The costs of full recovery

I don’t always agree with Speaking Up boss and Social Enterprise Ambassador, Craig Dearden-Phillips, but his column in this week’s Third Sector is spot on. He firmly demolishes the umbrella-body sponsored nonsense that is ‘full cost recovery’ (FCR).

FCR isn’t an entirely bad idea in principle. It’s a positive alternative to those situations where grant funders want to give organisations money to do a project but specify that none of the money can go towards your ‘core costs’. The intention of this method of grant-funding is to ensure that grant money is spent on the projects that it’s meant to fund.  The practical result of it is that it discriminates against any organisation that has a staff team but doesn’t receive an ongoing grant for those staff members to just turn up.

They have the choice between taking responsibility for a project which their permanent staff team do not manage and play no role in – which reduces the arguments for undertaking it at all and possibly raises the question of whether it can be covered under their insurance – or cross-subsidising the work their staff do with funding from other activities.

So FCR is better than the active and artificial exclusion by funders of costs that you would take into account if you were pricing a job in the market place.

But – as Dearden-Phillips outlines – FCR has no place whatsoever in the world of trading and tendering for contracts, however much the eternally ludicrous Compactites (the Compact, it’s like a legal agreement that’s not enshrined in law and which nobody agrees to) suggest it does.

As a company tendering for a contract your questions are:

(a)   what are requirements of the contract?

(b)  what is the price you are willing to fulfil them for?

The abstract idea of ‘full cost’ is utterly meaningless in a market system. In industries where the main cost is labour, your full costs are whatever you decide they are.

If a commissioning organisation won’t meet your full costs, you either reduce costs, do the work at a loss on the basis of its wider value or you don’t do the work.

And, of course, this is already the reality for most small organisations trying that are trying to establish themselves. You go to some commissioners with a tender for some work. They say “that’s great but will you do it for £75,000 instead of £110,000”.  You say “what about my full costs?”  They say, “well, we’ve got a budget of £75,000 and some work that needs doing, do you want it or not?”

If you’re a small, unknown start-up organisation local dignitaries are indifferent to this slight against your full costs. And you definitely do want it because £75,000 is a lot more use to a small start up organisation than nothing. So you make it work by finding ways to do things more efficiently and/or working later.

As Dearden-Smith points out, this also works the other way and – once you’ve developed your services and your reputation and can do things well for less money than what commissioners are prepared to pay – you can make a profit.

For larger charities and established local providers there’s more scope to insist on your right to your full costs but it’s not clear who benefits from this.

I think it’s completely reasonable for contracts and funding to be awarded on the basis of factors other than the lowest price. And none of this is an argument in favour of commissioners underfunding contracts to the extent that the only way they can be done within the budget is badly. Organisations who deliver better services at a higher cost can and should make the case for being paid to do so but, as Dearden-Smith says, it’s not an organisation costs that are of interest to the purchaser (or the wider public), it’s the value that the organisation offers for the money.

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