. The review noted 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.” This agreement was the culmination of four years’ hard work by
acevo; in 1998 acevo research on funding challenges resulted in the seminal document
Who pays for core costs?. This marked a real turning point for the sector, highlighting the
duty of third sector organisations to allocate overheads by using a transparent,
comprehensive and defensible system.
To meet this challenge, acevo and New Philanthropy Capital published Funding our Future
II in 2002, which advocated the use of a Full Cost Recovery template. This approach was
further supported by the Gershon Eff iciency Review in 2004, which recommended that
the government should improve its funding relationship with the third sector through
measures including, “making further progress towards full acceptance of the principle of
full cost recovery, ensuring publicly-funded services are not subsidised by charitable
donations or volunteers”. In 2004 acevo produced Full Cost Recovery: a guide and toolkit
on cost allocation which provided the sector with an updated and more practical guide to
full cost recovery. Acevo have sold over 5,000 copies to date.
2005 saw the National Audit Office publish Working with the third sector, a significant
report which showed that improvement continued to be needed in the way government 5
departments provided funding to third sector providers of public services. The report
revealed the 2002 HM Treasury review’s recommendations had been addressed, but this
had not been enough to bring about a widespread behaviour change in government
funding practices. The report commented “There has been progress since the 2002
Treasury Review, but not enough. Whilst the Home Office and the Treasury have sought
to push matters forward, a significant gap remains between the principles set out in the
review and subsequent practice.” The report showed that due to the different contexts
of government departments, there would be an expected level of variance with regards
to funding practices, yet emphasised the need for government departments to find new
and innovative ways of working with the third sector.
With support from the Big Lottery Fund, in 2006 acevo and NAVCA began a three-year
programme providing education and training for the third sector in full cost recovery. The
programme trained development workers and other staff at local infrastructure
organisations to provide them with the skills, knowledge and tools in order to offer
affordable and sustainable support in full cost recovery to the smallest third sector
organisations operating at a local level. The aim of the project was to train 330
development workers and other staff in LIOs each year for three years. This knowledge
was to be cascaded down to front line organisations, aiming to reach 14,850
organisations during the lifetime of the project. With the training programme reaching its
second anniversary, over 7,000 front line and umbrella organisations have been trained in
full cost recovery.

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2007 saw a renewed commitment by the Government to the principles of full cost
recovery. The Third Sector Review The future role of the third sector in social and economic
regeneration, which set out plans to promote the partnership between the Government
and the third sector, accepted that “Government funding should allow an organisation to
recover the full cost to it of providing a service including an appropriate element of its
organisational overheads” and that the government still had work to do developing
more sophisticated statements on full cost recovery. The National Offender Management
Services’ Third Sector Action Plan, which covers the role of the third sector in
transforming public services, continued this direction, highlighting the overall importance
of surer funding and stating that progress needed to be made in the implementation of
full cost recovery.
Vast ground has been covered with regards to sustainable, progressive and ‘surer’ funding
for the third sector. Recent years have seen the rhetoric of full cost recovery become
embedded within third sector and government interaction over public service delivery.
However, as this report will show, the implementation of full cost recovery remains
inconsistent and is increasingly challenged by the new environment the third sector
faces with regards to public services. Will full cost recovery continue to be the third
sector’s reality?

쮿 2002 Full Cost Recovery Template was launched. Currently over 5,000
copies have been sold
쮿 2004 Simplified book and interactive CD-ROM of Full Cost Recovery
6 Template, both of which are HM Treasury-commended
쮿 2006 - 2008 Acevo and NAVCA conduct the Full Cost Recovery programme

Time for a new conversation? Price versus cost


Full cost recovery has become an established aspect of third sector dialogue. However, its
relevance for the sector today with regards to funding has recently come into question.
Currently two main types of funding relationships exist. There are procurement-based
relations, where a department specifies a service and then pays a third sector
organisation to supply it, and donor-based ‘grants’ funding, where a funding organisation
will provide financial support towards the project or activity a third sector organisation
wants to undertake. For 2006-7, income derived from grants was down from 52 per
cent to 38 per cent, whilst income derived from procurement rose from 48 to 62 per
cent. With the increasing dominance of procurement for public services, it is now
suggested that third sector organisations should move away from the language of full cost
recovery to that of ‘price’, where bidders submit the price at which they believe they can
deliver the specification with relatively limited transparency on underlying costs.
The debate supposes that full cost recovery only should hold relevance for the third
sector whilst it was operating within a grants-dominated public services market, as the
grant-maker would be requesting details of the budget and questioning where the money
will be spent. Now in this new, competitive environment of procurement, it is suggested
that third sector organisations need to look beyond the internal concern of meeting their

