One of the, ah, benefits of doing most of my work from home is that I’m around for any visiting salespeople. Recently I had a visit from a lovely young lady who was doing an energy efficiency swap program funded by the government. She swapped our old shower heads and light globes for new ones – all for free! At the end of the visit, I had to give my contact details, and also sign an online form to say that I did indeed receive this service. A couple of weeks later I got an email to confirm that I had received the light globes and shower heads. This was then followed up by a phone call for the same purpose. I thought at the time that this was overkill really for a handful of items that would not have cost much money. I even thought that the accountability might have cost more than the actual items. But then I reasoned that this was government money and needed strict accountability procedures. And I accepted the process and moved on.
I was reflecting on this experience last week, after I’d been discussing cost recoveries with a charity Finance Director (also known as overhead fees, indirect cost recoveries and probably a few other labels!). As charities, when we receive funding from the government to implement a project on their behalf, we are generally allowed to allocate a certain amount of our institutional costs towards the costs of running that project. Often there is a set percentage allocated for indirect costs like the cost of the office rent and organisational audit, as well as allocations for costs like portions of salaries for staff that are working directly on that project.
I see cost recoveries as compensation for the investment in accountability that charities have to make. It’s a necessary investment in order to properly spend government funds. I do understand that not everyone shares this view! I have encountered a few issues with administering cost recovery systems in my time, but I’ll focus on two key areas here: the philosophical argument and the mechanics.
Firstly, the philosophy behind allocating organisational costs to projects. Some practitioners argue that as much grant money as possible should be allocated towards the project itself, in the belief that more money = more impact. Now, I haven’t spent the majority of my career working and volunteering for charities because I think that the work that we do isn’t worthwhile; I absolutely do believe that we are making a difference. However I also believe that in order for charities to remain financially sustainable and therefore to be able to keep on doing our good work, we need to receive fair compensation for implementing projects on behalf of government. Getting back to my energy efficiency example, we are accepting of accountability measures when governments spend their funds, so why do we question this when other agencies spend funds on behalf of governments? Isn’t it reasonable – and better – that government money is spent by organisations that get audited, have sound financial systems and perform monitoring and evaluation of their projects? If we invest money in these functions – not huge sums, but reasonable amounts – I believe that this can lead to higher quality and impact programs implemented by charities.
So, if we’re agreed that it’s okay to actually allocate cost recoveries to programs, the next tricky issue can be how. Back to the accountability point, charities need to demonstrate that the costs that they are allocating are based on real and reasonable expenditure. This can get quite complex when you are running a number of different projects and have various different staff working on them. Add to that incurring costs for each project in a number of countries and therefore a number of currencies, and it can quickly turn into a recipe for errors and often, unfortunately, more cost in human resources needed to maintain the systems.
I have three pieces of advice in this area. First: establish sound policies for how the cost recoveries will be allocated. Obviously make sure that these comply with donor requirements, but also ensure that they get senior sign off and that they are generally understood. Check in on things like appropriate salary rates to charge, what apportionment methods to use (for example, charging costs based on floor space or head count or Full Time Equivalent staff numbers), and how frequently these policies get reviewed.
Second: invest in user friendly systems to capture and allocate costs. In my experience, investing in data capture earlier in the process saves time down the track when it comes to reporting. Spend time designing a system that will provide the right information and make sure you think about future needs as well as the burning issues of right now. Think about the human side of these systems when you are designing them. There is no point in designing the most whizz bang Excel timesheet if it is so complicated that most of the people that need to use it get put off and don’t end up even opening it!
Which brings me to my third point: cost recoveries – or whatever it is that your organisation likes to call them – are not just something that the Finance team concocts randomly in a back office. Nor are they something that the grant proposal writers generate and then everyone ignores. The development of cost recovery policies and systems, and then the recording and reporting side, should be a shared responsibility across the organisation. One of the best examples of cost recovery systems that I saw was at a charity where my Finance staff worked closely with the grants team when developing project budgets, they then worked closely with the team that were implementing the projects to ensure that appropriate cost recoveries were being allocated. They assisted with timesheets and reports that they developed in conjunction with the users of these tools to ensure the right costs were being charged at the right time. We also developed a suite of reports to measure cost recovery levels and had KPIs for senior management around this. And it worked: over an 18 month period, cost recoveries – and the organisation’s financial sustainability – went from abysmal to above targets. And the impact of the agency’s work didn’t suffer!
If you’d like some assistance in setting up cost recovery policies or systems, or some general advice on the subject, please contact us. Or if you’d like to share some experiences that you’ve had with cost recovery systems, please leave a comment below. And for myself, with this recent lot of weather in Melbourne, I think that I might just need to go and switch on one of my new energy efficient lights!