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Stephen Bubb, Head of the Association of Chief Executives of Voluntary Organisations (ACEVO), introduces their ground-breaking work on defining and apportioning core costs

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To survive and remain effective, all organisations must fund their core costs. Core costs are the inevitable overheads incurred by an organisation in the delivery of services and projects, from research and development, through financial planning, management and control, down to paying for communications and the rental of premises. In the private and public sectors these expenses are generally taken for granted and written off. Unfortunately third-sector organisations frequently encounter problems in funding their core costs. The trend towards project funding and contracts has resulted in a unique challenge for the third sector in striking an appropriate balance between overhead and activity costs. Third-sector organisa-tions must overcome funders’ reluctance to finance those costs by justifying this balance.

Over the last few years, ACEVO has worked hard to promote the core costs agenda, and to help resolve the issues arising from it. Our report Who Pays For Core Costs?, published in August 1999, provided an analysis of the difficulties facing third-sector organisations in the new project-based culture. It highlighted the third sector’s need to improve its accounting and business planning for all infrastructure costs, and challenged fun-ders to improve their performance measures to gauge more accurately the effectiveness of core cost grants.

The report suggested three funding models that could make finance core costs a more attractive option for donors. Under ‘full project funding’ the funder would meet reasonable costs associated with a project, as part of a funding package. By ‘development funding’, the donor would cover the organisation’s internal infrastructure costs to enable a period of growth. The ‘strategic funding’ model lets donors cover costs over a set period, recognising the importance of an organi-sation’s continued existence rather than focusing on specific outputs or projects.

Who Pays for Core Costs? became a bestseller, emphasising the need for a rapid resolution of the central issues within the core costs debate. The Government pledged to investigate funding practices, and the Home Office’s Active Communities unit included a list of core cost items and funding models in its

Compact Code of Practice on Funding. The Treasury’s recent cross-cutting review, The Role of the Voluntary and Community Sector in Service Delivery, committed the Government to covering all relevant overheads in its dealings with the third sector. A major step forward, these fine words need to be acted upon!

Despite substantial progress in addressing the core costs shortfall, many problems remain: primarily the lack of any common framework for calculating core costs and allocating them to specific projects. This absence has led to the adoption of disadvantageous strategies in cost allocation. Most widely used is the ‘fixed percentage’ approach, whereby organisations divert a set proportion of project funding into covering costs. Unfortunately, they often need to shuffle their costs in order to keep the percentage attractively low to donors, expending time and effort massaging figures rather than delivering output.

Organisations are sometimes forced to restrict their costs artificially, paring back on investment that would improve effectiveness in the medium to long term. Alternatively they may take on work for less than its true cost, relying on private donations to make up the deficit. These practices encourage funders to seek to pay less than the true cost of providing the service, resulting in unfair expectations on the part of the funders and unnecessary difficulties for the funded organisations.

To establish a mature, open relationship between funders and the funded, it is vital that the third sector adopts a recog-nised method for understanding cost bases and then allocating these costs. By presenting to funders the true cost of providing services, organisations will stand a far greater chance of covering them and

thereby running themselves effectively and efficiently. The new manual, Funding our Future II: Understand and Allocate Costs, provides a basis for this to happen. Commissioned by ACEVO and written by the charity New Philanthropy Capital, the manual presents a step-by-step template to help third-sector organisations to understand and plan their costs. Using the template to undertake an accurate analysis of their true costs, organisations can decide how to allocate those costs, sharing them across all outputs. Organisations will then be able to choose more effectively between funding approaches.

The manual is not prescriptive and does not suggest appropriate levels of costs, as it is impossible to make any meaningful generalisations across the entire sector. Instead it is offered as a valuable tool to help organisations document and allocate all the relevant costs they encounter. The manual includes numerous and varied illustrative case studies, showing how the template can be applied by very different types of organisation.

Wide use and recognition of the manual and template will demonstrate good financial practice across the sector. By including all relevant overheads when costing a project or output, third-sector organisations can show a good understanding of costs and an ability to control them.

A collective effort across the sector will be needed in order to maximise the manual’s potential. By providing a transparent and reasonable method for allocating costs, it could be used to establish a new and valuable basis of trust between third-sector organisations and their funders. For the future, I would expect every sector organisation to have this manual and use it!

Stephen Bubb is the Chief Executive of ACEVO. You may email him on: stephen.bubb@acevo.org.uk. ‘Funding our Future II: Understand and Allocate Costs’ (£19.99 + p&p), can be ordered from www.acevo.org.uk or call: 0845 345 8481.