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full costs and focus instead on the necessity to provide a value-for-money 'price' for
their services.
Do we need to operate in a new paradigm of price?
쮿 Exactly what is the impact of full cost recovery on the sector today – do third sector
organisations actually cost their products and are some organisations in the sector
more likely to cost their products than others?
쮿 Does this language of full cost recovery remain confined to the third sector or has it
been recognised by funding organisations?
Challenging the rhetoric surrounding third sector funding will allow us to establish a
greater understanding of the commissioning environment for the third sector today and
allow us to establish what progress needs to made to ensure successful and efficient third
sector service delivery. Is it time up for Full Cost Recovery?

Full Cost Recovery: the third sector perspective


The Full Cost Recovery programme has had a significant impact on the third sector,
having trained over 700 development workers who have in turn trained over 7,000 front
line organisations since it first began. Identifying the full costs of running the organisation
and improving the financial sustainability of the organisation were identified as the main
reasons for the involvement of third sector organisations in the Full Cost Recovery
training programme. Many commented that the training allowed their organisation to
move forward with confidence towards a sustainable future. 7
Third sector organisations have begun to recognise that if they want a sustainable and
productive level of funding, they need to perform full cost recovery. For the internal
structure of an organisation, full cost recovery is seen to help improve management of
costs and help secure a sustainable and responsible future. Establishing their full costs also
allows third sector organisations to become more aware of comparing their costs with
what funding is available. Externally, full cost recovery has increased the confidence of
third sector organisations to make contact with funders and it has allowed the
organisations to establish their contestability and value within their respective public
service markets.
It has been acknowledged by many organisations that the awareness and promotion
campaign conducted has been a considerable success. It was commented that template
instructions were clear and accessible to all types of members, ranging from very small
residence associations to large voluntary organisations. Those from infrastructure
organisations pointed out that worries concerning losing the process of full cost recovery
in translation were abated by the template and training courses, which helped co-
ordinate their cost recovery activity.

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Case study.:
Project North East
From their inception in 1980, Project North East have been designing, building and
managing innovative projects that help enterprising people and communities develop
their ideas, and create wealth and employment. They have recently undertaken acevo’s
Full Cost Recovery programme. Project North East have since cascaded the training
down to their members, Tracey Moore from their Voluntary Support Team explains:
“Our Full Cost Recovery programme was called ‘Covering Costs’. We identified the
need to undergo this process from discussion with our VCS networks and current
programme participants and through the conference that we held at the end of 2007.
We accessed the acevo training for our advisers and trainers and held an in-house
session. The training was initially developed as two half-days followed by up to three
days one-to-one in-house support and one course was delivered in each of the four
North East sub-regions. The training was attended by two people from each
organisation where possible – one project manager/CEO and one finance/admin
person to ensure the message was clear across the organisation and was easier to
embed.
Feedback suggested a full day of training would be easier to attend than two half days,
so the second round of training was delivered as a full day classroom training followed
by up to three days one-to-one support. Each course was monitored and evaluated
closely and we have the results of the evaluations from all eight ‘Training’ courses.
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Feedback has been excellent – the participants are currently undergoing the one-to-
one support. I thoroughly enjoyed the seminars and the opportunity to meet other
people facing the same issues and opportunities as ourselves
In total we have supported 64 organisations across the region through the Covering
Costs programme and 106 participants have been trained. We are now undertaking
case studies and outcomes assessment with those who have completed the full training
and support cycle.”
Sylvia Hawkins, Finance and Administration Officer from Women’s Health in South
Tyneside, South Shields was one participant in the Covering Costs programme:
Sylvia decided to embark on PNE’s Covering Costs programme in order to help clarify
what funders mean by full cost recovery, what is included, and to set up systems to
calculate it for funding bids.
Sylvia commented, “The course was excellent and provided me with a sound
understanding of what full cost recovery is and what costs grant-giving bodies will fund.
I was surprised by some of the costs that could be included. For example, I didn’t
realise that depreciation costs are acceptable to many funders.”
Sylvia found PNE’s one-to-one support to be particularly beneficial. “The support was
timely as we were working on funding applications.” The support reassured Sylvia that
the formula she was basing her full cost recovery work on was on track, but made
some refinements by adding some costs and placing others in different categories.

