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CHAPTER SIX CASE STUDIES

Introduction

6.1 This Chapter contains FCR case studies from the voluntary and the public sectors. Each has been selected as it is felt to illustrate examples of good practice that others could use when trying to implement FCR.

The voluntary sector case studies

6.2 The voluntary sector case studies have been selected to cover a diversity of organisations in terms of activities and scale. These are:-

• Barnardo's Scotland, part of a United Kingdom wide organisation that employs 900 staff within Scotland providing a range of services for children and young people;
• The National Schizophrenia Fellowship ( NSF) (Scotland) which provides services for those with mental health problems throughout Scotland through its 173 staff and 25 projects;
• The Castlemilk Economic Development Agency ( CEDA) whose 53 staff provide a range of economic and business development services to the residents of Castlemilk, a large housing estate on the outskirts of Glasgow;
• Parkhead Citizens Advice Bureau whose 15 staff offer information and advice services to the residents of Parkhead, a deprived inner city area in Glasgow's East End; and
• The Speyside Trust who operate an outward bound centre promoting equal opportunities for people with disabilities.

6.3 Despite the diversity of organisations all have had some success in ensuring that the services they deliver are based on full or partial recovery of "core" costs in addition to direct project costs. It is possible to draw on their experiences to highlight what seem to be some key good practice lessons. The main ones are:-

• The need to develop a model so that "core" costs can be calculated prior to being apportioned to projects. Generally this has been done on a per capita basis. For example, in CEDA and NSF the total core costs have been calculated and the number of staff has been divided into these. This per capita cost then has to be recovered from the funders of each project in proportion to the number of staff each employs. An alternative approach is the Speyside Trust's model, which allocates overhead costs to contracts on the basis of the proportion of total turnover they account for;
• There is then a need to be transparent about these costs when approaching funders. Not only does this emphasise the professionalism of the sector but it also has an educational purpose in that those who are being negotiated with (often at a senior level) may not be aware of the costs involved in running an organisation. In the Barnardo's example this approach is described as a Know, Show, Grow strategy;
• These costs then need to be explained to, and discussed with, funders as does the Speyside Trust. A balance has to be struck when doing this: too little detail as with, for example, an undifferentiated "management fee", and funders are likely to be unhappy: too much detail then there may be disagreements as to eligibility, as CEDA found;
• There is also a need to explain FCR, and its implications, to project staff as do both Barnardo's and NSF. This ensures that staff, who may be asked to recoup core costs through project income, understand why this is being done;
• The need to diversify funding sources. A number of the case studies (for example CEDA and Parkhead) deliver some services at less than full cost. Having a number of funders increases the chances of being able to cross subsidise without running down reserves, something that has been a problem for NSF. The Speyside Trust's diversification of funding sources means that it can afford to take a strong line in negotiations with funders as it has other sources of income to fall back on should one contract be lost;
• Allied to this are the moves being made by both CEDA and NSF to reduce their dependency upon grant and Service Level Agreements. In CEDA's case this involves trying to win more competitive contracts (which has the additional benefit of avoiding the need for detailed cost scrutiny) whilst NSF has appointed a fund raiser to build up reserves; and
• Finally, if the voluntary sector is serious about FCR, it has to be willing to withdraw from service delivery (or renegotiate the terms) if costs cannot be recovered. CEDA, NSF and Parkhead have done this, whilst the Speyside Trust has been able to adopt a "take it or leave it" attitude to contracts because of its diversity of funding sources and the fact that there are few other competitors. This may be painful but it seems unlikely that all funders will implement FCR if it is felt the sector will continue to deliver services that are not fully costed.

6.4 What underpins many of these good practice lessons is the need for the sector to see FCR as an exercise in both education and presentation:-

• Education is seen as being needed as often the public funder with whom negotiations are being undertaken may be unaware of the true costs of service delivery. This reflects something identified in the Focus Groups: public funders are often unable or unused to calculating the true costs of their own activities. Comparisons may often be between the voluntary sector's full costs and the public sector's marginal costs, with the voluntary sector invariably appearing to be more expensive. This lack of awareness of true costs was said to be experienced even at a senior level in public organisations; and
• Presentation skills are needed in that it is unlikely that simply showing how much it costs to deliver a service will result in the necessary resources being forthcoming. As was found in the Focus Groups, much of the skill in FCR seems to lie in how the costs are presented and in what detail. For example, it may be possible to apportion core costs to projects without the funder being aware that these are core, rather than project, costs.

Full Cost Recovery Case Study: Barnardo's Scotland

Summary

In order to recover the full costs of its operations Barnardo's Scotland has implemented a Know, Show, Grow full cost recovery strategy. This involves identifying the main core cost drivers, calculating the proportion of these to be allocated to each project and then including these as separate headings in budget calculations. Experience has shown that funders are far more likely to accept itemised costs rather than a standard undifferentiated "Management Fee".

Introduction

Barnardo's Scotland is part of Barnardo's UK. Although there is a separate Scottish board, and the Scottish operation enjoys a high degree of autonomy, formal governance comes through its UK Council.

Within Scotland 900 staff are employed working on 62 projects. The projects are focused upon children and young people and cover such areas as youth crime, homelessness and care leavers. Projects are delivered within 27 of Scotland's 32 local council areas although the main areas of activity are in the central belt and the other urban areas. Most projects are delivered under Service Level Agreements for councils and cover statutory services. Income in 2006/07 is around £23 million. The main sources are: Social Work (56%), Education (13%), Supporting People (5%), Scottish Executive (4%) and Barnardo's' own resources such as donations and fund raising (13%).

