WV IPG Finance Staff Orientation Cost Allocation and Revised Budget Policies

WORLD VISION INTERNATIONALJUNE, 2013

Agenda

Key Clarifications and Changes in Cost Allocation

Related Changes in the NO Budget Template

Coming Tools and Resources Q & A

Basis for changes to policy and key messages

Support costs were not seen as a normal part of doing business

• All projects need support; few stand alone. • Think about doing a grant project

without finance reporting, payroll, accounts payable, information technology, security, management oversight, quality assurance, compliance, monitoring, administration, etc.

Support costs were seen primarily as overhead• All projects in WV are supported by

both Technical and Program Support Costs, and some by Sponsorship Support Costs and NRD• The allocation method used by WV

allows both direct costing of these support costs and allocation to projects by share of the total, through a pool

Previous communication about the composition of “CAM rate” has led to judgments about NO overhead & efficiency thus, put us at a disadvantage by implying NO “overhead” was higher than it is.

One critical common mistake

Perception that Support Costs were not properly allocated

• Audited• Generally Accepted

Accounting Method• Based on Actual

Expenditures • Double counting

avoided

Donors have limits• Most donors are able

to pay Support Costs• Some have statutory

or policy-based limits to costs• Others have been

confused about our costs and simply see WV as “expensive”

Support costs were not properly

forecasted in grant proposals• CAM Rates Used

• Costs not considered as part of a Go/No-Go decision• Importance for Finance and Grant/RDU

Teams have not always collaborated to accurately forecast; allocated costs varied wildly in proposals

Support costs have been a

barrier to seeking

grants• Some support offices

unable to “match” support costs past donor limits

• Too many grant opportunities have been missed as a result

Delinking Budget & Cost Allocation

1) Costing the Organisational Structure• National Director decides, Regional

Leader approves• Transparent and total view into NO & ZO• Standard Template• Standard cost categories: Programme

Support/ Technical Support/ Sponsorship Support/ NRD

• Programme Support Rate for internal discussion not for proposals; no more ‘CAM Rate’

• Responsive to changes in funding• Expectation = NO budgets to remain flat

until FY16, with few exception.

2) Funding the Organisational Structure

• Plan, budget and direct charge where possible (invoice, SLA, LDR etc.)

• Limit allocation (Programme Support Costs and General Technical Support costs e.g. operations & ministry quality)

• Apply allocation methodology thoughtfully

• Recognise that Cost Allocation simply distributes costs

How have the policies been revised?

Budget Policy

• Timeline • Organizationa

l Structure

TimelineMay 15 • FRSC release Budget Template (per budget guidelines)

• Delays due to some changes • Templates released on May 15, except those for Fragile States

(released on May 16) • Note that NOs do not need to wait for the template to start working

on their budget

June 20 • SO’s update MYPBAS with FY14-16 forecast• This is important to allow NO’s to reflect the most updated SO

amount in the NO Budget template

July 15 NO’s submit NO Budget Template to RO for review ( with draft annual business plan)

July 16 FRSC provides NO analytical information to the RO

Aug 8 Deadline for RO to approve and post in WVCentral NO Budget Template, after thorough review

Aug 12 Summary NO budget template available to SO’s in wvcentral

Aug 21 Review of NO budget template at GFFT call

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Organizational Structure

Staff working full-time on a programme/project implementation. (DPC)

Staff /functions directly engage with specific aspects of programme/project implementation but are not part of the programme/project management structure. (TSC)

Staff/functions providing support & oversight to programme/projects. (PSC)

NO Staff/ Function Categories

Determining the specific staff/functions categories in a NO organizational structure contributes to a better understanding of costs that are directly linked to project objectives versus costs that provide support and oversight to accomplish the project objectives.

Cost Allocation Policy• Basics• 3 steps• Principles

Cost Allocation Policy• Same Driver• Three step process for allocation

1. Direct Cost, when feasible, especially incremental costs

2. Allocate to projects using current allocation tool to the limits of the donor

3. Reallocate remainder to other projects without restriction

• Forecasting for new project done based on estimated actual

• No CAM Rate• Monthly allocation • Reduce incremental costs at end of

grant

The 3-Step Cost Allocation Process

1. Directly charge the NO/ZO costs, where feasible• based on evidence• justifiable

2. Charge remaining pool of Support Cost (total support costs minus the ones directly charged) using Allocation Tool, up to the limit of the donor

3. Use the Reallocation Tool to re-allocate uncovered support costs to all other projects without donor restrictions

Cost Allocation StandardsCost based on the nature & purpose of the

costBudgeting based on the best estimate of likely

actual charges, including portfolio changesLocally-funded projects must have adequate

budget available to cover support costsFundraising costs of NRD offices should not be

allocated to projectsNOs without stable funding base can be

charged to the Fragile Context Special Fund (FCSF).

