Full Cost Recovery

Published on 8th August 2019

Full Cost Recovery

The
unskilled art of the charity sector

1st May 2019

Author: Anjie Enabor (Principal Consultant)

Definition

Cost recovery is simply
recovering the cost of a given expense. In our case as Non-government
organisations (NGOs) or INGOs, this is recovering the full cost of implementing
a project. Since we typically don’t make a profit, the least we can do is
recover the full cost (total cost) of delivering a project on behalf of the
donor or sponsor. Sounds simple enough doesn’t it? Well, keep reading.

Cost
recovery – the moral conundrum

In my experience, there is an
internal battle in the minds of implementers that makes them feel it is immoral
to recover their full costs. There is, I think, a particular breed of people
who prefer to be short changed, under estimate their worth and generally live
from hand to mouth. There are costs associated with turning up in Nigeria, say
Abuja, setting up an office (albeit temporary), making weekly bank transfers
from the U.K say to a Nigerian bank, having very skilled humans monitoring
activities and supervising projects in Nigeria and the UK in order to deliver a
project on behalf of a donor based in the global North. We typically tend to only
bill the cost of people and offices forgetting everything else in the example
above.

The more subsidised a project is,
the less and even near enough impossible it is for the donor to get a true
picture of how much it cost to deliver the output which by the way impacts
future funding because we are now in a cycle of snow balling a negative balance
and misusing unrestricted funds.

The less we clearly articulate
our costs, the more difficult it is to have clean data for post implementation
analysis and reporting.

The less structured our teams are
in the field and in HQ, the more difficult it is to budget in the right
positions, at the right level and at the appropriate level of effort (LOE)

The more we work in silos
(finance team not knowing what an employee’s fully loaded cost is per month or
which countries a project manager actually supports), the less we are able to
budget accurately let alone recover the right costs.

Cost
recovery – what donors expect

Most donors expect a fair share of costs (direct and
indirect) incurred to deliver their project. They also expect you to be able to
evidence its eligibility and justify your rationale.

There is an expectation that you understand how to bargain
and indeed are knowledgeable enough to educate them on thematic areas and
geographical locations where their own expertise is lacking.

As BOND put it in their September 2018 paper on DFID grants: A new model for cost transparency

, DFID are actually looking for a cost transparency model
that has and is:

  • Simplicity
  • Transparency
  • Fairness
  • Scalable
  • Predictable
  • Value
    for money
  • Substantive

Cost
recovery – what I need to do to get better

To improve your cost recovery
skills, you must simply know and recover all
your costs. I’ve listed some of the tools below:

Timesheets – These are a simple, yet useful way of tracking your
time and objectively apportioning costs to the activities that consume your
time. They also act as a great resource for impact analysis with small
businesses.

Full cost – You should write down and track the full cost of each
activity. For example, it is no good using a person’s net salary when
budgeting, neither is it accurate to only reflect the cost of a conference
without consideration for the transportation, accommodation and subsistence
cost in staying alive and comfortable for its duration when budgeting.

Record Keeping – In order to bill someone else for costs that they
did not incur directly, you must be meticulous with records and be in the habit
of asking for receipts or other forms of evidence even in rural places. Some
clients of ours carry their own receipt books to the market when necessary in order
to have a record of billable costs.

Which of the above are you
committed to doing? Let us know here
how it goes and how this is impacting on your ability to budget correctly and
recover your costs.