Cost recovery practices

Barnardo's practice was to calculate project costs and then add onto these a management fee that was intended to cover other overheads (core costs). This was generally 10%. However, some councils refused to pay this amount. For example, Glasgow would only pay 7.5% Aberdeen only 8%. Despite this it was felt that the costs of the Scottish operation were being covered through project income, with Barnardo's own resources being used to fund experimental initiatives and ones set up to meet needs that the statutory providers had not recognised.

Recently there has been pressure for the Scottish operation to make a greater contribution towards the core costs of the UK-wide support activities. In order to do this it was calculated that the management fee would have to increase to 16%, a sum that it was felt most councils would be reluctant to pay. Accordingly a Know, Show, Grow strategy has been developed in order to move the operation to Full Cost Recovery.

The Full Cost Recovery strategy

The Know element involves identification of all of the core cost drivers and then allocating a percentage of project costs to these. Five main drivers were identified:-

• Property and Facilities Management which covered property management (with the costs for these being based on a fixed per site element and a variable element based on property rental), health and safety compliance, facilities management and strategic property management covering acquisitions and disposals;
• Information Technology which covers at cost hardware expenses, a per capita management cost and a variable cost based on the number of users at each site to cover such expenses as networking;
• Finance charges made up of a percentage of invoiced income to cover bank charges, a financial processing charge (to cover such costs as raising and processing invoices) and a charge for financial governance to pay for such things as audit. The last two charges are based upon a percentage of non-pay expenditure;
• A flat fee per head to cover Learning and Development, essentially training costs; and
• Human Resources which covers the costs associated with employing staff. This is based on a per capita cost rather than the number of full time equivalent employees as the key cost driver is the staff headcount.

All of these core costs are applicable to all projects. These costs are then aggregated and deducted from total project costs. The balance then attracts an 8% management charge to cover all other core costs, mainly line management. Initial experience has shown that funders seem willing to accept this.

The Show part of the strategy involves presenting these costs to funders in a way that will be acceptable to them. These are not disaggregated into the individual elements outlined above but are included as single budget headings, with the five main drivers being included alongside project specific costs.

Once this strategy is in place, and is accepted by funders, then the Grow element can be implemented. At this stage most of project and core costs will be covered. The organisation's financial sustainability is enhanced and it can then develop additional services in the knowledge that they are more likely to be fully funded.

Progress

Barnardo's feels that, although the strategy is still being implemented, if the 2006/07 budget is attained then it will essentially represent Full Cost Recovery. Scotland will then be covering, not only its own core costs, but also the core costs of headquarters activities. In financial terms this represents an increase of around £0.5 million on the 2005/06 budget. Experience is that the main problems with funders come when they are presented with a large percentage of the budget lumped under a "Management Charge" heading. To avoid this, the strategy is to break this charge down into its key elements and then enter these as separate budget headings. These are then included alongside other project costs so that it is not so obvious that they are contributions towards core costs. As such presentation is a key element in the success of the strategy.

Implementation of the strategy has involved a need to consult with staff and to explain to them the true costs of their activities thereby involving them in the process. This has generally been successful, although there has been a need to balance local project autonomy against potential centralisation of control in applying recharges.

For further information on Barnardo's approach contact:-
Martin Crewe

Tel: 0131 334 9893
Email: martin.crewe@barnardos.org.uk

Full Cost Recovery Case Study: The National Schizophrenia Fellowship (Scotland)

Summary

NSF (Scotland) is a national membership organisation providing a range of mental health services. Underfunding meant that reserves were being used to subsidise costs. Accordingly, in 2001, the board decided to adopt a FCR strategy. This involved working out the per capita cost to be charged to funders in order to cover overheads. These costs were then discussed with funders, most of whom gave a positive response. However, the majority of NSF (Scotland)'s income comes through grants. These often do not take account of inflation, so that the FCR uplift has now been eroded. As a result, NSF (Scotland) currently has to subsidise its activities from reserves. Accordingly, it is proposing to explain again to funders the implications for services of a failure to provide grants which encompass the costs of FCR. In parallel, it is in the process of appointing a fund raiser to help to rebuild reserves.

Introduction

NSF (Scotland) is a membership organisation, and registered charity, that provides a variety of services to support those with mental health problems and their relatives and carers. It has 173 staff (100 full time equivalents ( FTEs)). Of these, six FTE staff are based in the Edinburgh headquarters, the remainder in projects spread across Scotland. The main services are:-

• Information services (enquiry service, website, newsletter and publications) that are provided through the National Office in Edinburgh;
• A network of 23 mutual support groups;
• 16 drop in/resource centres;
• A variety of outreach activities, including a befriending project, outreach and youth workers, a voluntary counselling scheme, a self help project and a community liaison officer;
• Employment and training activities, with some projects providing training placements under the Permitted Work Scheme whereby people in receipt of Incapacity Benefit are allowed to work; and
• Carers Support both through dedicated Carers Officers and the drop-in centres.

In total NSF (Scotland) runs 25 different projects. Although services are provided in Edinburgh and Glasgow, most are delivered in rural and semi-rural areas, with a particular concentration in Dumfries and Galloway, Highland, Fife and Aberdeenshire.

