Costing a charity service before tendering for the contract

3 days ago
3 min read

Introduction

Charities win service contracts they cannot deliver for the money, and the shortfall is met from unrestricted funds. Donations given to support beneficiaries end up subsidising a commissioner who has underpaid for a service. That is a governance failure as much as a financial one.

It happens for understandable reasons. The service is needed, the tender is competitive, and declining feels like abandoning the people who would have used it. Full cost recovery is also harder to calculate than a direct-cost figure, so the overhead gets understated.

Costing properly before bidding is the only way to know whether a contract is worth winning. The arithmetic is not difficult; the discipline is.

1. Costing a charity service before tendering means full cost recovery

Direct costs are not the cost of delivery.

Include the support functions

Finance, HR, management, IT, premises, governance, insurance, training and recruitment. Nine lines, all real. The service cannot be delivered without them. Excluding them does not make them disappear.

Apportion them on a defensible basis

Headcount, staff cost or floor area. Whichever you choose, apply it consistently and be able to explain it to a commissioner. Write the method down once.

2. Cost the things tenders routinely omit

Several real costs sit outside the obvious.

Staff cover and turnover

Holiday, sickness, training days and the cost of recruiting replacements. Frontline services need cover and cover costs money. Build a realistic percentage into the staffing line.

Mobilisation and exit

Setting a service up and closing it down both cost, and neither is delivery. Price them explicitly. Exit costs are the ones most often forgotten.

Data, reporting and monitoring

Commissioner reporting requirements can consume a substantial amount of staff time. Read the specification before costing it.

3. Decide the bid on the number, not the mission

The discipline is in being willing to walk away.

Set a floor before you see the tender price

What the service costs plus a contribution. Deciding afterwards invites rationalising. Put the floor in writing before the bid meeting.

Be prepared to decline

A contract delivered below cost reduces what you can do elsewhere. Declining is sometimes the more mission-aligned choice. Trustees should be told when you do.

4. Be transparent with commissioners

They frequently do not know what they are underpaying for.

Show the full cost in the bid

Broken down, with the overhead explained. Some commissioners will accept it; none can consider it if it is hidden. Present it as a table rather than a total.

Say what you would remove at a lower price

Volume, hours, reporting frequency. That is a better answer than delivering the same for less. It also keeps the conversation open.

5. Review delivered contracts against the costing

This is how the next bid improves.

Compare actual cost against the bid annually

Every contract. The pattern of where you underestimate will be consistent. Fix the model rather than the individual bid.

Renegotiate or exit where the gap persists

Contracts are renewed on the assumption they work. Say plainly when they do not. Commissioners rarely hear this and need to.

Conclusion

A contract won below cost is funded by donations given for something else, so cost on a full recovery basis: include finance, HR, management, premises, governance and training, apportioned on a basis you can defend to a commissioner.

Cost the things tenders routinely omit — staff cover, turnover and recruitment, mobilisation and exit, and the reporting the commissioner will require. Set your floor before you see the tender price so you are not rationalising afterwards, and be willing to decline, because delivering below cost reduces what you can do everywhere else. Show the full cost in the bid with the overhead explained, say what you would remove at a lower figure, and compare actual against bid annually on every contract.