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Costing a Service Level Agreement

Costing a Service Level Agreement. Douglas Westwater 4 th September 2008 Welcome. Welcome and Introductions. 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:

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Costing a Service Level Agreement

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  1. Costing a Service Level Agreement Douglas Westwater 4th 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? • Unit cost - how do I calculate the unit cost of my service? • 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 • Everything is negotiated

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

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

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

  8. Break Even Point Break Even Point

  9. Working out your price Assumptions; • All costs are fixed or variable • Fixed costs remain constant • Variable costs vary in proportion to 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 unit per unit

  11. Explanation – Don’t worry yet!! • 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 • 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

  14. Solution Fixed Costs Break Even point = ------------------------- Selling price – Variable cost per unit per 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

  16. Solution Fixed Costs (divided where appropriate by 200 to get a per intervention cost - same applies if yearly costs are used) Break Even point = ------------------------- Selling price – Variable cost per unit per 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. • Direct costs should be attributed to each activity • Consistent and logical method to apportion remaining costs related to ‘Drivers’; • Space allocated to the project • Numbers of beneficiaries • Numbers of employees involved (usually the largest cost)

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

  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 direct costs overtly • Present contingency fee clearly • Present core cost contribution as a management fee. This should include contingency

  22. Resources • http://www.philanthropycapital.org/tools_for_charities/available_tools/full_cost_recovery.aspx • http://www.fullcostrecovery.org.uk/main/index.php?content=home • http://www.biglotteryfund.org.uk/full_cost_recovery • http://www.scotland.gov.uk/Publications/2007/02/14110906/0

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