To summarize…what’s new ?• New name: CAM to Cost Allocation Policy• New tools: Re-Allocation, Forecasting, etc.• New separate policy: Budgeting Policy for NO/ZO• Identify and charge to grants incremental costs—

reduce at end of grant absent new funding • “Fair share” only in through step 2• Step 3 is called “leveraging existing funding”• Support Offices are no longer required to provide

additional match for Support Costs beyond donor limits, can provide match for competitiveness

• Service Level Agreements (SLAs), especially for S23 – Technical services and sectors & S27 – ZO – technical services. Guidance pending.

Does this have any impact on overall NO

Costs?

Potential NO Cost impacts of new policesExisting grant budgets remain the same,

but allocations to existing projects could be reduced because of flat budgets and more grants

Global Centre attempting to lower costs through flat budgets for three years, could help reduce overhead rates

NO Efficiency ratios monitored and kept at a reasonable level

Support Offices have access to the approved NO Budgets and they are reviewed annually in August

What will be different about proposal budgeting

in grants?

Basic process: Forecasting allocated costs in grant proposals Existing NO budget will have PSC, TSC and

DPC CostsDPC for proposed project is added to

current projects to determine share of DPCThe share of DPC determines the forecast

of PSC and TSC for the proposed projectFollow three step process to assess the

impact of the proposed project on “other projects”

Make Go/No-Go decision; Present PSC and TSC in proposal as preferred by the donor

• Sample in handout

• Donor budget formats are different

• Allocated cost forecasting tools coming soon

• Based on existing NO budgets

• Trial has been successful in several USG applications

What new tools are being developed?

New Tools Under DevelopmentReallocation Tool: to distribute PSC and TSC

which cannot be charged to grants Forecasting tool: tools for use in forecasting

allocated costs for proposal budgets and for Go/No-Go decisions

Refined Go/No-Go guidance for NO Directors

New allocation spreadsheets for monthly allocations

wvcentral pages with resources and training materials

Coding guidance to ensure that reallocations can be tracked

Is the policy unfair to sponsorship programs?

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Incremental grant revenue will likely reduce the amount of programme support costs allocated to other funding streams…a simple example

Note: instead of overhead read ‘Support Costs’

Exclusive of Grants

% ShareSupport Costs Allocation SC %

Sponsorship 0.8 220,000 176,000

US Gov. 0.2 220,000 44,000 220,000 22%

Inclusive of Grants

% ShareSupport Costs Allocation

Donor Cap

New Grant Balance

Sponsorship 73% 220,000 160,000 173,000 79%

US Gov. 18% 220,000 40,000 40,000 18%

New Grant 9% 220,000 20,000

7,000 13,000 7000 3%

220,000 20%

More on Incremental Grant Revenue

NDs will anticipate impact in Go/No-Go decisions

• As part of the Go/No-Go decision, NO and SO staff need to work quickly to complete a preliminary forecast of expected DPC for each proposed project so that anticipated need for “reallocation” will be forecast

• If the proposed project will have too much negative impact on the implementation of sponsorship programs, ND can make a No-Go decision

SOs can request tracking of reallocations to monitor impact

• Reallocation tool should have proper coding to allow tracking

• Depending of the size of the grant for which reallocations must be made compared to the size of the portfolio, the impacts will vary significantly

Will these new policies increase burden on NOs?

There is a degree of additional, necessary work…• We acknowledge that this is somewhat

complicated and adds to the workload, but such efforts are needed to allow us to increase our grant portfolio and leverage more funding for the CWBOs.

• More and more donors today are only willing to cover support costs where they know exactly what they are & the benefits to their project. The new protocols bring clarity

How Global Finance can support• FRSC is already supporting NO

by providing NO budget templates

• A multi-level group (SO, GC, RO, NO) is developing more tools

• FRSC is also producing analysis on NO budget