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PNE’s adviser worked closely with Sylvia on using the Big Lottery and acevo Full Cost
Recovery spreadsheets, which calculate costs for full cost recovery given different
funding criteria. Said Sylvia, “These systems really clarified full cost recovery for me, and
the one-to-one support was ideal in helping to attribute the project’s actual costs when
using them.”
Since PNE’s Covering Costs programme, the organisation has successfully obtained
funding with full cost recovery included. Sylvia said, “We managed to secure five years’
funding from The Big Lottery, which includes the salary costs for three full-time posts.
This has put the organisation on a stronger footing, and has safeguarded three jobs for
the next five years, which is great news.”
Sylvia believes that the programme has had a significant impact all round. “Thanks to
PNE, I’m much more confident about applying full cost recovery in funding bids and
understanding what different funding bodies will cover.”

Conversation with the third sector revealed there was still significant work to be done
with regards to full cost recovery. Third sector organisations still feel that there are many
barriers to the successful achievement of full cost recovery within the third sector. A key
challenge to the implementation of full cost recovery is the behaviour culture of third
sector organisations. One main aspect appears to be naivety. It was commented often
that organisations simply do not know what their costs are in order to perform full cost
recovery. When one community accountant spoke about implementing full cost recovery
in third sector organisations she mentioned “they [TSOs] tend to ‘freak out’ when talking 9
about putting systems in place”.
Feedback from our members revealed that larger organisations usually show more
confidence with full cost recovery and tend to have their own systems in place. For small
and medium sized organisations practice remained disparate and dependent on the
individual organisation. This situation is exacerbated by the time and resource pressured
environment many third sector organisations face, organisations often simply won't think
in the manner required for appropriate cost recovery. For example organisations often
do not determine their cost allocation in advance as this would depend on how many
projects they run, something probably often undetermined on a long-term basis by the
organisation. Nicola Youern of Southern Focus Trust spoke of a three-way division
between the third sector – social enterprises, service providers and voluntary and
community organisations. “When split, the first two accept the language of full cost
recovery, yet voluntary and community organisations just don’t”.
This situation is worsened by the skills deficit within the sector. Jackie Wheeler, a
community accountant from Newcastle CVS notes that a major stumbling block is that
no-one is necessarily account-minded in smaller organisations, “Getting those skills there
in the first place is a struggle, once they are in place...Indeed many smaller organisations
work on a week to week basis, often with only a board of trustees.” Feedback from our
members showed that time issues and a lack of manpower impinged on the
development of such skills to ensure full cost recovery. For many organisations failing to
achieve full cost recovery becomes a vicious circle – organisations continue ‘plucking

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figures out of the air’ as they are not skilled enough or in an appropriate mindset to
perform sufficient full cost analysis, yet this arbitrariness with regards to determining costs
leads to further impediments concerning future recovery of their full costs.
The crux of the difficulty surrounding the implementation of full cost recovery for third
sector organisations often revolves around the vital difference between understanding
and agreeing to the concept and actually performing it. Even if an organisation knows
their full costs, it has to be prepared to support them. Third sector organisations often
experience a situation where they have to decide whether to meet full costs or lose out
financially and provide the service. There are many incentives for a third sector
organisation to provide a service outside financial motivations.

Full Cost Recovery: the funders’ perspective


Most major funders support the principle of full cost recovery. It cannot be denied that full
cost recovery has allowed a significant level of progress to be made in the relationship
between the third sector and commissioners. Full cost recovery is viewed as a positive
initiative that results in an improved ability to negotiate with funders and secure full funding.
Funders commented that full cost recovery allowed an element of accuracy and transparency
to be introduced in their dealings with the third sector. Full cost recovery was seen to be an
important tool to prevent costs being disguised and re-emerging. It was also emphasised that
commissioners are interested in the quality of service and full cost recovery provides an
important way to tackle outside providers that do not deliver on what they have promised.
Full cost recovery is also recognised by many commissioners as a way to increase
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sustainability; full recovery of costs allows organisations to survive and projects to continue –
vitally important for both the funder and the funded.

