Capturing and Understanding Your True Cost

Clarity of your true costs is critical.

ARTICLE | Jun 13, 2019
by Nicolie Lettini, Vice President of Indirect Cost Services

What you do every day matters. You deliver valuable services to your community, impacting those who depend on you. Clarity of your true costs on a unit by unit basis is critical to ensure sustainability, maximize impact, and create internal efficiencies.

As the diversity of your services increases, the true cost of delivering a service becomes increasingly opaque. This blurring of costs across different programs is not due to poor accounting practices or lack of proper planning and budgeting, it is due to the uncertainty of indirect costs and how to apply it. Governments, nonprofits, or for profits, all share the same challenge: how to assign organization-wide shared costs (indirect costs) to the end service received. All organizations have shared support services that benefit the entire organization at variable levels per program. The difficulty comes when adding these indirect shared costs onto your organization’s direct costs to calculate your true cost of midstream or endpoint services.

THE PROBLEM

In this scenario, a city government provides trash and recycling pickup, a police department, several city parks, and a litany of other services on which the public depends. All of the city departments have departmental budgets for their direct operations, but the general fund provides critical citywide support including accounting, legal, human resources, and IT. These shared services are a critical part of service delivery, but the cost of support to each of the city’s operations is once again elusive. What is the true cost of maintaining each park, dispatching one police officer, or picking up garbage for a new development in the city? To set rates for these services and ensure that the general fund stays solvent, a fully loaded cost of service is needed. How much should the city budget next year, where can services be expanded and what must be trimmed?

THE SOLUTION

COST ALLOCATION can be used by the financial leaders of our example organization above to assign the shared service costs to the different services they offer. A cost allocation plan will assign a proportional amount of the costs of all contributing people, processes, intangibles, and infrastructure to each unit of service produced, giving the organization an accurate and defensible view of their true costs at a granular level.

THE OUTCOME

Our city Finance Directors can spread the costs of the IT department by the number of computers each department uses and assign cost of the legal department by the number of hours they worked on projects for each department.  After assigning proportional amounts of the general fund shared service costs to the operating department, he will see the true cost of maintaining parks, how much to charge for trash pickup and what it would cost to add a police officer to a beat.

Local governments have very distinct missions, requirements and restrictions. However, they all share one driving commonality: they all want to deliver the best services in the most efficient manner possible. To succeed in any industry, visibility of the true cost of service is needed.  By leveraging a cost allocation plan, true costs can be fully understood.

ABOUT eCivis

Since 2000, eCivis has been the most trusted and widely used SaaS grant management system by state, local and tribal governments. eCivis’ innovative solutions not only address grants management services and software but now includes revenue recovery using indirect cost rates and cost allocation plans. Public sector entities rely on eCivis to identify appropriate grants, efficiently manage awarded grants, and maximize revenue recovery leveraging indirect cost rates. www.ecivis.com

For more information contact: Corey Coll, Regional Sales Director, ccoll@ecivis.com or 702-372-4323

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