Full cost recovery: The one trick non-profit organisations need to know

When it comes to running your non-profit organisation (NPO), how financially literate are you or your team?

In these days of increasing competitive funding rounds, this is becoming a necessary requirement, in addition to being a key question asked by outside agencies.

For example, to apply for funding to the National Lottery Community Fund, you’ll need to be able to provide a rundown of all overheads and costs for that particular project. This includes even things such as the proportional cost of heating the office.

Providing these details is known as full cost recovery, or FCR. Getting it on top of it is the one trick that can turn around charity finances.

Here’s how to get it right, in five easy steps.

Step 1: Review costs

Step 2: Identify costs

Step 3: Apportion

Step 4: Allocate

Step 5: Check your work

Final thoughts on getting full costs recovery right

Step 1: Review costs

To recover the costs, you need to first identify costs.

This means you must consider everything that you do and ask how much it costs to do it.

This sounds difficult but the data is right there in your fiscal management systems, or your invoices, or the bills you receive, and so on.

But without this information easily at hand, you can’t sustainably plan and deliver your services—or carry out FCR.

Step 2: Identify costs

As you might already know, there are two main types of costs: direct and overheads (sometimes called indirect).

Direct project costs are the costs that relate clearly to a project. These can include salaries for project workers, volunteer expenses, and dedicated equipment.

Overheads are costs that partly support the project, but also support other projects or activities. These could be a proportion of salaries of central staff, such as administrators. They could also be rent and utilities costs, or legal and audit fees.

Getting FCR right is mostly about sharing out the overheads to your projects.

And here’s a key trick: move overheads to direct costs where possible.

For example, if 40% of a person’s time is spent on an activity related to a project, the cost of that time could be treated as a direct cost rather than adding all their costs to overheads.

The balance needs to be right, though. If your quoted overhead figure is too low, the project may not appear reasonable to a funder.

Step 3: Apportion

Having identified your overheads, you need to create a consistent way to divide these costs across projects.

There are several ways to do this – and you need to find one that’s best for your organisation.

The simplest is that if you run two projects of roughly the same size, staff numbers, direct costs, etc, each should cover half of the overhead costs.

It’s important that overheads are shared between projects in a fair and reasonable way.

Here are some of the most common methods for sharing overheads.

Direct project expenditure

The simplest method for sharing overheads is based on direct project expenditure. Those that have higher direct costs take a higher share of overheads, proportionally speaking.  

But this method is only appropriate if the overheads are small compared to the total direct project costs, and the direct project costs in each project are of a similar type.

Otherwise, it gets complicated.

Staff numbers

You might decide the number of staff working directly on a project reflects in a fair way the relative sizes of those projects.

Therefore, apportioning costs based on headcount may be a suitable basis to share all overheads.

Remember to adjust calculations for part-time staff. If volunteers work on projects, you need to consider their time, too.

Premises

It may be possible to share costs based on the length of time each project uses premises. Or you can measure the floor area occupied by each project.

This works especially well if your premises costs are substantial.

Service users

The number of service users or beneficiaries could be used as the basis for sharing overheads if each beneficiary incurs a similar level of costs or if you’ll receive funding based on the number of beneficiaries.

National Lottery Community Fund offers excellent guidance on how to calculate the full costs of your project, including the project’s overheads.

Step 4: Allocate

Once you’ve figured out the method of allocation, it’s just a matter of apportioning costs based on that approach.

Here’s where you can make smart use of technology.

Spreadsheets can help with basic calculations. However, cloud accounting software working in real time can make amendments, correct exceptions, and automate exchanges to reduce errors and ensure the allocation of overheads is up to date.

Cloud accounting software also helps organisations track costs in real time and allocate overhead costs to different projects based on an assessment of fair apportionment.

Step 5: Check your work

After calculating your project’s share of the overheads, consider if the results make sense.

Ask whether they appear reasonable based on your knowledge of the project. Assess whether the project’s overheads related to direct costs seems fair.

Here’s a tip: compare the calculations with those of other projects.

Generally, funders are prepared to pay a fair level of overheads towards a project, but they need transparency.

If grant-makers choose not to fund projects fully, NPOs should be up front about any shortfall and how this will be funded.

To ensure this, NPOs should count all their costs when bidding for projects and make sure they don’t cherry pick costs to suit them or hide the real costs of their work.

Final thoughts on getting full costs recovery right

Doing full cost recovery well – and getting it right – is one of the signs of a very well-run NPO.

While it might sound difficult, the key goal is to keep things as simple as possible.

The principles are straightforward, but you need to be ordered and methodical with your calculations.

Don’t overcomplicate things, especially if the numbers are small.

Access to clear, concise, and timely management information is crucial in a well-managed and sustainable NPO.

Having processes in place around FCR helps develop an understanding of activities, as well as increasing the success of grant applications and ensuring funding of overheads doesn’t impact heavily upon unrestricted donations and reserves.