We offer a detailed step-by-step guide to help charities apply full cost recovery when applying for funding grants
Full cost recovery (FCR) enables charities to recover more of their overheads, which leads to well-managed organisations and greater financial sustainability. FCR is essential for all charities, but it is sometimes seen as overly complex, especially when charities are writing grant applications. In this article, we present a how to guide to make that process simpler.
Costs associated with running the charity cannot always be linked directly to a charity’s services. These costs are often referred to as overheads and they are vital to a charity’s work. FCR ensures that each activity or service is properly funded and that a fair proportion of overheads is apportioned to each.
FCR is what charities need to charge to break-even and recover all costs in an activity or service, including overheads. Here are the steps that your charity should follow.
To recover costs, you need to first identify costs. Consider everything that you do and ask how much it costs to do it. If you do not have complete oversight, you might need to consult your financial management systems. Without this information you cannot sustainably plan and deliver your services.
Most activity comprises of two main types of costs: direct and overheads (sometimes called indirect). FCR is about sharing out these overheads to activities. Direct project costs are the costs that relate clearly to a project. These can include salaries for project workers, volunteer expenses, and dedicated equipment.
Overheads are costs that partly support the project, but also support other projects or activities. These could be a proportion of salaries of central staff, such as administrators. They could also be rent and utilities costs or legal and audit fees.
Consider moving overheads to direct costs where possible – for example, if 40% of a person’s time is spent on an activity related to a service the cost of that time could be treated as a direct cost rather than adding all their costs to overheads. The balance needs to be right, however, as too low an overhead figure may not appear reasonable to a funder.
Having identified your overheads, you need to find a consistent way of dividing these costs across projects. There are several ways that organisations divide costs. One size does not fit all. Each project’s share of the overheads should be appropriate given the nature and extent of its activities. There should be a rationale for the method used that can be justified and supported and will be approved by funders.
The simplest example is that if you run two projects of roughly the same size, staff numbers, direct costs, etc., then each should cover half of the overhead costs. But it becomes more complex the greater the number and nature of projects you have.
It is important that overheads are shared between projects on a fair and reasonable basis. You may decide to share all your overheads in the same way or that some overheads should be shared in one way, some in another. The most common methods for sharing overheads are explored below:
One of the simplest methods for sharing overheads is based on direct project expenditure. But 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.
You might decide the number of staff working directly on a project fairly reflects the relative sizes of those projects. Therefore, apportioning costs based on headcount may be a suitable basis to share all overheads. Remember to adjust calculations for part-time staff. If volunteers work on projects, you need to consider their time, too.
It may be possible to share costs based on the length of time each project uses, or the premises or the floor area occupied by each project. This works especially well if your premises costs are substantial.
The number of service users or beneficiaries could be used as the 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.
National Lottery Community Fund offers excellent guidance on how to calculate the full costs of your project, including the project’s overheads.
Having decided the basis of allocation, it is now just a matter of apportioning costs based on the approach you have selected. Digital technology can assist in establishing processes and methods by which to recover overheads.
Spreadsheets can help with basic calculations, but real-time software can make amendments, correct exceptions, and automate exchanges to reduce errors and ensure that the allocation of overheads is up to date.
Cloud-based accounting software also helps organisations track costs in real-time and allocate overhead costs to different projects based on an assessment of fair apportionment. You will need to establish the parameters within which you allocate those costs, but technology will make it easier than manual processes to keep on top of things.
After calculating your project’s share of the overheads, consider if the results make sense. Ask whether the results appear reasonable based on your knowledge of the project. Assess whether the project’s overheads related to direct costs seems fair. Compare the calculations with those of other projects.
Generally, funders are prepared to pay a fair level of overheads towards a project, but they need transparency. If grant-makers choose not to fund projects fully, charities should be up front about any shortfall and how this will be funded. To ensure this, charities should count all their costs when bidding for projects and make sure that they do not cherry pick costs to suit them or hide the real costs of their work.
While it might sound difficult, try to keep things as simple as possible. Don’t overcomplicate, especially if the numbers are small. The principles are straightforward, but you need to be ordered and methodical with your calculations.
Access to clear, concise, and timely management information is crucial in a well-managed and sustainable charity. Having processes in place around FCR helps develop an understanding of activities, as well as increasing the success of grant applications and ensuring funding of overheads does not impact heavily upon unrestricted donations and reserves.
Find more charity finance resources at the Sage Non-profit Success Hub