Case Study: Gilchrist Riley Cost Calculator
This case study features an interview with Jen Riley, Program Manager at SHARC, Co-Chair of Social Impact Measurement Network Australia, and a board director at Windana Drug and Alcohol Recovery, and David Gilchrist, Director of the Centre for Public Value and Research Director of the Institute of Public Policy, at the University of Western Australia.
Jen and David discuss Pay What It Takes (PWIT) commenting in particular on the PWIT Cost Calculator 2.0 tool that assists not-for-profits and funders in determining the true cost of delivering programs.
Jen and David emphasise that it’s not only crucial to account for direct expenses but also both direct and indirect overheads, as all these costs impact a not-for-profit’s ability to run its programs effectively and sustainably. The discussion highlights the value of grounding submissions and funding decisions in clear, transparent financial information rather than assumptions. By doing so, the tool helps bring greater understanding and transparency to NFPs and funders, increasing mutual trust and information reliability.
“Sustainability in my mind is not that the sector is still here tomorrow, but rather that the sector can continue to provide the quantity, quality and timing of services that it needs to provide.” — David Gilchrist
Case Study Summary
In this case study, Jen Riley and David Gilchrist share what brought them to PWIT and why sustainability (and myths about overheads) makes full costing urgent. They explain aspects of the Cost Calculator 2.0 tool and how it helps organisations cost and price services consistently. Jen discusses the three layers of cost - direct costs, direct overheads, and indirect overheads - and why distinguishing them (and putting them into a funding budget) is critical.
Jen and David then share key turning points in their PWIT journey, including the role of evidence in correcting misunderstandings about how NFPs operate. They discuss entrenched overhead myths, and the risks of under-funding to quality and organisational health.
Jen provides a practical walkthrough to building a budget that includes all three cost layers and David highlights the organisational impacts of taking on funded work. David also sets out a clear argument for why charities should be costed like any other organisation and why partial funding should be unacceptable.
Jen and David discuss how to engage CFOs and finance committees including how to frame PWIT through governance - risk, accountability, and sustainability - and using the tool to demonstrate the gap to true costing. The pair provide practical tips (including using real data with boards and finance leaders) to show when programs are being subsidised and why that creates sustainability risk.
Jen points out the trust tensions between funders and grantees, and why transparency about real costs improves outcomes beyond blunt overhead percentages.
The case study concludes with Jen and David's advice to NFPs considering PWIT. This includes a call to action to use the Cost Calculator 2.0 tool, and for sector leaders to emphasise partnership and accountability in funding decisions, and to position PWIT as critical for a sustainable sector and stronger social outcomes.
Read on for the complete case study and all of Jen and David’s tips, advice and thinking on Pay What It Takes.
1. Jen and David speak about how they got involved with Pay What It Takes.
Jen Riley:
I've spent more than twenty-five years in the social sector and that brought me into the Pay What It Takes work. I've worked on both sides – within the NGO sector as a funds recipient, and on the other side designing funders’ grant programs.
My recent role was the Chief Impact Officer at Smarty Grants, where I got to work with hundreds of funders. There, the issue kept coming up about the true cost of program delivery and the gap in funding for organisations. So, when I was asked to join the Pay What It Takes committee, it felt a great fit in terms of my experience.
David Gilchrist:
In many respects it was a natural journey for me being a chartered accountant. So costing and pricing is a really easy thing for us to do as accountants. But there were two things that really stood out.
One was the sustainability question being increasingly asked in the sector. Sustainability in my mind is not that the sector is still here tomorrow, but rather that the sector can continue to provide the quantity, quality and timing of services that it needs to provide. Costing and pricing is a critical aspect of that particular question or idea. Remember, it is those people who rely on services and supports to live their lives that are ultimately impacted by poor sustainability.
The second element is talking the same language between accountants, whether government funders or philanthropists, and the sector. Increasingly it is being observed and understood that financial literacy is an incredibly important issue not just for organisations, but also for governments and other funders. The Pay What It Takes program has been really interesting to me because it's captured all of those parties and not just focused on not-for-profit organisations as we have typically done.
