Full cost recovery template

ACEVO and New Philanthropy Capital have developed the resource, ‘Full Cost Recovery: A guide and toolkit on cost allocation’, a template on cost allocation which is recognised by the third sector. Below we introduce the template, explain how the template works and give brief guidance on how to implement it.

Introduce the template
The template:

  • Provides a basis for organisations to cost a single project, activity or service
  • Provides a framework to allocate costs
  • Illustrates how overhead costs are intimately linked to "front-line" activities
  • Does not prescribe levels of management overheads
  • Adheres to the principles behind the Chartered Institute of Public Finance and Accounting (CIPFA) guidance on best value accounting for local authorities

How the template works
The template helps you calculate the full costs of project, activity or service using the following method:

  1. Calculate the direct costs of project, activity or service
  2. Calculate the total overhead cost for the whole organisation
  3. Allocate a relevant share of each overhead costs to the project, service or activity using a defensible method

Although the template will help voluntary and community organisations to understand their costs, it is then up to individual organisations if they choose to publicise the results to funders or not. It is not compulsory for organisations to adopt the template, it can simply be used as a framework for calculating costs and can help build worthwhile relationships with funders.

It is also important to note that the guide does not suggest appropriate levels of costs but it does focus on types. It suggests that organisations should include non-cash costs such as attributed rent on buildings owned by the charity, depreciation of equipment as well as fundraising costs. All of which can be apportioned to specific projects where necessary.

How to implement it
Organisations should follow four general stages in implementing full cost recovery:

ARAF – Analyse, Review, Allocate, Fund

1. Analyse and count costs
Determine what it will take to deliver the project, activity or service - identify all the associated cost items and calculate the totals of these items.

2. Review costs, particularly your overheads
Review your overheads and determine whether action is needed. This does not necessarily mean driving overheads down. You may feel you are not spending enough on some areas, for example planning, evaluation and professional development.

3. Allocate your costs proportionately
Having calculated your total spend on overheads; allocate a relevant portion to the project, activity or service. In the template you can allocate each type of overhead – premises and office costs, central function costs and governance and strategic development costs – one step at a time, based on a ‘cost driver’ (the basis on which costs are allocated).

4. Fund your costs
You should now develop a strategy for funding the total cost of the project. Decide whether to meet your costs through fundraising, contracts, grants, other income streams or a combination. If you know how much funding is available, the template helps to determine if this will cover the full cost of provision. If the amount of funding is not known, it helps to look at what general fundraising income will be required to cover the full costs and therefore what portion of your general fundraising you should allocate to the project.

More specifically, there are six stages to calculating the full costs of a project or service:

1. Calculate the direct project costs
2. Calculate the organisation’s total overheads
3. Allocate office costs to central functions (finance, personnel) and the project/service
4. Allocate central functions to the project/service and other activities, for example governance
5. Allocate other activities to projects
6. Allocate fundraising costs if needed

The template describes the actions for each stage in more detail. ‘Full Cost Recovery: A guide and toolkit on cost allocation’.