Press Release - Office of the Third Sector: The implementation
of full cost recovery
6 June 2007
Full cost recovery remains an important principle for financial
relationships between government and the third sector, but
government departments have found difficulties in translating the
principle into practice, according to a review published today by
the National Audit Office.
Today’s review examines the progress made by central government
departments in ensuring that, by April 2006, third sector
organisations are fully paid for the services they deliver on
behalf of the public funder. Overall policy responsibility for
relationships between government and the sector rests with the
Office of the Third Sector – part of the Cabinet Office- and HM
Treasury; although individual departments are responsible for their
own spending programmes.
The NAO found that although full cost recovery has been kept
high on the policy agenda since 2002, a significant proportion of
third sector organisations do not consider they are receiving full
cost recovery, even though the target date has passed. The report
found that few departments had made significant practical changes
to funding practice in response to the target. However, departments
generally felt the spirit of the target had been met.
The review concludes that full cost recovery is not a concept
that public funders can implement or roll out in a mechanistic way.
The concept does not necessarily apply in the same way across the
variety of financial relationships between public funders and the
sector. And the term has the potential to mislead participants into
thinking that all costs will be recovered in all situations,
risking an expectation gap persisting between funder and funded.
The concept also fails to reflect some third sector organisations’
preparedness to share the costs and risks in ‘joint ventures’ with
public bodies.
The NAO recommends that the Office of the Third Sector and HM
Treasury develop more sophisticated statements on full cost
recovery that reflect funders’ responsibilities for fair treatment
and risk management. The NAO also sets out the need to acknowledge
that departmental practice towards cost recovery will vary with the
purpose of the funding and the environment it takes place in.
The review identifies government’s current initiative to support
the training of 2,000 public sector commissioners working with the
third sector as an opportunity to develop and promote further
thinking around the practical application of full cost recovery.
The review also provides a framework for government departments to
use in reviewing their major programmes and funding streams, and
recommends they develop more explicit judgements on the application
of full cost recovery to each, to arrive at agreed and mutual
expectations on the issue with third sector
organisations.
Joe Cavanagh, NAO Director for work on the third sector,
said today:
“Full cost recovery is an important but complex issue.
Government has shown a commitment to implement full cost recovery.
But our report has shown that the expectations vary significantly
between funders and the sector, and that real changes in practice
are hard to see. The planned training for public sector
commissioners is an ideal opportunity to promote a more
sophisticated approach.”
Kevin Curley, National Association for Voluntary and
Community Action (NAVCA):
“This excellent report takes us beyond the simple assertion that
full cost recovery should be applied to all public funding for the
voluntary and community sector (VCS). It is the first report I have
read which identifies the distinctions between grants and contracts
and explains the value of both types of funding. The report shows a
real depth of understanding of the complexity of the issues
involved.
“This report should be read by the leaders of local VCS
organisations and by those in local government who decide funding
policy and lead local strategic partnerships. It will help everyone
involved in local partnerships to understand why grants for VCS
organisations should be sustained as an essential part of the local
funding mix”
Stuart Etherington, Chief Executive of the National Council
for Voluntary Organisations (NVCO):
“The issue of full cost recovery has been at the heart of
debates around the relationship between the voluntary and public
sector. This report is a very helpful contribution to that debate,
and should help to translate the high level principle into
practice. This is something that is urgently needed to ensure that
the Government meets the commitments they made back in 2002.
Stephen Bubb, Chief Executive of the Association of Chief
Executives of Voluntary Associations (ACEVO):
“The NAO report states clearly that no department has undertaken
a proper review to ensure third sector organisations can achieve
full cost recovery. Five years after the government made a firm
commitment to the principle, this is truly staggering.
We now want to work with government on a radical overhaul of
procurement, so that third sector organisations can secure fair
prices for their work. Local authorities and primary care trusts
must take into account the wider social benefits of commissioning
through the third sector. Driving prices down to rock bottom levels
will not secure real value for the public. For our part, leaders in
the sector need to be tougher negotiators, and secure a better deal
for the people they serve.”
Notes for Editors
- Full cost recovery aims to ensure third sector organisations –
including charities, voluntary and community organisations and
social enterprises – receive payment for the full costs of services
they deliver on behalf of public funders. This means securing
payment for both the direct costs of service provision and any
overhead costs legitimately incurred in support of the service.
Failure to pay for the full costs could result in third sector
organisations subsidising public services and eroding their
charitable reserves. This can threaten value for money through
short term risks to the quality and effectiveness of a service, and
longer term risks to choice and competitiveness in public service
markets if organisations collapse or withdraw due to financial
difficulty.
- NAO expects to publish two further reviews of the third
sector’s relationship with government. One will examine how the
third sector’s involvement in the delivery of public services has
been affected by the introduction of Local Area Agreements, and a
second looks at the public funding of large national
charities.
- Press notices and reports are available from the date of
publication on the National Audit Office (NAO) website, which is at
www.nao.org.uk
- The NAO employs some 850 staff and is totally independent of
government. NAO has had a specialist team examining government
policy on the third sector since 2005, when the Value for Money
report Working with the Third Sector was
published.
All enquiries to Donna Watson
NAO Press Office: Tel: 020 7798 7038
Mobile: 07917 555 388