The potential of full cost recovery is being realised:

Case Study:
Southern Derbyshire Voluntary Sector Mental Health Forum
Angela Kerry, Voluntary Sector Liaison Officer
Angela gives an example in Derbyshire where mental health commissioners have put a
sum of £100,000 into next year’s operational budget to help bridge the gap for
organisations that have a genuine case of under-funding historically.
“One of my main concerns is that in such a competitive market, it appears to us that
larger organisations might be willing to forego the principles of full cost recovery to
tender below market rate in order to break into new areas – a sort of loss leader!
Whilst local organisations suspect that this is happening, it is very difficult to prove and
of course it could simply be that the overheads in a big provider are much lower when
spread across several contracts. It does mean however that many smaller providers
cannot compete if measured on price alone.
In addition, some local authorities and PCTs are giving lower than inflation increases to
voluntary sector providers, and even if staff salaries are frozen, other bills are not and
the gap to full cost recovery begins to increase.

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Our County PCT now give the same percentage increase to all providers from the
MHS Trust to the smallest voluntary sector provider. We welcome this equity, although
we do still need to be aware of where organisations are running below full costs and try
to ask the PCT to make exceptions in those cases. Where the PCT cannot give more,
they are now more willing to negotiate a reduction in the level of service to achieve full
cost recovery. Often it is the providing organisation that is reluctant to do this as they
feel they would be letting their customers down!”

Funding organisations appear to support the rhetoric of full cost recovery although the
reality remains very different. Feedback collated from funding organisations showed that
the dialogue between third sector organisations and funders is still incomplete. The
language of full cost recovery has been promoted and disseminated amongst the third
sector, yet has not been done so thoroughly with commissioners and work remains to be
done in this area. Acevo members have repeatedly noted funding organisations rarely
include overheads or do so in a way which underestimates the true cost, for example
accepting no more then 10 per cent overheads.
Currently eight out of the thirteen government departments are recognising full cost
recovery. The failure by government funders to implement the recommendations of the
2002 Treasury Review has been highlighted by the recently published NAO Report
Working with the Third Sector, which comments:
“There is a definite expectation gap between funders and third sector organisations
concerning what constitutes costs. This is aggravated by continuing perceptions of the 11
third sector as amateur and grassroots, for example seeing volunteers as free resources.
This is added to by a high level of confusion in the commissioning process concerning full
cost recovery – some funders were concerned that if they paid overheads, they will end
up double funding overhead costs.”
In both types of funding relationship, funders noted difficulties in translating the principle
of full cost recovery into practice. Concerning donor-based relations, where departments
provide financial support towards projects or activities, it remains quite legitimate for a
funder to contribute towards cost, rather than covering all costs. In addition, many donor
relationships remain strategic rather than project-based, so there is no need to recognise
full cost recovery at all.
Regarding procurement, commissioners often feel that responsibility falls to third sector
organisations to ensure they can deliver sustainable services at the prices they quote. A
charity commission survey from February 2007 found that only 12 per cent of those
surveyed delivering public services felt they achieved full cost recovery in all cases.
Funders often feel limited in the action they can take themselves. For example, where
third sector organisations are competing against private providers, funders fear any
special treatment of third sector providers on full-cost recovery risks distorting the
selection of the best value service deliverer. Yet commissioners are reluctant to tackle in-
house services that don’t give value for money. There are many internal reviews, but little
action or re-configuration and often results are not made public if they reflect badly on
statutory services. As such a like-for-like comparison within public service markets is
often impossible.

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Case Study:
Big Lottery Fund
Peter Wanless, Chief Executive, Big Lottery Fund
Peter Wanless is Chief Executive of the Big Lottery Fund. The Big
Lottery Fund (BIG) was launched in June 2004 following the
merger of the New Opportunities Fund and the Community Fund.
It is the largest single lottery distributor, and will give out more than £2.3 billion
between 2006 and 2009.
Peter ref lects on the impact of full cost recovery over the last two years and gives his
thoughts on the future of full cost recovery:

