Full cost recovery: What is it and why do non-profit organisations need it?

Around two decades ago, the National Audit Office (NAO) announced that no activity can be undertaken without the provider racking up central administrative costs.

In the same breath, the government also set out that if that provider is a charity or non-profit organisation (NPO), then it shouldn’t be expected to subsidise these overhead costs from donations. 

According to the NAO, funders do have an interest in helping charities meet a fair portion of overhead costs because it makes it possible for providers to manage activities and finances more effectively.

But what does that mean in practice?

In this article, we take a closer look at full cost recovery, from what it is to why your charity or NPO needs to secure funding for all costs involved in a project.

Here’s what we cover:

• What is full cost recovery?
• Overhead costs: The basics
• Calculating your overheads
• Final thoughts on full cost recovery for NPOs

What is full cost recovery?

In the past, NPOs might have been tempted to not fully cost a grant application or contract bid.

Why?

A fear of pricing themselves out of success.

And this could be an issue with funders who wouldn’t typically care about how a project was costed, as long as it was delivered.

But today, we’re seeing wider acceptance of the idea that the full cost of delivering projects should be met – whether that’s through grants or contract fees.

Full cost recovery (FCR) means getting funding for the total cost of running a project, including direct and indirect costs.

Direct costs are costs that come about from carrying out a specific activity. Meanwhile, indirect costs are the shared organisational costs that underpin those activities (e.g. admin work, finance), but are difficult to attribute to a specific project.

What all this means is that your NPO can ask for the funding you need for every part of your project, including administrative costs and a share of your overheads.

FCR applies not just to procurement, but grants too.

Overhead costs: The basics

Overheads tend to cover a wide range of costs.

Some of these might be for infrastructure, such as offices, facilities, IT hardware and software, and any equipment or vehicles you might need to roll out a project.

Some NPOs might have had finance, administrative, and management staff contribute to a project indirectly; their costs also need to be accounted for and recovered.

Overhead costing allows you to see what exactly what you need from funders to break even. Understand your cost base, and your organisation will probably recover a higher level of overheads in funding applications.

The bottom line is this: without FCR, these costs can seriously limit the level of service an NPO offers those who need it because there’s no opportunity to retain a profit, let alone break even.

Getting your overheads right also helps you build a better-organised charity with greater financial sustainability, so it’s worth taking the time to account for it all.

Calculating your overheads

So, you’ve already established FCR with a funder in principle. But how do you calculate a fair, appropriate amount to be used for different projects?

This is a challenge for more charities, and one we’ll talk you through next.

Normally, calculating your overall overhead costs might seem pretty straightforward. But sharing them out across multiple projects is where things tend to get tricky.

To help you navigate that challenge, you need the support of a strong finance and administration system that can calculate, track and allocate costs effectively.

Cloud accounting software is ideal for this.

It helps NPOs track costs in real time, and allocate overheads to any number of projects based on an assessment of fair apportionment.

You’ll be the one setting up those allocation parameters, but the crucial thing is that the technology makes it far easier to stay on top of everything (while saving you time in the process).

Digital tools can also help control and reduce overhead costs in the first place.

Grant-makers will still need transparency of overheads, but organisations using this kind of tech are leaner and more agile, putting them in a far better position to win funding and get the job done.

Final thoughts on full cost recovery for NPOs

FCR is a no-brainer for any NPO, no matter the size.

Grant-makers today know the importance of ensuring that NPOs recover overheads. In fact, some grant programmes focus solely on funding overheads.

It isn’t always easy to get funders to recognise that they should pay, but being able to present a clear view of those costs will definitely go a long way.

The kind of insight you get from digital tools means you can explain overheads and cost models clearly and in a straightforward way.

That leads to more productive conversations with funders and grant-makers, which could increase your chances of making a successful bid.

An in-depth view of your organisation’s finances is the key to making more strategic decisions and winning more funding later down the line.

Looking at the bigger picture, NPOs that cost their work more accurately can build more solid infrastructure, be more organised, and ultimately be more sustainable.

Ultimately, getting to know your NPO by going through the cost and recovery planning process will leave you better equipped to smash your objectives and be more effective when it comes to providing vital services to people who need them, exactly when they’re needed.