1. Costing a Service Level Agreement Douglas Westwater 4 th September 2008 Welcome

2. Welcome and Introductions

3. Course Summary Putting a price on the services that you deliver can be very difficult. The session takes you through some of the key principles of costing your services, including: Full cost recovery - what does this mean and how can I calculate it for my organisation? Full cost recovery - what does this mean and how can I calculate it for my organisation? Unit cost - how do I calculate the unit cost of my service? Unit cost - how do I calculate the unit cost of my service? What is the best way to present our costs in the SLA? What is the best way to present our costs in the SLA?

4. Context : Service Level Agreement A Service Level Agreement (SLA) is a service contract where the level of service is formally defined. In practice, the term SLA is used to refer to the contracted delivery time (of the service) or performance A Service Level Agreement (SLA) is a service contract where the level of service is formally defined. In practice, the term SLA is used to refer to the contracted delivery time (of the service) or performance Everything is negotiated Everything is negotiated

5. Service Level Agreement Definition of service to be delivered Definition of service to be delivered Cost Cost How is service measured, and outcomes analysed and monitored How is service measured, and outcomes analysed and monitored Problem management (what systems do you have in place) Problem management (what systems do you have in place) Customer (ie Midlothian Council, NHS etc) responsibility – SLA is a 2 way process Customer (ie Midlothian Council, NHS etc) responsibility – SLA is a 2 way process Warranties and insurances Warranties and insurances Termination of contract - why Termination of contract - why

6. Context of costing How fully you cost your recovery depends on How much you need this contract How much you need this contract Your relationship with the purchaser Your relationship with the purchaser Begging or selling Begging or selling

7. Full Cost Recovery Core Costs CEO / Admin staff Rent etc Project A Project B Project C Profit margin and surplus£$$$$$

8. Break Even Point

9. Working out your price Assumptions; All costs are fixed or variable All costs are fixed or variable Fixed costs remain constant Fixed costs remain constant Variable costs vary in proportion to activity Variable costs vary in proportion to activity The only factor affecting costs and revenue is activity The only factor affecting costs and revenue is activity

10. Forumla - don’t worry yet!!! Fixed Costs Break Even point = ------------------------- Selling price – Variable cost per unitper unit

11. Explanation – Don’t worry yet!! Sales revenue per unit less the variable costs per unit equals a financial contribution to fixed costs Sales revenue per unit less the variable costs per unit equals a financial contribution to fixed costs Eventually a given number of contributions will cover the fixed costs Eventually a given number of contributions will cover the fixed costs Each contribution per sale after this point is no longer required to cover fixed costs and is therefore profit Each contribution per sale after this point is no longer required to cover fixed costs and is therefore profit

12. Example A social enterprise training org (MVA?) markets workshops openly. The maximum number of participants is 20. Lesley wants to be able to offer other social enterprises or vol orgs free or subsidised places.

13. Information we have Commercial Charge Selling price £80 per place at each course Fixed Room Hire£250Fixed Facilitator£410Fixed Marketing and admin £250Fixed Handouts£5 per place at each course Variable Lunch£5 per place at each course Variable

14. Solution Fixed Costs Break Even point = ------------------------- Selling price – Variable cost per unitper unit 250 + 410 + 250 910 -------------------- ----- 80 – 10 70 Break even point is 13 participants per course. Once there are 13 paying places on the course all costs are covered. Therefore 7 places can be free or subsidised

15. Exercise 1 Commercial Charge£60,000200 units x £300 MVA Hire£7500Fixed Freelancers£35,000Variable 200 units x £175 John salary£20,000Fixed Stationary and admin £2500Variable

16. Solution Fixed Costs (divided where appropriate by 200 to get a per intervention cost - same applies if yearly costs are used) - same applies if yearly costs are used) Break Even point = ------------------------- Selling price – Variable cost per unitper unit 37.5 + 100 £137.50 -------------------- ----- 300 – 175 + 12.5 £112.50 Break even point is 1.2 interventions. He needs to do 1.2 interventions to break even. This represents a loss. He therefore needs 1.2 x£300 = £360 per job to break even or 1.2 x 200 = 240 interventions to break even. 0.2 is the loss each intervention. He makes an income of £125 each time. 125 x 0.2 = £25 loss x 200 interventions = yearly loss of £5000

17. Fully costing your product or service There is no right or wrong answer and it will be an estimate. 1. Direct costs should be attributed to each activity 2. Consistent and logical method to apportion remaining costs related to ‘Drivers’; Space allocated to the project Space allocated to the project Numbers of beneficiaries Numbers of beneficiaries Numbers of employees involved (usually the largest cost) Numbers of employees involved (usually the largest cost)

18. Allocating costs Direct Premises ManagementOther Project costs Individual Project costs with apportioned overheads Though no precise answer ALL costs must be allocated

19. One solution? Admin space is 20% of rental (£6000)*. Rest is a direct costs for the café. Rental costs according to space occupied is 80% café (£4800) and 20% outreach (£1200) Admin salary costs is £51,000* apportioned by number of employees. Café is 15% (£7650) and outreach programme is 85% (£43,350) *Full overhead therefore is £57,000

20. Apportionment Café - £12,450 Outreach - £44,550 Total allocated is £57,000 To allocate by employee only would be Café £57,000 x 15% = £8550 Outreach£57,000 x 85% = £48,450

21. Presenting Cost Present in the way the SLA requests Present in the way the SLA requests Present direct costs overtly Present direct costs overtly Present contingency fee clearly Present contingency fee clearly Present core cost contribution as a management fee. This should include contingency Present core cost contribution as a management fee. This should include contingency

23. Resources http://www.philanthropycapital.org/tools_f or_charities/available_tools/full_cost_reco very.aspx http://www.philanthropycapital.org/tools_f or_charities/available_tools/full_cost_reco very.aspx http://www.philanthropycapital.org/tools_f or_charities/available_tools/full_cost_reco very.aspx http://www.philanthropycapital.org/tools_f or_charities/available_tools/full_cost_reco very.aspx http://www.fullcostrecovery.org.uk/main/i ndex.php?content=home http://www.fullcostrecovery.org.uk/main/i ndex.php?content=home http://www.fullcostrecovery.org.uk/main/i ndex.php?content=home http://www.fullcostrecovery.org.uk/main/i ndex.php?content=home http://www.biglotteryfund.org.uk/full_cost _recovery http://www.biglotteryfund.org.uk/full_cost _recovery http://www.biglotteryfund.org.uk/full_cost _recovery http://www.biglotteryfund.org.uk/full_cost _recovery http://www.scotland.gov.uk/Publications/2 007/02/14110906/0 http://www.scotland.gov.uk/Publications/2 007/02/14110906/0 http://www.scotland.gov.uk/Publications/2 007/02/14110906/0 http://www.scotland.gov.uk/Publications/2 007/02/14110906/0