At a national level NSF (Scotland) is also involved in a number of policy and practice activities, many of which are linked to Scottish Executive priorities.

Income in 2005 was £2.89 million. Of this 95% came through grants (mainly through the Mental Health Specific Grant) from a variety of public sector bodies including the Scottish Executive, local authorities and Health Boards. The balance came from trading income (4%) and donations (1%). As a national organisation NSF (Scotland) receives some core funding from the Executive (through Section 10 (1) of the Social Work (Scotland) Act (1968)) as a contribution to core costs and its national information activities. However, the value of grants from the Scottish Executive has fallen: from £101,700 in 2004/05 to £82,000 in 2005/06. This has been due to the loss of funding through Section 16B of the NHS (Scotland) Act 1978.

Cost recovery practices

In 2001 NSF (Scotland)'s Board felt that its financial stability was being undermined by the extent to which the services it provided were underfunded and were being subsidised from reserves. Accordingly a policy decision was made to try to move towards full cost recovery. The per capita costs needed to support the main infrastructure activities of finance, operations, personnel and administration were calculated. This came to £2,100 for each FTE staff member. Senior staff from NSF (Scotland) then visited the funders and explained NSF (Scotland)'s cost profile to them. They outlined the likely consequences to services were the full costs of services not covered. Given that most funding covers staff salaries and essential overheads, the implication was that services would have to be cut back.

The response to these visits was generally positive with many funders being willing to increase grant levels. However, these increases were generally "one offs". Since then NSF (Scotland)'s financial situation has slowly deteriorated as cost increases have outstripped grant income. For example, in 2005 NSF (Scotland)'s expenditure exceeded its income by £50,000. This was covered using reserves, so that 2.8% of expenditure was being funded from NSF (Scotland)'s own resources.

The Full Cost Recovery strategy

The strategy is now, once again, to approach funders and explain NSF (Scotland)'s financial position and seek grant increases or at least an understanding by funders of the likely consequences of the failure to provide such increases. Given the decrease in the Executive's core grant and salary increases (with staff being paid on local authority scales, albeit one year in arrears in line with the practice of grant giving by local authorities) the per capita charge needed to support the infrastructure costs of finance, operations, personnel and administration is now £2,440 per FTE.

NSF (Scotland)'s financial problems are made worse by the fact that most of its income comes through the Mental Health Specific Grant ( MHSG). Although this has the advantage of being ring fenced (so that it has to be spent on mental health) the total amount has remained static for a number of years. MHSG also excludes any provision for depreciation. Many of the grants have also been in place for long periods of time. Negotiating increases on these long standing grants tends to be difficult. More recently secured grants generally tend to be given on a full cost basis with there being little questioning of the need to recover infrastructure costs.

Given the uncertainty over full cost recovery NSF (Scotland) is currently in the process of appointing a fundraising manager. The aim is to increase donations so that unrestricted reserves can be rebuilt. However, were full cost recovery to be implemented then reserves could be used, in part, to set up or support new services where NSF (Scotland) had identified a need that was not being met and was unlikely to meet statutory funders' criteria.

A key part of the strategy has been to keep senior managers informed of the need to cover full costs and to be transparent about the level of these.

Progress

Grants are often given on a "take-it-or-leave-it" basis with no opportunity for negotiation. In part this might reflect the perception of grants as being a donation. NSF (Scotland) wants grants to be seen for what they are: a payment for the cost of providing services. As such they should be made at a level that enables the full costs of service delivery to be covered.

Although some income comes through Service Level Agreements, experience is that these tend to be treated in exactly the same way as grants by funders.

If it proves impossible to obtain the income needed to cover project and infrastructure costs then NSF (Scotland) will, as it has done in the past, withdraw from providing services. The implementation of FCR is therefore seen as being something that will be beneficial to service users.

However, one of the fears, were FCR to be introduced, is that greater use will be made of competitive tendering. Given that the services NSF (Scotland) provides are labour intensive the only way a commercial operator could make a profit would be by cutting back on staff costs, in particular salaries and training. This is felt to be likely to be detrimental to the quality of service provided.

There is also a fear that FCR could result in a greater drive for "efficiency". One consequence of this could be that the medium sized organisations, that have to spread infrastructure costs over a limited number of projects, will be at a disadvantage. One impact might be that they go out of business and the services they provide are then delivered by larger bodies. In the longer term this could prove detrimental to those using mental health services, who often benefit from the range of services provided by different, complementary, bodies.

For further information on NSF (Scotland)'s approach contact:-
Ian Gilmour
Finance Manager

Tel: 0131 557 8969

Full Cost Recovery Case Study: Castlemilk Economic Development Agency

Summary

To recover the full costs of its operations the Agency has developed a financial model that enables it to identify all of its core costs and then allocate these on a per capita member of staff basis. However, experience has shown that funders rarely agree as to what items are eligible to be funded as core costs. Accordingly costs are covered through a degree of cross subsidy, mainly from the income earned through commercial contracts.

Introduction

The Castlemilk Economic Development Agency ( CEDA) is one of Glasgow's eight area based Local Economic Development Companies ( LEDCs). A company limited by guarantee with charitable status, it delivers a range of business development, economic development, training and regeneration services for the residents of, and businesses based in, Castlemilk, a large housing estate on the southern edge of Glasgow.

