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Governance, Grants

Cost recovery for small charities…

17 August 2022

Foundation Manager Graeme Marsh outlines some guidance and tips for small charities on understanding, communicating, and planning for cost recovery…

One of the parts of my job that I really love is connecting with the dedicated and passionate people who lead the small charities that we support. Often these are volunteers, but even when they are paid staff, they’re typically juggling many different roles, from fundraising to operations, finance, volunteer management, and much more. I believe that it is an important role of any grant maker to offer support where they can (and when it is wanted) to the charitable causes we work with, and I consistently see the same challenges faced by these organisations in funding their work.

Two areas in particular cause some headaches for organisations and they are cost recovery budgets/funding bids and understanding reserves. In this post I hope to cover cost recovery budgeting and give some practical guidance that I hope will be of use to any small charitable cause looking to secure funding for their work.

Understanding what your organisation’s costs are is a critical part of managing your charity, delivering your services effectively and sustainably, and ensuring that funding covers the true cost of delivering any proposed project. This has long been a challenge for how charities communicate with their donors, after all people often want to feel like their donations are going to make a difference to the end user, not paying the accountants bill. The evolution of the sector to a larger, more professionally driven form, along with media stories around charity CEO’s salaries has led to a charity’s ‘worth’ being measured not by their achievements, but by how much they spend on the ‘end user’ and an obsession with ‘overheads’. This is complicated further by the difficulty many charities have in actually communicating the impact of their work, but that is another topic.

We were really pleased to fund the Befriending Project led by The Archway Foundation in Oxford on a cost recovery basis. (Picture credit: The Archway Foundation). 

Grant funders, unencumbered by the more emotional drivers that underpin donations should perhaps be more pragmatic, yet the same challenges remain and all too often this leads to charities trying to convince of the value of their work by producing budgets that are not truly reflective of the costs involved in delivering it. The result can be a shortfall in the funds needed to sustain the organisation. I have seen this on several occasions, where organisations have received considerable amounts of ‘restricted’ funding, but have been unable to deliver projects effectively due to a shortfall in the ‘unrestricted’ income needed to sustain their indirect costs.

There are essentially three aspects of your costs to consider when putting together the budget for any project, which are:

Direct Costs – these are project costs that you can directly link to the project you are seeking to fund

Direct Support Costs – these are costs that are linked to the project you are seeking to fund, but typically won’t solely be apportioned to just that project.

Core (indirect) Costs – these are your underlying organisational costs that can’t always be linked to a particular project, but are critical to the organisation operating successfully.

Let’s take a look at a simple example.

A local charity that supports older people experiencing isolation wants to run a lunch club at a local hall, hosted by a full-time staff member and volunteers, using their minibus to collect people to attend. A full budget for this project should include:

Direct Costs e.g., driver, fuel, food, venue hire, volunteer expenses, advertising the project.

Direct Support Costs e.g., staff costs, minibus upkeep/servicing, fundraising, operations, volunteer coordination (these will be organisation wide costs, a part of which should be apportioned to any project).

Indirect Costs e.g., governance/accountancy fees, insurances, staff salaries (for those leading the organisation but not directly involved in the project), administration, IT etc.

For any charitable organisation to deliver its work effectively, all three costs need to be met. Effective governance, monitoring, administration, financial management, maintenance, IT, etc all underpin an organisation’s capability to deliver its work and cost money to deliver effectively. Failure to fund these parts of a charity’s work can be terminal.

Understanding cost recovery can also help organisations to understand the value of the work they are delivering. Projects can sometimes appear good value when you only look at the direct costs, yet they may create large amounts of indirect support costs and not be as efficient as they first appear. Projects like this are a risk for any organisation to take on, as they are ‘iceberg’ projects that can appear to funders and donors to be very low cost to deliver, but they require a lot more operational support to deliver. A good example of this is a Befriending programme, which can often have relatively low direct costs (as time is typically given by volunteers) but high levels of direct and indirect support required to ensure the programme runs effectively and safely.

If the sector were to adopt a total cost recovery approach in how funding was delivered, then the issue of project v core funding would be far less of a problem for small organisations. The responsibility for this sits both with funders and with those seeking funding, to give a true picture of the costs of their work. However, the inherent power dynamic between funders and applicants means that the onus is on funders to lead this and to encourage better practices from each other, as well as from those we look to fund. Of course, a cost recovery budget can be challenged, but as is the case with reserves, the key is not to try and hide your overheads, but instead to ensure that they are sense-checked, proportionate, and value for money.

It is only my opinion, but I believe that every funding application should be based on a full cost recovery basis, and every funder should be questioning this with their applicants to ensure that the organisation has the means to deliver their project effectively and sustainably.

Graeme Marsh – Foundation Manager