CFG: Meeting of the Overseas Special Interest Group
Cost Recovery Policy and Practice
– A Case Study
What am I going to cover?
• History - why did we develop a cost recovery model?
• Cost Recovery Policy
• Cost Recovery Tools, Roles and Responsibilities
• Cost Recovery Reporting and follow up
• The Budget Test: Benefits of assessing projects using this tool
• Risks, outstanding challenges and future plans - a way forward
• Questions
History – Why did we develop a cost recovery policy?
2 Reasons: (1) How we are funded
History – Why did we develop a cost recovery policy?
2 Reasons: (2) We were making losses without one and
reserves were low
Cost
Recovery
Process
Introduced in
2008
Why develop a cost recovery practice?
•
Funding from donors
•
Lack of overhead (or ‘core cost’) funding from donors
•
Lack of organisation sustainability
•
Recognising and identifying the impact that funding, which does not include overhead
funding, can have on financial sustainability
Considered choices for funding decisions: how to calculate the real cost of donorfunded projects; when to say “yes” and when to say “no”
Cost Recovery:
Tools, roles and responsibility
• Project/Donor budgets: Review and Submit to donor
• Approval and Authorisation process
• The Budget Test- What is it, and how does it work?
The Budget Test
PRACTICAL EXAMPLE
•
Aims to identify the real costs of delivering a project
•
Taking the total project budget cost as the starting point, it adds a number of hidden costs that would
increase their overall commitment depending on different scenarios
•
The test is passed if the ‘total recovery’ amount in Table 2 (US$42,000 in this example) already includes
an amount which is more than the ‘target amount to be recovered’ in Table 1(US$38,000)
•
Only if the test is passed can programme staff approach the donor with the budget proposal
•
If the test fails for financial reasons (that is the total recovery is less than the target of the amount to be
recovered) then the proposal is rejected.
It is possible to resubmit the proposal with details of other factors including:
1. Will the donor will fund the project in advance or arrears?
2. Are there any additional issues about working as part of a consortium?
3. Are there any strategic reasons for working with these donors/partners relating to future funding
proposals
Table 1: Part 1 of the project budget test (adapted and actual percentages not used)
Item
US $
Total project budget
200,000
Base % recovery
% margin
required to cover
overheads
Comments
10%
Standard amount to cover internal costs
calculated from past experience
Is project budget less than
$400,000
Yes
No
+4%
+0%
Smaller projects require relatively more support
Is project in a country
where we have an
established office?
Yes
No
+0%
+3%
Projects with an established local office require a
lower % of the London office costs
Is the project partly or
wholly funded by donor X
or donor Y?
Yes
No
+2%
+0%
Some donor reporting requirements/associated
risks increase the cost of working with them
Target of amount to
be recovered
38,000
+19%
Total additional costs by accepting
this project
Table 2: Part 2 of project budget test (adapted)
Other costs already included in the
budget
US $
Communication staff
2,000
Advisory and Policy Staff
2,000
Finance, HR and Legal staff
4,000
Regional Management (London based)
and CD costs
12,000
Non-staff costs
2,000
Central monitoring and evaluation
5,000
Donor management fee
15,000
Total recovery
42,000
Is the budget test passed?
YES
Comments
Non-salary London costs e.g. IT
The test is passed if the “total recovery”
figure (part1) is higher than the “target of
amount to be recovered”
Figure 1: Process of project budget test
The Budget Test: Benefits of assessing budgets in this way
• Provides a structured way of assessing the financial impact of funding on a
recipient organisation
• The process makes sure that the NGO recovers sufficient overheads to
cover the full cost – or at least know that it has taken a decision that does
not
• Also gives confidence that you are not overcharging a donor for overheads
• Information about the real costs of a project becomes transparent
• It offers a simple approach for assessing project budgets, and to make the
optimum use of a donor’s, and an NGO’s, funds
• The logical and transparent approach of this test allows programme staff to
see the detailed consequences for the NGO of limited funding for a project.
This is really useful information for programme staff who regularly negotiate
The Budget Test: Possible Risks and Challenges
• Projects with high development impact may be turned down on financial basis.
• The test may be seen as rigid and too focused on finance, causing resentment amongst
staff and see the finance team policing and not supporting them
•
The desire for the budget test to be relatively simple (so it is easily understandable and
calculable by all staff) risk causing decisions to be made on an over-simplistic basis – not all
projects of the same size require the same level of head office support
• The way the test is used in this case study does not specifically consider country office
overhead recovery (though this is considered at the sign off point, and it could be brought
into a different version of the test).
The way forward…
• In the long run we may hope that all funding will include sufficient overhead
costs to ensure a project can be professionally run without incurring
additional costs
• It is vital to be confident in asking donors for their overheads to be fully
covered; and to establish accounting systems which show how costs relate
to individual projects
• Organisations may need help to find ways of doing this, either from a friendly
donor, or from an external accountant or auditor
• In the meantime it is vital for NGOs to know the real cost of delivery and to
use structured approach to decide when to say yes and when to say no to
donor funding.