CEDA has an establishment 53 staff and a 2005/06 turnover of £2.8 million. The turnover comes from a mixture of core funding and project and contract income. Core funding of £186,000 comes from Glasgow City Council ( GCC) (41%) and Scottish Enterprise Glasgow ( SEG) (59%), Glasgow's local enterprise company. Project income, mainly given through Service Level Agreements ( SLAs), amounts to more than 75% of turnover. Currently around 30 projects are being delivered in partnership with funding bodies such as GCC, SEG, Communities Scotland, the Department of Trade and Industry, The Big Lottery Fund and the European Social Fund. The balance comes from competitive contracts and contributions from subsidiary operations. The main one commercial contract is Action Team for Jobs. This was won by a partnership of LEDCs from the Department of Work and Pensions.

Cost recovery practices

Given the cocktail of funding that CEDA attracts, all with different eligibility criteria and conditions, a financial model has been developed to ensure that core costs are identified and can then be allocated. Total core costs are calculated to be approximately £380,000. This sum is made up of seven broad budget headings, including staff costs, property, administration, corporate management, and project development. In their turn these broad headings are broken down into a total of 31 sub-headings such as audit fees, directors' liability insurance, staff training, computer maintenance and depreciation. Formerly these sub-headings were presented to funders. However, experience was that there was considerable variation in practices, with not all funders being willing to recognise all items as legitimate costs. Accordingly practice is now to allocate core costs over the following broad budget headings:-

• Property, broken down into rent, insurance, rates and maintenance and repair; and
• Administration, covering: telephone and postage, stationery and photocopying, publications and subscriptions (to journals and databases), computer maintenance, and depreciation.

The total sum is divided by the total staff and a per capita core cost figure (that needs to be recovered through project and contract income) of £3,500 is arrived at.

The Full Cost Recovery strategy

CEDA's approach is to recover the full costs of its activities from the cocktail of funding it receives. This involves a degree of cross subsidy, often from the commercial contract income it obtains and surpluses generated and gifted from subsidiary operations. Those funders who are being subsidised rarely recognise this.

Its experience is that often funders do not adopt a strategic approach, with items that are accepted as eligible being a reflection of individual prejudices rather than any corporate view. This can make long term planning difficult as staff changes might result in changes to what is judged to be eligible core expenditure. Often funders do not base their approach to determining what they will support on any analysis of real costs. What is judged to be eligible can also change over time as policy changes, as was the case with European support for training, with now only project specific training costs being allowable.

A particular problem is experienced with those funders that are unwilling to pay cost of living increases. As all CEDA's staff are employed on similar conditions of service, regardless of the project funding stream that covers their costs, this means that there has to be cross subsidy. This normally comes through commercial contract income. There have, however, been instances where CEDA has withdrawn from contracts where there was an unwillingness to pay cost of living increases. In these instances it was felt that the degree of cross subsidy required was unreasonable.

The differences in policy between funders can involve CEDA in additional costs. For example, there may be a need to keep separate time sheets as some funders will cover the costs of some activities whilst others will not. Experience is that when there are to be cut backs the focus is invariably upon core costs, the importance of which tends not to be recognised. Cut backs by large organisations also tend to be made across the board, with all fundees having to accept the same percentage decrease. The alternative, the funder undertaking a strategic analysis of its activities and making decisions as to which are its main priorities, rarely (if ever) happens.

Although most of CEDA's project income is derived from SLAs, experience is that funders can treat these like grants. This means that there is interference with the details of costings and a focus upon overall costs, rather than upon the quality of service that is being delivered.

CEDA recognises the need for best value in all of its activities. However, improving productivity is not incentivised by funders. For example, in commercial contracts, that are regulated by maximum targets, any overperformance is a cost to CEDA that has to be cross- subsidised or underwritten by other income streams. This is an obvious disincentive to trying to improve performance. A similar situation applies to increasing productivity and controlling costs. CEDA recognises the need to control operating costs. However, where productivity gains are made, the usually result is a net reduction in the funding for future years, rather than the ability to diversify or improve the quality and consistency of services.

Progress

CEDA covers its core costs from its various strands of income. However, without the £186,000 of core funding from GCC and SEG this might be difficult. Losing this money would double the core costs that are now to be recovered though project and contract income. However, it is recognised that core income may be cut back. Accordingly CEDA, along with the other LEDCs, has recently set up a wholly owned subsidiary company that will bid for economic development and training contracts. Given that competitive tendering is not subjected to detailed cost scrutiny, this is seen as being one way of ensuring that core costs can be covered.

Whilst the implementation of Full Cost Recovery is seen as an ideal, CEDA's experience is that it will be very difficult, if not impossible, to gain agreement with funders on exactly what FCR should cover. For example, some funders will not cover bank charges, project development costs or even pay cost of living increases, all of which CEDA feels are legitimate costs. Even was such agreement to be possible, setting figures on each item would be problematical, with there being no guarantee that funders would be willing to accept CEDA's figures. Given this, CEDA is currently exploring a number of scenarios intended to enable it to cover its core costs, whilst reducing its exposure to risk.

For further information on CEDA's approach contact:-
Fraser Kelly
Chief Executive

Tel: 0141 634 1024

Full Cost Recovery Case Study: Parkhead Citizens Advice Bureau

Summary

Parkhead Citizens Advice Bureau ( CAB) aims to bid for all contract work on the basis of the full costs of service delivery, although in a small number of cases it does not receive these. The keys to implementing FCR are seen as being the need to be transparent about costs, ensuring that costings are accurate and justified and being able to argue and negotiate (not just over costs but also about the level of service to be delivered relative to these costs). Should the Executive wish to implement FCR then education was seen as being the key requirement.