How relevant is the language of FCR today for funding


organisations?
The language is still relevant because we all, funders and fund seekers, need to
understand the real costs of delivering social change. We are not there yet as a
community of funders, or within the community and voluntary sectors. When the Big
Lottery Fund implemented its full cost recovery policy back in early 2006, the language
sounded new – at least new from the mouths of funders. We were proud as an
organisation to be one of the few funding organisations pro-actively using the term,
implementing it comprehensively across our new programmes and providing support
12 about it to applicants. Over the last three years, the terminology has become more
familiar both to funders and third sector organisations, thanks to the work of
organisations like acevo.
Full cost recovery helps us, and the organisations we fund, to get a better and more
meaningful picture of the full costs of running a project and achieving impact. The
language continues to be important because there is unfinished business in the funding
relationship between funder and fund seekers, especially the third sector. FCR can lead
to a better and more honest dialogue among funders and fund seekers and can help
move away from an age-old dialogue about core costs vs. project costs and more
effectively harness the opportunity that can be created by focusing on the outcomes to
achieve and invest in.

What are the positives concerning full cost recovery?


A key advantage offered by full cost recovery is that it can level the playing field across
all organisations and all sectors. The starting point of your conversation as a funder,
with any organisation seeking funds, is based on the recognition that there are a range
of costs that cut across the work of an organisation and its operation. These are valid
as long as there is clear explanation and analysis of how this is the case.

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At BIG, full cost recovery is important for three significant reasons, which we believe are
shared across the sector too. Full cost recovery:
쮿 allows better planning and strategic decisions in the organisations we fund
쮿 releases time and energy for performance improvement and project delivery
쮿 creates better and more sustainable outcomes and organisations

What are the barriers to Full Cost Recovery?


There are still some barriers to full cost recovery in the world of funders – not all
funders are fully onboard with the principles. More pro-active work needs to be done to
promote standards of practice to funders. We want funders to recognise that the costs
of running the organisation, the overheads, are not separable from the projects that they
fund.
There are also barriers arising from lack of awareness in the third sector. Some
organisations still have little knowledge of how to apply the principles. It is up to us to
demystify the concept – using straightforward language. We need to help organisations
to understand all their costs. This is about what we do, and how we work with others.
We have already produced guidance materials to support applicants. We also welcome
all the work that organisations like acevo have done to support organisations through
their full cost recovery service and toolkits to raise capacity in the sector. But we know
that more needs to be done and we want to continue working with our partners to
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ensure that all third sector organisations understand and can apply full cost recovery.
A challenge for funders adopting full cost recovery is that there will be potentially ‘less to
go round’ in terms of money – this issue won’t go away – but in order to address this
concern we need to get better at understanding the true costs of achieving change.

Are we in a new language of price?


As a grant funder using public money, we have responsibility to be accountable for its use
and understand and explain its impact. Therefore we need to understand how much of
our money is contributing to achieving real change and this is where we sometimes need
an honest dialogue about funds going to running projects and how much is contributed
to overheads. We cannot just ask an organisation to name its price. We want to ensure
that an organisation is getting all the funds it needs to deliver a project. But we are also
under an obligation to ensure that organisations do not make profit from Lottery money.
So we need to ensure that any contribution to overheads is “fair”, justifiable and
contributes to the ongoing health of an organisation. The language of full cost recovery
remains an important aid to doing this.

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Recommendations
Collating the feedback of third sector organisations and funding organisations resulted in
the following recommendations:

Challenge behaviour
The acevo Full Cost Recovery programme has had a significant impact within the third
sector. However, the report showed how behaviour within the third sector often hinders
the implementation and obtaining of full cost recovery. Such behaviour must be challenged.
This can be done by a systematic and sustained articulation of the benefits of full cost
recovery and through the highlighting of examples of best practice.
There were also worries that the language of full cost recovery remained not geared
towards the agenda of commissioners. Commissioners need to achieve new theoretical
and practical understanding of their roles in relation to commissioning services from the
voluntary and community sector. A thriving market place requires sensible competition,
diversity and expertise, of which the voluntary and community sector is an essential
component. Acevo are producing a practical workshop for the statutory sector in
association with IDeA with regards to engaging with the third sector and assessing full
costs.

Capacity build
Important work needs to be done with regards to improving the facilitation of full cost
recovery within the third sector. The third sector community accountants (CAS) who seek
14 to support voluntary and community organisations on issues of financial management and
accounting could be an important resource in this respect. We found that community
accountants are highly valued in terms of enabling small to medium voluntary and
community organisations (up to £250,000 income) to manage their funds effectively. As
yet, only a minority of areas have access to a CAS, but some 80 CASs across England are
providing direct support to approximately 6,500 VCOs on these issues, with a total staffing
of only 105 full-time equivalent community accountants. Community accountants must be
empowered to aid the third sector and this needs to be addressed.