2. What is the Pay What It Takes Cost Calculator 2.0 tool?
“The idea of the tool is to give people guidance and also very practical elements of understanding costing and pricing in their own organisation.”— David Gilchrist
David Gilchrist:
So, the calculator itself, as the 2.0 suggests, is a revised version following enculturation with accountants and also people within the sector. The idea of the tool is to give people guidance and also very practical elements of understanding costing and pricing in their own organisation. Unfortunately, the document (tool) can’t have every answer in it or cover every eventuality. But it gives people examples so they can understand and appreciate the way of thinking that is most appropriate in terms of costing and pricing.
Jen Riley:
When I was at Smarty Grants, we took this resource into a real-world environment when we were approached by an organisation who wanted to do a Pay What It Takes approach. And when I went to use the guide, not as an accountant, but as a user, I found it quite challenging. The concept was strong, but it had a number of different ways of trying to work out costings.
And so, I was in conversations with David who explained there are three levels of costs and there is a way to do the allocation. So we decided to rework the guide using a user perspective, while also aligning it with the language of accountants.
3. Providing clarity on how organisations face three layers of costs.
Jen Riley:
As a Program Manager, what was so useful in working with David was coming to an understanding about the distinction between direct costs, direct overheads and indirect overheads, and getting real clarity about what those three levels are and what fits in those buckets. And then asking, well, how do you do the allocations? Many program managers are not trained in finance. So having direction and clarity from a guide such as this so that we can talk to accountants around these three categorisations of costs is really important, as is having a consistent language applying to all.
David Gilchrist:
Understanding distinctions between the types of cost is key, but also if you go around underfunding and you put sustainability at the real cliff edge, then that's going to have an impact because the sector can't just simply be replaced, or we can't just use another sector or reallocate funds to have needs met.
“Having direction and clarity from a guide such as this… is really important, as is having a consistent language applying to all.” — Jen Riley
4. Cost Calculator 2.0 tool comes with useful examples.
David Gilchrist:
The case studies (published with the Cost Calculator tool) are really critical because they demonstrate at a practical level how to do things in a certain circumstance or situation, or with regard to certain information, and they also communicate to organisations that this is a skill element that is really needed. The cases show people how to do it, and they also reinforce the importance of understanding the cost base of your services.
5. Key turning point in Jen and David’s Pay What It Takes journeys.
David Gilchrist:
For me, the key turning point has been the openness of philanthropists and government to taking up this material and understanding costing and pricing better. I think the funded organisations understand the concept of costing and pricing, but they are focusing on the priorities they have in order to keep their organisations moving forward and the practicalities of implementing costing and pricing. To have funders take this up positively, I think is a critical turning point and I'm really pleased to see that.
Jen Riley:
“It’s about bringing data and facts into the conversation and being curious about why fear and myths exist.” — Jen Riley
One of the things that put the fire in my belly was working with funders and hearing some of the misinterpretations out there about the not-for-profit sector. That was a real turning point in my role at Smarty Grants, having conversations with funders and realising we need to educate on both sides of the fence about where the money comes from and how it's used.
Funders are highly interested and passionate but don’t always really understand how a not-for-profit operates. I've often dealt with funders or governance committees that haven't worked in the not-for-profit sector.
Having an idea, for example, that organisation overhead is somehow covered by someone else. Genuinely, some think there's block funding and government funding out there to cover these costs. Being able to have that conversation and say, well, who do you think's covering this?
I think it's about listening to the other side and trying to understand what the blockages are. So, having them talk about overheads and how they get wasted in the not-for-profit sector and saying: can we unpack that, can we have a conversation about what do you mean by that? What do you mean by wastage? And let's have a look at a budget that runs a not-for-profit. It's about bringing data and facts into the conversation and being curious about why fear and myths exist.
This cost calculator helps people have these conversations in a way that gets us out of what can be not a helpful dynamic between funders and grantees.
Bringing it into a current day situation where the most recent ACNC report found that sector revenue has increased by 11 billion, but expenses have increased by twenty-two billion at the same time. So, charity costs are rising twice as fast as revenue and that's why this full cost funding matters.