Introduction

CABs are independent local charities that provide advice and information from over 200 locations in Scotland. The CAB Network was established over 60 years ago, although the individual CABs are independent with responsibility for raising their own funds and delivering services for their local community.

Parkhead CAB employs 15 staff and has a 2005/06 turnover of £428,127. This comes from a variety of grants and contracts given for providing a range of advice and support services to the residents within Glasgow's deprived East End. The organisation aims to cost all of its services on a full cost basis.

Cost recovery practices

Although Parkhead CAB aims to cost all of its services at full cost this is not always possible. For example, it delivers a local authority contract for a fixed price.

The governing body has taken the decision to apply for all contracts/funding on the basis of full costs. If the funder is unwilling, or unable, to pay these then the service will either be reduced to the available level of funding or the contract will not be entered into.

The Full Cost Recovery strategy

The full cost recovery strategy has been developed to include a proportion of overhead costs in all bids. These include:-

• Premises;
• Management;
• Publicity and promotion; and
• Staff time not spent on service delivery.

In order to be able to recover full costs it is felt that the following are the key elements:-

• Being transparent to funders about the need for full costs;
• Being able to accurately calculate costs;
• Being able to argue for full costs; and
• Being willing to negotiate on the level of service to be delivered for the agreed cost.

The ability to accurately apportion costs was helped by experience of delivering European Social Fund ( ESF) projects. The ESF application process requires the applicant to be able to breakdown and apportion costs. This was seen as a useful experience in being able to apply FCR in practice.

However, some services are still funded on a non- FCR basis. This has been possible through diversification of the funding base and developing services through specific project funding. For example in 1998 the organisation was totally dependent upon Glasgow City Council for funding. Currently income comes from 9 different funding streams and 8 different funders. Most of these support the principle of FCR.

Progress

It is felt that some funders will take time to move to FCR. This will require a significant amount of education. Despite this the principle of FCR is felt to be attainable. For example, some public sector organisations had purchased services from Parkhead and had not tried to argue about the overhead costs that they should pay. This is seen as a model of good practice that other public sector agencies should learn from.

For further information on Parkhead Citizens Advice Bureau's approach contact:-
Ginny Jackson

0141 554 3834
manager@parkheadcab.org.uk

Full Cost Recovery Case Study: Speyside Trust

Summary

Speyside Trust seeks to recover its full costs by apportioning unallocated overheads to projects on the basis of a percentage of turnover. The Trust has been pursuing a policy of full cost recovery in recent years to combat rising deficits.

Introduction

The Speyside Trust is a charitable trust that operates the Badaguish Outdoor Centre. Established in 1984 to promote equal opportunities access to the outdoors for people with disabilities, the Trust now employs around 20 people.

Services delivered by the Trust include: respite care, short breaks, childcare, summer play schemes, outdoor education (for both mainstream and special needs clients) and residential accommodation for various groups.

The main sources of funding are local authority social work departments and the European Social Fund. Together this accounts for around half of the Trust's income. Other sources of funding include private fundraising and mainstream outdoor education activities.

Cost recovery practices

The Trust's practice is to allocate overheads across five main service headings where possible, these being: Care, Children's Services, Training, Provision of Residential Education, and Fundraising. The remainder of overhead costs that cannot be allocated are apportioned across contracts on the basis of the proportion of turnover they make up. For example, a project attracting 20% of the organisation's total turnover would be apportioned 20% of the organisations unallocated overhead costs. The Trust has partial exemption from Value Added Tax and a similar model is used in relation to calculating tax recoverable on exempt zero rated and standard rated supplies.

Full Cost Recovery strategy

A decision was taken at Director level two to three years ago to pursue the recovery of full costs for the delivery of services to public sector funders. This was in response to a growing operating deficit.

Unallocated costs, which are apportioned across contracts, include the following: depreciation, central administrative costs and office overheads that it is not possible to break down.

An example of a contract where the Trust is recovering full costs relates to an agreement with Highland Council for the provision of respite care. Costs per person have been offered to the Council based on a sliding scale. This means that if the Council fills a certain amount of places then it receives the best price per head. As the number of places falls then the price per head increases.

It was explained to the Council that the price included a number of apportioned overheads which typically account for something in the order of 30% of the total costs of delivery, and that this cost was necessary for the Trust to be able to deliver care. These costs represented a significant increase on the price of the previous contract.

The Trust was able to take such a strong position as the business plan states that the organisation should not leave itself open to being dependent on any one public sector funder. With a significant proportion of income coming from elsewhere the Trust could take a strong line on this particular contract: almost a "take-it-or-leave-it" approach. Other factors putting the Trust in a strong position to be able to recover full costs were:-

• The fact that the proposed cost increase was perceived as being fair as it brought the cost into line with similar providers; and
• The services offered being of a nationally recognised high quality and unique in Scotland.

Progress

The current accounting system allows the calculation of full costs to be done easily for each new contract or agreement, though the paperwork burden or "audit trail" can be burdensome. For example, for some European funded contracts, a proportion of overheads are being paid but drawing this down requires a full set of duplicate paperwork which can be time consuming to produce. Where the additional overhead costs being sought are fairly small, it may not always be worthwhile pursuing them.

