Summary of initial findings of CFDG and CIPFA Charities Panel full cost recovery survey

11th April 2006

The Charity Finance Directors' Group (CFDG) in collaboration with the CIPFA Charities Panel, has recently undertaken a quick survey of CFDG members to understand the challenges charities face in contracting with government to provide public services.

Our initial findings show that over half of those charities surveyed recover only 85% or less of the cost (including overheads) of delivering the service to the funder. Charities are increasingly being seen as playing a key role in delivering public services and strengthening local communities through innovative ways of working yet it seems funders aren't prepared to pay for the high quality service they receive. In addition funders are requiring greater levels of financial detail such as office and staff costs rather than agreeing a price for a quality service that ensures best value for money.

Challenges charities have faced in building full cost recovery into their processes are as follows:

Risk. Over 60% of Charities believe they aren't adequately compensated for the risk they undertake in delivering the service. Reasons given for this are greater risk transference without additional payment, short-term contracts that cause difficulty in resource re-deployment when a contract ends, and funder/provider relationship weighed in favour of the funder. The following example given by a charity illustrates the imbalance in the sharing of risk. "Overspends caused by increased activity rather than poor management have to be borne by the provider whereas funders frequently will try to reclaim or impose restrictions on underspends by a charity even where caused by good management." Another example of inadequate risk sharing given was when a charity's contract was "reduced this year without a compensatory reduction in service requirements".

Contract lengths. 55% of charities highlighted that the lengths of their contracts are inappropriate to the service they provide. Charities want to see longer contracts that are relevant to the services they are providing in addition to appropriate risk sharing in contracts which enable them to make best possible use of public funds rather than the current "long term relationships with short term contracts".

Imposed pricing budgets. Throughout the survey a key theme arose of charities having pricing budgets imposed on them by their funder. For example one charity explained that funders based their contributions to indirect or support costs of projects on a fixed percentage of the total direct cost budget for the activity. The charity said "this is commonly in the range of 6-9% of direct project costs. Commonly, this is around 50-66% of the actual support costs of most projects we deliver. The shortfall has to be covered by 'core' or unrestricted grant funding. Most of these funders will not accept an alternative costing basis that exceeds their fixed percentage." One charity called for an end to imposing pricing budgets saying this is an "arbitrary formula" and instead "overheads and administration of budgets should be funded on an equitable basis, based on an organisation's actual running costs, and apportioned on a reasonable basis."

Funders themselves are increasingly facing greater financial pressure and uncertainty over government funding making them reluctant to sign or renew contracts for lengths longer than a year. In particular, health and social care budgets are facing constraints and as one charity put it, they are expecting a 'gloomier prospect for next year' as the anticipation is that 'there is likely to be no funding for development and inflationary uplift will be lower'.

Chris Harris, chair of the CIPFA Charities Panel, commented: Public sector procurement performance is poor with ill-fitting contracts being imposed without much thought. The beneficiaries suffer because the quality of service is not acknowledged, the charities suffer because compliance is onerous and the public sector suffers because resources are not used appropriately. We recommend that good practice (as set out in the CJC guide to Third Sector Delivery) is used to inform funders across the public sector and that should mean a better deal for everyone."

60% of charities responding didn't expect to achieve full cost recovery of the services they provide despite a government announcement that as of April this year all statutory funders should implement full cost recovery. Some of the reasons given for this are mentioned above such as the financial pressures faced by funders, the reluctance from funders to cover the full costs of delivery. Other reasons are a lack of understanding and acceptance at local levels, as one charity said "our funders believe we should use our 'profits' to make up the difference", and fear of losing contracts to other service providers meaning those most at need don't get the specialised support services they require.

Changes charities would like to see to make their contracting process more efficient and effective are acceptance of central support overhead costs, longer term contracts with focus on output and quality rather than service provider delivery costs, uniformity in the way local authorities treat contracts with charities and a move toward partnership building.

The Home Office, in March of last year, published Strengthening Partnerships: Next Steps for Compact, which included ideas for a "Compact Plus" standard and potential commitments for public sector bodies which include the following:

· When seeking to deliver public services through the voluntary and community sector, use procurement rather than grants, do not seek information about management fees and overheads, and agree outcomes which capture the additional quality of services which may result from delivery by the voluntary and community sector
· Implement multi-year funding models and make payments promptly, offering payments in advance of expenditure to organisations wherever appropriate
· Share risks fairly between funder and provider, ensuring they fall on those best able to bear them
· For projects funded by grants, give a legitimate proportion of funding for overhead costs

CFDG and its members ask that these potential commitments are verified by the incoming Compact Commissioner as part of the "Compact Plus" and work is undertaken to ensure that all statutory bodies adhere to them thereby bringing stability to funding relationships with the voluntary and community sector.

For further information, please contact: Clare Rice at CIPFA on 020 7543 5712 or Email: clare.rice@cipfa.org

Visit www.cfdg.org.uk for information about the Charity Finance Directors' Group or visit www.cipfa.org.uk for more information about the CIPFA Charities Panel.

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