6. What are the main challenges and barriers to organisational adoption?
“People need to understand what are the full costs, rather than talking about just overheads… a project costs what it costs…” — Jen Riley
David Gilchrist:
There are two barriers that come to mind. The first barrier is just the lack of sexiness to do with costing and pricing. People don't like talking about accounting and I get that, but I'm really thrilled with the Pay What It Takes program and the processes that have been undertaken supporting enculturation. People are starting to see that if we do understand this stuff, we're going to be able to build stronger organisations and so, for want of a better phrase, this area is becoming more sexy, and I think that's a really fantastic outcome.
The second difficulty is breaking down the prevalent myths that Jen talked about that are substantially embedded in the way we think about not-for-profit and charitable organisations.
One of those myths relates to organisations not needing to make a profit. And of course, any organisation that operates in a mixed economy like that in Australia, must make a profit in order to rebuild its balance sheet. It doesn't mean that government or philanthropists can just write cheques, but it does mean we're all working towards ensuring a positive outcome is much more likely.
Jen Riley:
One of the key ideas in the guide is that programs should be covered with full cost budgeting rather than just the budget relating to direct service delivery. The reason for this is every program needs direct overheads. It needs, you know, staff and resources to deliver a program, but the staff don't exist in a vacuum. Resources and IT don't exist without a bigger system of support around it. So, it's really important that things such as rent, IT systems, insurance, you know, those direct overheads are accounted for, but also things like leadership, HR, and learning and development and finance, governance and compliance. Who's paying for these costs if it's not included in these budgets?
People need to understand what are the full costs rather than talking about just overheads. And anyone in business, and the people I've spoken to on Boards, they get it. They understand, they run businesses. But I think it's understanding how it's allocated. So let's unpack that: a project costs what it costs, let's work out that cost, let's be transparent about that cost, and then let's acquit against that cost.
7. Building a project or organisational budget with a Pay What It Takes lens.
Jen Riley:
So, if you're running a school breakfast program you're including the cost of your breakfast and staff. But also the direct overheads, such as rental for the space, electricity, the IT systems and the insurance. Those are costs to run a breakfast program. But a breakfast program sits within an organisation and includes indirect costs such as your child protection policies, your leadership, your HR, your finance and your governance and compliance.
There are three layers of cost that go into running a project and the allocation needs to be done equitably and fairly and proportionate to that program. Otherwise, if you just fund the direct costs, the other things don't costed, and Not-For-Profits go broke.
“There are three layers of cost that go into running a project… if you just fund the direct costs… not-for-profits go broke.” — Jen Riley
David Gilchrist:
Overheads are just one component of costs. It's important that organisations understand what the financial impact of undertaking a particular funded project will be. And that impact is not just relating to the direct costs like employing more people or renting more rooms, or whatever it happens to be, but it might also be an impact on your administrative ability.
For instance, payroll might be impacted where you need more staff to be able to administrate. You might need more accounting support. You might need more head office support of some description. You'll certainly need more HR support in recruiting people, training people, and doing all the things that need to be done from a regulatory perspective.
So, if we just look at one group of costs, we don't really understand what the total cost of delivering that service is. The total cost relates to those direct costs and overheads that impact the organisation delivering that service, as well as the organisational cost increases as a result of you taking on those extra people and doing those extra things and having the extra regulation and audit and other aspects that impact the way the organisation operates.
If you don't understand that, then you are at risk of taking on programs that are going to cost you at the end of the day. You will also get yourself into what I call a consultancy void where you can't walk away from prospective programs even if those programs aren't relevant to your purpose as an organisation because you need the income to be able to pay the bills. You don't want to be held to ransom in that way. You want to understand what's going on, not because you can necessarily get a cheque to cover the difference, but because you knowingly accept a project appreciating intellectually what the financial impact of that project is.
Organisations are quite used to coming up with the direct costs like staffing, rent, the motor vehicles and so on. But they really need to figure out the administrative impact – what extra resources will be required and also what kind of opportunity costs or impact on leaders’ time to other programs and what impact cost wise in time and money on all of the other programs that you operate. If a new program is not central to your purpose, but you have to take it on because you've got financial challenges, understand what potential impact it will have to your purpose.