The Speyside Trust has had a certain amount of success in recovering full costs on some contracts, most notably the respite care agreement with Highland Council. However, the different approaches of funders, and their differing requirements regarding the required breakdown of costs, means that there is still some progress to be made before full cost recovery is practiced across the board.

The Trust also recognises that funders are constrained as they do not have additional funds. Given this, there is a limit to the extent that FCR can be pursued at any one time.

For further information on Speyside Trust's approach contact: -
Andrew McKenzie

Tel: 01479 861 381
Andrew.m@badaguish.org

The public sector case studies

6.5 There are four public sector FCR case studies. These are:-

• The Big Lottery Fund, as they adopted the principal of FCR, by allowing all legitimate overhead costs to be recovered by voluntary organisations;
• The Scottish Executive, as they have made a commitment to accept full cost recovery principles and have developed a policy to guide their implementation;
• Historic Scotland, who are now in the process of adopting the principle of FCR; and
• The Chartered Institute of Public Finance and Accountancy ( CIPFA) which, although not a public body, is the professional accountancy organisation for those working in the public sector. As such it has produced guidance for local government on defining full costs and accurately apportioning overheads.

6.6 It is possible to draw on these case studies to highlight what seem to be some key good practice lessons. The main ones seem to be:-

• Developing a clear approach to the criteria on which applications for funding will be based is crucial. In the case of the Big Lottery Fund and the Scottish Executive there is a set of standards through which funding will be appraised. This ensures that everyone is treated equally but also ensures that those bidding for funds are clear on what is required;
• Developing a list of "overheads" that can be reasonably included in bids for contracts or services is the key to ensuring that those bidding for funds do not include costs that are not eligible, or could not be covered; and
• By developing consistent frameworks, such as the CIPFA Best Value Accounting Code of Practice, and by modelling them on public sector practice it becomes easier for organisations to justify their costs (and harder for the public sector to deny them).

6.7 Two of the case studies also show that the implementation of FCR may not always be to the benefit of the sector as a whole. For example, the Big Lottery Fund estimates that its policy of adopting FCR has cost between 5% and 10% of its grant aid. In effect this means that, for the same expenditure, it receives 5% to 10% less notional outcomes. Similarly, Historic Scotland estimates that its introduction of FCR will result in the organisations it funds receiving less money. These examples show that:-

• FCR's implementation will not be cost neutral; and
• Without a real increase in funding some organisations will receive more money. However, this will be at the expense of others that will receive less.

Given this, it would seem that implementation of FCR needs to be undertaken in as transparent a way as possible so that all parties are aware that there are likely to be winners and losers.

Full Cost Recovery Case Study: Big Lottery Fund

Summary

The Big Lottery Fund has now moved to FCR adoption, having taken a phased approach to its implementation. It has developed a framework that allows organisations a degree of freedom in calculating their full costs though there are certain costs that cannot be covered based on the Fund's Statement of Financial Regulation.

Early evidence suggests that grant funding has increased by around 5% to 10% as a result of FCR implementation, although it was too early to tell what the overall impact has been.

Introduction

The Big Lottery Fund was launched on the 1 June 2004, building on the experience and practice of the New Opportunities Fund and the Community Fund to create a single organisation that reduces overlap and provides the best value for money for lottery grants. The Fund aims to bring improvements to communities and to the lives of those most in need. It does this by providing funding for a wide variety of organisations, including voluntary and community groups, local authorities, schools and other educational bodies, and private sector organisations.

Cost recovery practices

The Big Lottery Fund took the decision in principle to adopt FCR in its funding regimes. It developed a series of principles about its operations that underpin how it works in England, Scotland, Northern Ireland and Wales. The Accessibility principle stated that they would adopt the principle of FCR by allowing all legitimate overhead costs to be covered.

The decision was taken to evidence the fact that the Big Lottery Fund was providing genuine support to the voluntary sector. They felt that they needed to take a lead, even though they recognised, at the start of the process, that this would be a difficult step to take. It was also felt that the move would produce longer term policy gains as voluntary organisations could spend their time developing and delivering services rather than trying to access resources to survive.

There was wide consultation with stakeholders to ensure that this was the most appropriate route forward. The key aim was to ensure that the voluntary sector recognised that a move to FCR could see less organisations receiving funding (due to the extra costs covered by FCR that would not have been paid for in the past). The voluntary sector responses suggested that they recognised this issue and were prepared to accept it as one of the consequences of FCR implementation.

Full Cost Recovery strategy

The FCR Strategy was a four stage process.

Stage 1 - The Big Lottery took the "in principle" decision to adopt FCR. This was based on a detailed assessment of the hard facts around FCR. They wanted to ensure that they could develop a model that would avoid double funding and grey areas as well as assessing what costs were to be covered under FCR. They then worked together with a number of umbrella organisations to develop the principles and try to make the process work.

Stage 2 - Involved assessing the possible full costs against their Statement of Financial Regulation. This resulted in the production of a framework that identified areas that could be funded and removed those where they legally could not cover costs. Key areas that were not eligible for funding, that are subject to some dispute by voluntary organisations, include:-

• Retrospective funding, so that past activities are not funded, even though they would now be eligible for full costs;
• Reserves, with costs not being funded that do not have a specific output or outcome that can be attributed to them; and
• Notional costs, with the Fund not covering in kind or subsidised services at full cost. For example, they would not pay a notional salary for a volunteer.

