Funding fairly: Using the Compact to get full cost recovery

When money is tight and sources of funding are falling into the ‘slim-to-none’ category, any new grant programme or opportunity is likely to be welcomed with open arms. But with an unrelenting drive to make efficiency savings, the amount of funding available for publicly funded projects and programmes (through both grants and contracts) can be squeezed to such an extent that some charities end up subsiding the true costs of services themselves.
What’s the problem with that? After all, that money is there to provide a service isn’t it, not to make a contribution to that organisation’s finance and HR teams, or part of a new computer system? If a charity contributes these costs to public services then surely everybody wins? Well the short answer is no. In fact, everyone ends up losing; it is unsustainable, short-term, and self-defeating.
A service has to be priced and funded fairly. If an organisation can’t recover its full costs then it has to use its other resources, often limited reserves, to subsidise the funding. The organisation might be able to run that service for a year, maybe two, on that basis. But what happens after, when the reserves had been run down and there hasn’t been adequate investment in the longer-term needs of the organisation to keep it operational? This might seem like a worst-case scenario, but the truth is that every time an organisation is not funded on the basis of full cost recovery it is a real risk to their long-term sustainability.
At a high level, the argument for funding voluntary sector organisations at full cost has been won. Back in 1998 government agreed and committed to allowing organisations to recover appropriate costs, a commitment that has been renewed by the Coalition. Charity Commission guidance states that full cost recovery is much more than ‘a nice to have’, that trustees have a duty to use charity assets as effectively as possible:  “Charities should always aim to recover the full cost of delivering services for public authorities, including administrative and overhead or "core" costs.”
When it comes to actually arranging funding costs for services, it doesn’t always run so smoothly. Take, for example, a recent Compact Advocacy case where a grant-funded programme was set up by a national government department. The guidance notes said explicitly that funding could be used for salary costs only. This of course went against the principles government have committed to, but most importantly meant that smaller organisations, often those on the frontline and with the expertise to deliver the work, would not be able to participate in the programme.
We advocated on behalf of an organisation that would have been excluded on this basis and worked with the government department to change the terms of the grant programme to ensure that organisations could recover appropriate costs. For them full cost recovery wasn’t a nice ‘add-on’. It was the determining factor which made the crucial difference in whether they could deliver the service or not.
At the Compact Advocacy Programme we are committed to ensuring that Compact principles such as full cost recovery are followed. If you have an issue that you’d like to discuss with us please get in touch on 020 7520 2460 or

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