8. How the Cost Calculator tool is aligned to the language of financial professionals.
“In accounting terms, there’s actually no difference between a charity or a commercial organisation or a government department...we should account for costs in the same way …” — David Gilchrist
David Gilchrist:
I was really keen to start talking about this sector in exactly the same way as we talk about any other sector in accounting terms. So, while the sector is purpose driven, in accounting terms, there's actually no difference between a charity or a commercial organisation or a government department. We should account for costs in the same way, and we should be assessing cost in the same way as we do with the others.
For instance, if we were a government and we wanted to fund an engineering organisation to build a bridge over a river, we wouldn't give them half the funding and tell them to go and find the other half themselves. They wouldn't accept the project if they weren't getting all of their overheads covered plus a profit that is going to allow them to be sustainable into the future.
I don't understand why we don't use the same thinking in this sector. Once again, it doesn't mean that more money will be made available or that there's endless amounts of money. But it does mean we understand much better what the financial challenges are and we can all work together, funders as well as providers, to try to resolve those conundrums.
9. Tips for Adopting Pay What It Takes.
“If the funding doesn’t cover the cost of the program… organisations are effectively subsidising those programs themselves.” — Jen Riley
Jen Riley:
CFOs and finance committees can play a really important role in adopting Pay What It Takes principles because they bring the fact-based financial lens to a discussion about the true cost of delivering programs. One of the most useful things they can do is start the conversation with the Board using real financial data. And when you look at the money, it becomes quite clear: if the funding doesn't cover the cost of the program, the true cost of the program, including direct and indirect overheads, organisations are effectively subsidising those programs themselves.
So, we need to start asking, well, how are they doing that? And if they're cutting corners, they're not delivering the full impact they could, and all sorts of other unintended consequences begin to take place.
Over time this creates a lot of financial stress in not-for-profits and can lead to closures and mergers. I think from a governance and an investment perspective, the CFO is not going to be excited about seeing a program fold after they've just invested in it. This is about bringing a sustainability and risk lens to the conversation, and that sort of conversation opens up the idea around how well are we spending our money?
10. How to engage CFOs and Finance Committees?
“By presenting data using transparent costing tools… and framing this issue around sustainability, accountability and governance, it becomes a lot easier to engage those financial leaders.” — Jen Riley
Jen Riley:
I found it useful to talk about sustainability and risk management with CFOs and finance committees. If we underfund or expect organisations to somehow subsidise their existence, it's going to mean, for example, they're not going to have the best data privacy policies, or the best learning and development. It creates a risk environment. CFOs and finance committees understand risk and from a governance perspective that is essential. By presenting data using transparent costing tools such as the Cost Calculator 2.0 and framing this issue around sustainability, accountability and governance, it becomes a lot easier to engage those financial leaders.
David Gilchrist:
So the first thing CFOs can do is demonstrate to the Board and others how this (Pay What It Takes) program is indicative of the whole sector moving towards making sure the sector is getting paid for all costs relative to programs. I think that supports them, but it also supports others to have confidence. So, while we might not be there yet, everyone's moving in that direction and there's no reason why your Board shouldn't be involved in that.
A useful strategy for engaging CFOs is to use the calculation suggestions and processes outlined in the documents (Cost Calculator 2.0) to demonstrate the difference between what they've been doing and what true costing and pricing communicates in relation to the true cost of service delivery and to extrapolate that for medium- and longer-term sustainability outcomes. So, people are basically selling the farm in order to pay bills today but not going to be able to operate and pursue their purpose tomorrow.
The second is removing mythology. Many board members of not-for-profit and charitable organisations and CEOs and staff have the same mythological view that an organisation shouldn't make a profit; shouldn't cover its costs because it's a charity. For some reason it seems to be immune from financial processes that every other organisation's not.
Jen is sick of me saying this, there's no such thing as a surplus. It's a profit. And you have to make a profit to be financially sustainable. If you don't, you are not.
11. Jen discusses crucial elements for getting people on board with Pay What It Takes.
Jen Riley:
It is a head and heart argument. There is some really interesting long held beliefs about the not-for-profit sector, positive and negative, but this idea that it’s run by volunteers and that there are big overhead budgets - it's simply not true.
