Full cost recovery is an important principle for the financial relationship between government and charities, but government departments have struggled to translate the principle into practice, according to a review from the National Audit Office.

The NAO has found that, although full cost recovery has been kept high on the policy agenda since 2002, many organisations do not consider they are recovering the full cost of delivering services despite the fact that the government’s target date of April 2006 has long passed.

The report found that few departments had made significant changes to funding practice in an attempt to meet the target, despite a general feeling that “the spirit of the target” had been met.

The review concluded that full cost recovery is not a concept that public funders can implement in a mechanistically, as it does not apply in the same way across the variety of funders and funding relationships at work within the third sector.

The NAO recommended that the Office of the Third Sector and the Treasury develop a more sophisticated statement on full cost recovery to reflect funders’ responsibilities for fair treatment and risk management. It should also acknowledges that department practice towards cost recovery will vary depending on the environment within which it takes place.

Joe Cavanagh, NAO director for work on the third sector, said the report showed that expectations vary between funders and the sector. “The planned training for public sector commissioners [through IDeA] is an ideal opportunity to promote a more sophisticated approach,” he added.

Stuart Etherington, chief executive of NCVO, said: “The issue of full cost recovery has been at the heart of debates around the relationship between the voluntary and public sector. This report is a very helpful contribution to that debate, and should help to translate the high level principle into practice. This is something that is urgently needed to ensure that the government meets the commitments they made back in 2002.”

Acevo chief executive Stephen Bubb said: “The NAO report states clearly that no department has undertaken a proper review to ensure third sector organisations can achieve full cost recovery. Five years after the government made a firm commitment to the principle, this is truly staggering.”

Bubb said he now wanted to work with government on a “radical overhaul” of procurement strategy, so third sector organisations could secure a fair price for their work. “Driving prices down to rock bottom will not secure real value for the public,” he added. “For our part, leaders in the sector need to be tougher negotiators, and secure a better deal for the people they serve.”