Remain responsive
Feedback recommended that the Full Cost Recovery template needs to maintain its
responsiveness to the diversity of today’s third sector. The template should be aimed at all
members from very small residence associations to large voluntary organisations. Based on
feedback, we are launching an improved electronic guide and toolkit for multiple project
cost allocation – The Full Cost Business Planner (FCBP) – an advanced version of the Full
Cost Recovery Template. The Full Cost Business Planner will allow organisations to cost
multiple projects ensuring all overheads are allocated consistently and appropriately.
The FCBP toolkit also includes a Business Plan Writer which will help third sector
organisations to write their business plans efficiently and effectively. The toolkit enables
organisations to assess their true capacity and plan strategically as well as cost projects on
a sustainable basis.

Is it time up for Full Cost Recovery?


acevo_artwork:FCR Briefing 13/6/08 11:27 Page 15

Build and sustain the relationship


We are looking to sustain the practice of full cost recovery within the third sector, and
look forward to working with government on such action. The Office of the Third Sector
needs to develop more sophisticated statements on full-cost recovery that reflect the
complexity of the subject, as well as the principles of fairer funding and risk management
which underpin the concept.

Is it time up for Full Cost Recovery?


On the second anniversary of the Full Cost Recovery programme we see a third sector
which is changing. With an increasing role in public service delivery, the third sector faces
a more challenging environment then ever before. This change has led to a new dialogue
within the third sector regarding cost recovery and has led some to challenge that the
sector must now modernise and talk in terms of ‘price’ rather then ‘cost’. As more
funding is delivered through contracts, organisations are getting used to bidding and
providing a price for the service that they think is right.
Do these new conditions for third sector organisations and funders indicate the practice
of full recovery – recovering the full costs of all your projects and services – has become
archaic? Is it time up for Full Cost Recovery? Whether or not an organisation’s funding
arrangements require a level of transparency with regards to the costs incurred providing
a service or if they only require the organisation to provide a price for their service, the
reality remains the same; in funding arrangements, grant or contract, an organisation has
got to know its cost base, even if just to accurately and sustainably determine its price.
The risks are just too high to do otherwise.
15
As this report illustrates, the impact of the Full Cost Recovery programme on the third
sector over the last two years has been substantial and full cost recovery looks set to
remain an integral part of the future of a successful and progressive third sector.
Full cost recovery remains an important principle for financial relationships between
government and the third sector but big challenges lie ahead in addressing the behaviour
cultures of both the third sector and the funding organisations they interact with. Third
sector organisations need to get better at understanding their costs and how these can
contribute to what they want to achieve. Funding organisations need to work with third
sector organisations to understand their true cost base. The onus is on service provider
to bid on full cost, but purchasers must consider due diligence. Fundamentally full cost
recovery is a cultural change. It is not an overnight process and is far from complete.
Where will full cost recovery be in two years’ time? This is not certain. What remains
evident is that money and the cost of delivery will always matter – alongside our end
goal of making a difference to the lives of people and communities. Until that culture is
achieved, full cost recovery continues to make sense.

acevo Association of Chief Executives of Voluntary Organisations


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16

Is it time up for Full Cost Recovery?


Published by acevo.
First published 2008
Copyright © 2008 acevo
All rights reserved.

No part of this book may be reproduced by any means, or transmitted, or translated into a machine
language without prior permission in writing from the publisher.
Acevo is the professional body for the third sector’s chief
executives, with over 2000 members. We connect, develop,
represent and support the leaders, to improve the sector’s impact
and efficiency. The UK’s broad not-for-profit sector now employs
the full-time equivalent of 1.5m staff, with a collective annual
turnover of £46bn. We promote a modern, enterprising third
sector, and call on these organisations to be:
 Professional and passionate in achieving change and
delivering results
 Well-led, with a commitment to professional development,
training and diversity
 Well-governed and accountable, with robust and fit for
purpose systems to protect independence and enable effective
decision-making
 Enterprising and innovative, taking a businesslike approach
to funding issues and striving for continuous improvement and
sustainable development

For more information, visit our website, www.acevo.org.uk