Overhead costs that can be covered are:-

• Payroll, accounts and administrative staff;
• IT equipment;
• Premises (including insurance, rent, heat and light);
• Governance costs (including senior staff salaries and expenses of trustees meetings);
• Strategic development costs (such as strategic business planning and training);
• Costs of fundraising to continue a project; and
• Project monitoring and evaluation costs.

Stage 3- After Stage 2 the Fund knew what was eligible for funding and what it had the legal power to cover. A key recognition at this stage was that some organisations would not have the capacity to work out their full costs and that some would not have the money to buy the tools that exist (such as the Association of Chief Executives of Voluntary Organisations' ( ACEVO) guidance on apportioning costs ( ACEVO, 2005)). As such the Fund has developed a "handy guide" to simplify the process.

Stage 4 - This stage involved ensuring that grant staff were trained in the principles of FCR and understood the concept. As part of this process the decision was taken to use a consistent framework for assessing full costs for large and small organisations. The large organisations (if they have a series of regional offices) were expected to develop standard approaches to building FCR into applications that were consistent across all offices. Smaller organisations are asked to justify their full costs in their own way. As long as the Fund is happy that overhead costs can be justified it will fund the organisation. This avoided the development of a complex and bureaucratic system.

Progress

The Big Lottery Fund is only just at the stage of receiving applications that have FCR built into them. However, progress towards this stage has taken several years and has resulted in a phased adoption of FCR.

In the early days of the Lottery (when it was the Community Fund) there was no allowance for overhead costs. Some projects' costs were not even included so the funding was very much marginal.

In 2002 this was changed to allow some overhead costs to be covered. These included project management and premises, but still excluded HR, finance and governance. This was developed further through the New Opportunities Fund when a percentage of overhead costs were allowed to be added to project costs, though this was set quite low.

The early evidence suggests that, compared to previous funding, there has been a 5% to 10% increase in the value of previous grants. There was an expectation that the increase would be more than this. However the Fund believes that it has probably been implicitly covering some overhead costs for some time. However, it is felt to be still too early to assess what the full impact would be.

For further information on the Big Lottery Fund's approach contact: -
Kevin Ashby

Tel: 020 7211 1800

Full Cost Recovery Case Study: Scottish Executive

Summary

The Scottish Executive, in the Compact with the voluntary sector, made a commitment to recognise the need for FCR in bids for service contracts. As such the Executive will accept fully costed bids for work. Those responsible for procurement believe that certain standards have to be met in the contracting process. These include behaving with integrity, questioning the costs, examining the costs and awarding contracts based on a compromise between cost and quality, reflecting best value for money.

Introduction

The Scottish Executive, in the Compact with the voluntary sector, made a commitment to recognise the need for FCR in bids for service contracts. The Executive has stated that it has a vision of the future where it will unlock the potential of voluntary and community action, where the voluntary sector's broad contribution to communities and to Scotland is fully recognised, where the sector is regarded as an equal partner alongside the public and private sectors and where it has a strong voice and the capacity to play out its role in Scotland (Scottish Executive, 2005b) .

Cost recovery practices

The Scottish Executive will fund projects that include a reasonable level of overheads. The process it goes through when assessing bids for contracts or services is to:-

• Ask for a cost breakdown;
• Examine this;
• Question the organisation on the costs; and
• Award contracts based on value for money (or more specifically the interaction of cost and quality).

The Executive follows a series of standards that are expected to be met by all those involved in the procurement process. These include:-

• Being fair, efficient, firm and courteous;
• Achieving the highest professional standards in the award of contracts;
• Publicising procurement contact points and making available as much information as suppliers need to respond to the bidding process;
• Notifying the outcome of bids promptly and, within the bounds of commercial confidentiality, debriefing winners and losers on request on the outcome of the bidding process in order to facilitate better performance on future occasions;
• Achieving the highest professional standards in the management of contracts; and
• Responding promptly, courteously and efficiently to suggestions and enquiries.

It is felt that good practice in negotiation is critical to gaining a "win-win" situation for the funder and those being funded. The need for negotiation skills is therefore crucial in ensuring that the outcome is acceptable to both parties. The Executive believe that any contractual relationship where one party deliberately pushes down costs will lead to longer term problems for the quality of service and the sustainability of the organisation delivering it.

For further information on the Scottish Executive's Procurement Directorate's approach contact: -
Paul McNulty
Head of Policy and Practice

Full Cost Recovery Case Study: Historic Scotland

Summary

Historic Scotland gives grant aid to a number of voluntary organisations involved in preserving the built and historic environment. In 2002 it moved towards funding one of these on the basis of FCR. This involved time sheet based calculations with core costs being funded in proportion to the time spent working on behalf of Historic Scotland. A consultation paper on the introduction of FCR for all voluntary organisations funded by Historic Scotland is to be distributed soon. It is a possibility that this may result in some organisations receiving less as currently funding is not tied to outcomes or specific projects but essentially covers core costs.

Introduction

Historic Scotland is an executive agency of the Scottish Executive, with over 900 whole time equivalent employees. Its aims are to protect, preserve and promote Scotland's historic environment. This includes ancient monuments, archaeological sites, historic buildings, parks and gardens and designated landscapes. It is responsible for the maintenance of over 300 monuments, ranging from Edinburgh Castle to archaeological sites such as Skara Brae on Orkney. It also provides grant aid to help others preserve and maintain the built environment. Its 2005 income was £58 million of which £36 million is funded by the Executive. The balance came from such sources as admission fees and retail sales.

