Full Cost Recovery

What is Full Cost Recovery?

Many organisations in the voluntary and community sector struggle to make ends meet, especially in relation to funding overhead costs. Costs such as management and leadership, research, development and innovation, and support functions like financial and personnel management are all essential, and integral, for any project to run efficiently and smoothly.

If the full costs of a project or service are not funded or 'recovered' the sustainability of the project, and indeed the organisation, is put at risk. It has traditionally been normal practice for voluntary sector organisations to cost activities based on the direct cost of delivery alone.

Full Cost Recovery (FCR) simply means securing funding for the direct costs of projects plus an amount to cover - or 'recover' – a proportion of general running (or overhead) costs. Every organisation needs to recover all its costs or it cannot pay its employees, rent office space, offer its products and services or plan for future development and delivery of its services.

• Direct costs are incurred as a direct result of running a project or service.
• Overhead / indirect / core costs are incurred by an organisation in order to support the projects that it runs.

The full cost of your organisation includes the direct costs of all your projects and services plus all your overheads. Therefore, the full cost of each of your projects should include both the direct costs and a portion of overheads.

Working out the cost of providing one service is relatively easy. When your organisation starts providing several different services, calculating the costs for each one becomes more complex, and it is likely that core costs can't easily be allocated to any one activity. Remember that costs are incurred for a purpose – that purpose should be service delivery and therefore should be able to be allocated or apportioned.

These costs all need to be fully analysed and understood in order to add a fair proportion to the direct costs of running the 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.

The total represents the total cost of delivery which should then become the price that needs to be paid for that service.

In principle FCR is a simple concept. Its implementation is likely to be more problematic. For example, doing the costing is one thing, obtaining the price from funders is quite another.

Recommendations for voluntary and community organisations

• Own the principle of full cost recovery
• Use the term price for delivery
• Cost projects and services on an accurate, defensible and sustainable basis.

Principles of full cost recovery

• Materiality

Analyse those core cost areas that are significant in your organisation i.e. the ones that make up 80% to 90% of your costs. There is little point spending vast amounts of time on other cost areas.

• Average costs (rather than marginal costs)

Average costs take everything into account

• No cross-subsidisation

Ideally you shouldn't have one project supporting another

• Allocate costs

Analyse the activities that create the various costs