How To Improve A Cost Allocation Plan

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While some municipalities may opt to find savings through drastic changes to their operations, others are making adjustments to achieve the same end result

Local governments are constantly on the lookout for ways to reduce unnecessary costs without sacrificing the quality of services to the community. While some municipalities may opt to find savings through drastic changes to their operations, others are making more subtle adjustments to achieve the same end result.

One such strategy is the adoption of cost plan software solutions that are customizable to a municipality’s needs to ensure money is being handled properly through all stages of use. These solutions offer a variety of features to increase transparency and accountability, while uncovering opportunities for savings.

But first, let’s back up.

What Is A Cost Allocation Plan?

In an interview with EfficientGov, Nicolie Lettini, President of CostTree, explained a cost allocation plan, at its highest level, is a tool used to calculate an indirect cost of an organization to get reimbursement back into the general fund.

“Organizations look at business operations and costs, what types of things they do in each department, and how best to allocate these costs out to people with a service,” Lettini explained. “The total indirect costs for the year is the result.”

Two Types

Under the umbrella of a cost allocation plan there are two types: a full cost allocation plan used internally and an Office of Management and Budget (OMB) compliant federal cost allocation plan.

Full cost allocation plans are utilized to charge out other funds within an organization. Cities can, for example, can use this when providing services to the public. Anyone who is receiving a service from the general fund– water funds, sewer, trash, etc. – will receive a charge that they can be reimbursed for, Lettini explained.

The full cost allocation plan can also be used in a user fee analysis. Cities can figure out what the full cost of a service is and build that into their user fee analysis when charging developers or the public for that fee. This will include a component of the indirect cost, which comes back into the general fund for reimbursement.

The second, and more conservative, approach to the cost allocation plan is the Office of Management and Budget (OMB) compliant federal version. This plan uses actual dollars and excludes some line item costs. Cities may often use this type of cost allocation plan for grant claims or federal funding received, Lettini told EfficientGov.

Why Cost Plans Matter

“The value of a cost allocation plan comes from any reimbursement that provides money to public departments to ensure their operations can continue or be improved,” Lettini told EfficientGov. “The plans are designed to ensure the finances are available to keep the city doing what taxpayers are paying them to do. “

According to Lettini, a general fund may pay for a variety of public service such as police and fire departments. A reimbursed cost acquired through a smart cost allocation plan may be translated into an additional police officer or fire truck. Cost allocation plans enable cities to go beyond meeting overhead costs and expand services to improve the community.

“Because improving services is something cities already have to do, it’s understood as a mechanism to get reimbursement for it,” Lettini explained. “Get the money back into serving the community.”

Make The Software Work For You

While it may seem like a daunting task to adopt a new technology and processes to reduce costs, many software solutions are easy to use and end up making financial reporting easier. According to Lettini, municipal leaders have a short list of tasks they must complete to optimize their cost allocation software:

  • Collect expenditures from each department
  • Identify allocations
  • Gather all information needed to complete the cost allocation plan

Acquiring the information for the cost allocation plan is a simple process of capturing allocation statistics or expenditures. This information can easily be transferred into the cost plan software with specific functionality designed for cost allocation plans to guarantee accuracy. For example, users can leverage a cost calculator to determine exact figures and ensure nothing is left behind.

“On average, city overhead rates are around 43 percent, leaving 33 percent on the table without a cost plan,” Lettini told EfficientGov. “I would say that is reason enough to do a cost plan the right way.”

Problems Remedied

Local governments are being asked to do more with less while managing increasingly tight budgets. Many municipal leaders are constantly hunting for more resources to do their jobs more effectively and efficiently. Cost allocation plan software not only helps cities find the money, but also completes key financial processes with less error.

“What many municipal leaders do not realize is how much money they could be getting back if a thorough cost allocation plan is deployed,” Lettini told EfficientGov. “When this capital is realized, cities are able to get their departments properly staffed and better serve the public.”

About the author

EfficientGov Staff

EfficientGov is an independent information service providing innovative solutions to fiscal and operational challenges facing cities and towns around the world.