8. A variety of funding mechanisms exist including
grants and contracts. Guidance issued following the Treasury's
cross cutting review of 2002[11]
advised funders to meet an appropriate share of an organisation's
overhead costs commensurate with the service, known as the "full
cost recovery" principle. This principle was important if
voluntary sector organisations were to remain sustainable and
deliver services effectively, as it enabled core costs as well
as the marginal costs of a service to be recovered.[12]
9. There has, however, been slow progress amongst
departments to implement the full cost recovery principle. The
Home Office was working with departments and the sector to spread
greater understanding of effective funding mechanisms. The Compact
was being re-launched in a more understandable form, and the Treasury's
and Office of Government Commerce's guidance would be re-issued.
Calculating a legitimate proportion of overhead costs was not
always straightforward for the organisation or a department.[13]
10. As part of Compact Plus, the Home Office was
encouraging departments and voluntary sector organisations to
look at whether a contract was more appropriate than a grant.
Where a contract was to be awarded, the voluntary sector organisation
determined at what level to bid in the procurement competition,
and the level of scrutiny and monitoring subsequently should be
similar to that applied to private sector providers of services.[14]
11. A further challenge for voluntary sector organisations
is the short term focus of many funding arrangements, with funding
often subject to annual renewal. The Home Office considered that
this situation partly reflected the relatively recent move to
three year spending deals for departments which were still being
rolled out more widely. Local authority settlements were only
just moving to two year deals, for example. Government contracts
with the private sector through, for example, the private finance
initiative, are however often for ten or twenty years. The Home
Office considered that long term contracts often related to situations
where large capital investment was required, and that generally
this was not the case where the voluntary sector provided services.
Medium term contracts, of say three years, were likely to provide
better value for money than one year contracts by enabling better
resource planning, and saving administrative time in seeking and
approving funding. The shorter the contract, the more risky it
was for the voluntary sector organisation and hence the "price"
paid would reflect that greater risk. Despite acknowledging these
issues, the Home Office itself has some 72% of its funding contracts
for a year or less, one of the worst cases in Whitehall.[15]
12. Payment before spending as opposed to in advance
of need is another principle not well understood in Whitehall.
The principle was accepted in the 2002 Treasury review and clarified
in guidance issued in 2003 and yet it is still not being applied
widely. A National Audit Office survey had highlighted that few
organisations had seen any noticeable change in practice in the
area of payment in advance of spending. Organisations often raised
the concern that funding was received late, and after staff had
been put in place. Uncertainty also existed when contracts were
up for renewal. It was important to reach a decision about contract
renewal before a contract ended but this was often not the case,
resulting in interim arrangements which could impact adversely
on the morale and motivation of staff employed by the voluntary
sector organisation whose continuing engagement was linked to
ongoing funding.[16]
13. Application forms are often lengthy and disproportionate
to the amount of funding applied for, especially for small charities.
The Home Office agreed that application forms could be simplified,
and other measures were also being taken, including having a lead
funder or a two stage process involving a one page application
and the provision of more detailed information only when the organisation
was seen as a real candidate for funding.[17]
14. Only five of 13 departments surveyed by the National
Audit Office had established policies and guidance to enable funders
to determine the most appropriate funding mechanisms. There was
no definitive source of guidance to which funders could refer.
The Treasury was updating guidance, including developing a decision
support tool. The Home Office agreed that there was scope to set
up framework agreements and partnership funding, but in some parts
of government the voluntary sector had not been seen as a serious
delivery partner in the same way that the private sector had been.
The Home Office expected arrangements for contracting with the
voluntary sector to catch up with those for the private sector
as the voluntary sector started to deliver more through contracts
rather than grants.[18]
10 Q 10 Back
11
The role of the voluntary and community sector in service delivery:
a cross cutting review, HM Treasury 2002 Back
12
Q 17 Back
13
Qq 20-23, 25 Back
14
Q 24 Back
15
Qq 30, 45-46, 69-73, 108 Back
16
Qq 26, 41, 110 Back
17
Q 58 Back
18
Qq 64-68 Back