And so being able to have a conversation, and to try to challenge or at least show them the figures on a piece of paper and say: this is what it costs to run an organisation. Before 9:00 on a Monday morning, a not-for-profit has spent money on compliance, governance, IT, finances, systems – like any other professional organisation. If funders want a program to be delivered well, we have to fund what it costs to run the organisation.
The crucial elements are listen to world views, to concerns, don't get into an argument! Work through the facts and figures together. I have found this the best way to approach this.
“Before 9:00 on a Monday morning, a not-for-profit has spent money on compliance, governance, IT, finances, systems – like any other professional organisation.” — Jen Riley
12. Jen’s key learnings implementing Pay What It Takes.
“The greater the transparency, and the more honest that dialogue is about cost, the better it’s going to be for everybody.” — Jen Riley
Jen Riley:
So a key learning is understanding both sides of the fence. And it's actually quite an emotional conversation because on one hand you've got a not-for-profit sector full of passionate people who care deeply about their work, and funding decisions can touch on issues of fairness, trust, and recognition.
And then on the other side, you've got the funders who might feel as though they've been taken advantage of in the past. But the grantees are constantly being asked to deliver impact and not being properly resourced to do so.
So there's a real tension here between the two sectors. And the biggest learning I've gained is that the greater the transparency, and the more honest that dialogue is about cost, the better it's going to be for everybody.
Rather than an arbitrary 25% overhead, which becomes a bit of a mystery bucket and funders feel a little bit scared about putting money in because they don't know where it's going (and also it's actually not enough anyway), I think it's better to outline the real cost to run the organisation and then proportionately allocate that to a program.
It's through having conversations with our finance colleagues who understand that process and what needs to happen. It's really important that we can articulate that to the funders as well.
The not-for-profit sector has had to move money around in the background to make things look good on paper and achieve a 25% overhead, when in fact, you know it's not that. That’s built distrust in the system, so we need to start being transparent about real costs. And then for not-for-profits to own the fact that they do need things like digital strategies, they do need to engage in cultural awareness training etc. They do need all this stuff to be a complete, responsible, sustainable organisation and they need to ask for that funding to do so.
But of course, they're worried that if they put a full cost budget forward, and the not-for-profit down the road doesn’t, that they are going to lose the funding. So, there’s a very real tension out there about how competitive our sector is, working as we are in this sort of market economy.
Having said that, I'm very excited that I have met funders who are really keen to do this properly and do this well.
13. Jen’s advice to NFPs considering Pay What It Takes.
Jen Riley:
My advice is: go with the facts. You know, David said to me, a project costs what it costs. It's not about making things up or adding things in or trying to explain stuff. It's actually just documenting the cold, hard facts of what it costs to run an organisation.
So, I think giving facts, facts and more facts and getting on the same page about what the actual costs are. Like we don't pay magical rent, we pay market rent, we pay market electricity costs, we pay the same costs for communications staff - these costs are real and being able to talk about them at the direct cost level, direct overhead level and indirect overheads and explain the full cost and then how costs are allocated.
And once we have shared language, shared understanding, these conversations are going to become a lot easier because it stops being about opinions and assumptions and becomes a more practical conversation about what it takes to create real impact.
“My advice is: go with the facts… documenting the cold, hard facts of what it costs to run an organisation.” — Jen Riley
14. David and Jen’s actionable recommendation and some concluding thoughts.
“Pay What It Takes… really is the future of having a sustainable not-for-profit sector and better social outcomes for Australians.” — Jen Riley
David Gilchrist:
Download the guide! Make sure you have a look at the Pay What It Takes program and implement that in your organisation.
Jen Riley:
Improving Australia for Australians is actually about a partnership between those delivering the work and those funding the work, and we both need to take accountability for those costs and the decisions that are made where we invest. And those decisions need to be made as a community, and it needs to be done fairly and equitably. So, in terms of Pay What It Takes, it really is the future of having a sustainable not-for-profit sector and better social outcomes for Australians.
David Gilchrist:
I would agree with Jen's concluding thoughts. I would also remind people that when we think about funding, when we think about costing and pricing, we should be thinking about that service delivery sustainability in the short-, medium- and longer-term, not just how we get through this financial year.