Cost recovery practices

Amongst other organisations Historic Scotland funds the Architectural Heritage Fund ( AHF). The Fund is a registered charity founded in 1976 to promote the conservation of historic buildings in the UK. Its five London-based staff manage a £150,000 Grants Scheme which gives money to registered charities for feasibility studies and option appraisals for historic building reuse. Historic Scotland reimburses 50% of the grants to AHF. In 2001 the Fund asked if Historic Scotland would consider paying some of its overheads as it was struggling to pay its costs. After consideration this was agreed.

The model that has been developed is a simple one which essentially involves Historic Scotland paying overhead costs in proportion to the time that Fund staff spend working on behalf of Historic Scotland, giving advice and support to grant applicants. Thus if 20% of staff time was spent working on behalf of Historic Scotland then 20% of overheads would be paid for. The model depends upon Fund staff keeping daily time sheets which allow staff time to be allocated to specific projects. Prior to the introduction of this new funding regime Historic Scotland reviewed the Fund's accounts to check that there were no items of expenditure that might be seen as excessive. As this was not the case, a three year funding agreement was entered into. Through this the Fund receives £52,000 a year to cover its staff and a proportion of its overhead costs. This sum is increased each year to take account of inflation.

Eligible costs include direct staff costs, staff on-costs such as national insurance and pensions contributions, payroll administration, travel expenses, premises, stationery, telephone, general accounting costs, responding to consultation documents, lobbying and campaigning and other dissemination events.

The Full Cost Recovery strategy

Historic Scotland has recently drafted a consultation paper on its approach to Full Cost Recovery to which, as a Scottish executive agency (and therefore bound by the commitments in the Scottish Compact), it has a commitment to recognise in service contract bids. The paper will be distributed for comments later this year. Although the details have not been finalised it seems likely that the approach will be based on the "light touch" model used to fund the AHF. As such it seems unlikely that a long list of items of eligible expenditure will be produced. Organisations that are to be funded will be expected to submit their accounts. If the expenditure profile seems reasonable then a proportion of overhead costs will be met. This proportion will be derived from the type of time-based calculations used in funding AHF.

Progress

The bodies that will be affected by this Strategy will be the 15 heritage organisations that receive annual grant aid totalling £600,000. In essence this is core funding in that it is not tied to specific projects and is mainly to cover overhead costs. The intention is that, following the consultation process, these organisations will be funded on the basis of specified projects and a proportion of core costs. The implications of this are likely to be:-

• Funding will be tied to the attainment of stated outcomes; and
• It is unlikely that Historic Scotland will fund all of an organisation's costs.

It is thought that this change may prove difficult for some organisations as they have not been used to thinking in terms of attainable objectives and outcomes. It is also felt that some will now be faced with a funding shortfall. In order to survive, in anything like their current form, they may have to become more pro-active in securing other funding streams.

Martin Fairley
Projects and Partnership Manager

Tel: 0131 668 8691

Full Cost Recovery Case Study: Chartered Institute of Public Finance and Accountancy

Summary

The Chartered Institute of Public Finance and Accountancy ( CIPFA) has developed a framework that is applied to local government. It provides a basis for defining full costs and covers the overhead costs that contribute to the total cost of services. The framework defines what total costs are and provides principles to follow when apportioning overheads.

Introduction

The Chartered Institute of Public Finance and Accountancy ( CIPFA) is a professional accountancy body in the UK and the only one which specialises in the public sector. It is responsible for the education and training of professional accountants and for their regulation through the setting and monitoring of professional standards. Uniquely among the professional accountancy bodies in the UK, CIPFA has responsibility for setting accounting standards for local government.

Cost recovery practices

CIPFA, through its work with local government, has prepared the Best Value Accounting Code of Practice 2003 - Scotland. This was established to modernise the systems of local authority accounting and reporting and to ensure that it meets the changed and changing needs of local government, particularly to secure and demonstrate Best Value.

Total costs are defined as all expenditure attributable to the service/activity, including:-

• Employee costs;
• Expenditure relating to premises and transport;
• Supplies and services;
• Third party payments;
• Transfer payments;
• Support services; and
• Capital charges.

Total costs essentially include an appropriate share of all support services and overheads. These should be charged, allocated or apportioned across users and other beneficiaries in accordance with the following seven principles:-

• Complete recharging of overheads, with all appropriate areas being are covered including corporate and democratic costs;
• Correct recipients: the system used must correctly identify who should receive overhead charges;
• Transparency: all parties need to be clear on the process and be provided with sufficient information to enable them to challenge cost allocations;
• Flexibility: there needs to be flexibility to ensure that costs can be updated;
• Reality: costs should be based on facts and not estimated where possible;
• Predictability/stability: charges should be as predictable as possible; and
• Materiality: ensuring that systems are not so complex that they become expensive to administer.

The model provides a framework within which both the public and voluntary sectors can cost their services in a consistent manner. If both are working to the same principles then it is possible to allow a "like-for-like" comparison to be made between services. This will have the added bonus of bringing the public and voluntary sectors together, which could improve partnership relationships.

For further information on the CIPFA framework contact: -
Don Peebles
Policy and Technical Manager

0131 559 3613
www.cipfascotland.org.uk

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