Transcript Negotiating a Service Level Agreement

Costing a Service Level
Agreement
Douglas Westwater
4th 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:
 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?
Context : Service Level Agreement
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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
Service Level Agreement
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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
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
Profit margin and
surplus£$$$$$
Full Cost Recovery
Project B
Core Costs
Project A
CEO / Admin staff
Rent
etc
Project C
Break
Even
PointPoint
Break
Even
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
Forumla - don’t worry yet!!!
Fixed Costs
Break Even point = ------------------------Selling price – Variable cost
per unit
per unit
Explanation – Don’t worry yet!!
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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
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.
Information we have
Commercial Charge £80 per place at
Selling price
each course
Fixed
Room Hire
£250
Fixed
Facilitator
£410
Fixed
Marketing and
admin
£250
Fixed
Handouts
£5 per place at
each course
Variable
Lunch
£5 per place at
each course
Variable
Solution
Break Even point =
Fixed Costs
------------------------Selling price – Variable cost
per unit
per unit
250 + 410 + 250
-------------------80 – 10
910
----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
Exercise 1
Commercial Charge £60,000
200 units x £300
MVA Hire
£7500
Fixed
Freelancers
£35,000
Variable 200 units
x £175
John salary
£20,000
Fixed
Stationary and
admin
£2500
Variable
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
-------------------300 – 175 + 12.5
-----
£137.50
£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
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’;
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Space allocated to the project
Numbers of beneficiaries
Numbers of employees involved (usually the largest
cost)
Allocating costs
Individual Project costs
with apportioned overheads
Though no precise answer ALL costs must be allocated
Direct
Project
costs
Premises
Management
Other
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
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
Presenting Cost
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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
Resources
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http://www.philanthropycapital.org/tools_f
or_charities/available_tools/full_cost_recov
ery.aspx
http://www.fullcostrecovery.org.uk/main/i
ndex.php?content=home
http://www.biglotteryfund.org.uk/full_cost
_recovery
http://www.scotland.gov.uk/Publications/2
007/02/14110906/0