A charity wins £20,000 for a project. The project runs, the outcomes are good, the funder is pleased. At year-end, the charity is further behind than it was.
Nothing went wrong. The £20,000 covered the sessional worker, the materials and the venue. It did not cover the rent on the room, the insurance, the payroll admin, the finance officer’s time on the reports, the supervision, or the trustee meeting where the project was approved. Those costs were real, they happened because of the project, and they came out of unrestricted funds.
Do that three times and you have a charity with a full programme and no money.
If the pattern feels familiar, the underlying question is what your work actually costs – which is where a strategy conversation usually starts.
The accounts already require this
Full cost recovery sounds like a fundraising idea. It isn’t. It’s an accounting requirement your charity is already meant to meet.
SORP module 8 is explicit: some costs relate directly to a single activity, others are incurred to enable a range of them, and those support costs must be apportioned across the activities they support in order to arrive at the full cost for each reported activity.
So the figure exists, or should. The problem is that charities calculate it once a year for the accounts and never use it when pricing a project.
There’s a second line in the same module that surprises people. Support costs are apportioned to relevant restricted funds too, unless the terms of the gift prohibit it. Charging a project its fair share of overheads isn’t a favour you’re asking a funder for. It’s how the cost of that project is properly stated.
What counts as a support cost
SORP names the usual suspects: governance, payroll administration, purchasing, budgeting and accounting, IT, human resources, building management and finance.
Governance costs are worth separating out, because they have their own definition and their own disclosure requirement. They cover internal and external audit, legal advice for trustees, and the costs of constitutional and statutory requirements – the trustee meetings, the statutory accounts.
Everything else splits three ways. A cost attributable to one activity alone is a direct cost of it. A cost shared between two activities is apportioned between them. A cost that enables everything is apportioned across everything.
That middle category is where small charities lose money. The CEO who spends a day a week on a funded project is not general overhead for that day. Neither is the finance officer’s four hours a month on the project’s reporting. Those are shared costs with a real and identifiable driver, and treating them as vague background expense understates what the project costs.
Working out your rate
Take your last set of accounts and split total expenditure in two: what you spent delivering activities, and what you spent enabling that delivery.
Say a charity spends £120,000 a year. Direct delivery accounts for £90,000 and support costs for £30,000. Support costs are therefore a third of direct costs.
Now cost a project. A part-time worker at 0.5 FTE is £15,000, materials £2,000, venue hire £3,000. Direct cost £20,000. Its share of support costs, on the same basis, is around £6,600.
The project costs £26,600, not £20,000.
That number is the one to work from. Ask for £20,000, and you have not won funding for a project – you have committed to spending £6,600 of unrestricted money you may not have.
Not sure what your overhead rate actually is?
Most small charities have the figure buried in their accounts and have never carried it across into a funding application. A free Charity Consultation will help you find it and work out what it means for what you’re currently applying for.
Choosing a basis you can defend
The proportion-of-direct-cost method above is the simplest, and for a small charity it’s usually enough. SORP allows others, and lists them: usage of a resource, measured by time taken or capacity used; per capita, based on the number of people employed in an activity; floor area occupied; and time, where someone’s duties span more than one activity.
Three rules govern the choice. The basis should be reasonable. It should stay consistent between years unless something changes. And you should weigh the benefit of greater accuracy against the effort of getting it; SORP says so directly, which is unusually practical.
A small charity does not need a sophisticated model. It needs one defensible method, written down, used in the accounts and used in applications.
That consistency matters more than the method. Your accounts have to disclose the apportionment policy you use, the total support costs, and how much was apportioned to each significant activity. An assessor comparing your application to your published accounts will see if the two don’t agree.
1) Watch which number you’re taking a percentage of
There is a trap in the arithmetic. Take the charity above: £30,000 of support costs, £90,000 of direct costs, £120,000 in total.
Divide the support costs by the direct costs, and the rate is a third, or 33%. Divide the same £30,000 by total expenditure of £120,000 and the rate is 25%. Same charity, same money, two very different-looking figures; the only thing that changed is what you divided by.
That matters the moment a funder caps overheads at, say, 15%. Fifteen per cent of what? If they mean of the total grant and you apply a 33% mark-up to your direct costs, you are over the cap without knowing it. If they mean of direct costs and you apply 15% to the total, you have under-claimed and will absorb the difference.
Funder guidance is often vague on this. It is a reasonable thing to ask them directly, and asking makes you look like a charity that understands its costs rather than one that doesn’t.
2) For a project, apply the rate rather than rebuilding it
Work out your support costs once a year from your accounts, derive a rate, and use that rate on each application. Rebuilding the calculation for every bid – asking what share of the rent, the insurance, the finance officer and the trustee meetings this particular project consumes – takes hours and lands close to where the rate would have put you.
So the normal method is: itemise the direct costs for the project, then add one line for support costs at your rate.
Three situations are worth the extra work.
When the project doesn’t look like your other work. The rate assumes projects consume support in proportion to their direct costs. That holds for work of a similar shape and breaks when one is unusual; a project delivered entirely in partner venues shouldn’t carry a full share of your rent, and one that is mostly coordination and reporting consumes far more finance and management time than its direct costs imply.
When the sums are large or the grant runs for several years. A percentage point of error on £20,000 is £200. On £150,000 across three years it is real money, and the funder is more likely to ask how you got there.
When the funder asks for a breakdown rather than a rate. Some do.
One thing to do before applying the rate: take out what is genuinely direct. The project manager’s time, the specific reporting, the supervision of the funded worker; those belong in the project’s direct costs. Leave them in the general support pool and you have understated the direct costs, then applied a percentage to the smaller figure, and lost twice.
Then present it as one named line with the basis stated: support costs at 33% of direct costs, apportioned on the basis used in our accounts. That sentence tells an assessor the work has been done and can be evidenced, which is worth more than the number itself.
When a funder caps overheads
Plenty do. A cap of 10% or 15% against a real rate of 33% leaves a gap, and pretending otherwise doesn’t close it.
Three responses, in order.
Read the guidance rather than assuming. Some funders fund full cost recovery explicitly and are clearer about it than charities expect. Others exclude specific things – governance costs are commonly excluded – rather than capping everything.
Then check your costing is right. Costs sitting in overheads that are genuinely direct to the project should be in the direct column. The project manager’s time, the specific reporting, the supervision of the funded worker – those belong to the project. That isn’t creative accounting; it’s more accurate accounting, and it usually moves more than people expect.
Then decide, consciously. If a gap remains, the charity is subsidising the project from unrestricted funds. That may be the right call – the work matters, the relationship is worth building, the project brings other benefits. But it should be a decision someone made and recorded, not something discovered in the accounts.
And it has a source. Subsidy comes out of your freely available funds, which is the same money your reserves policy is about. A charity subsidising three projects is running its reserves down deliberately, whether or not it has noticed.
What the board should settle
Three things, once, and then reviewed annually.
The charity’s overhead rate and the basis used to calculate it, so nobody has to invent one under deadline pressure.
Whether applications must include full cost recovery by default, and who can authorise an exception.
And how much subsidy the charity can afford in a year, in pounds, taken from reserves deliberately rather than discovered afterwards.
That third one is a trustee decision in the proper sense – it commits charitable funds, and it needs the reasoning recorded, which is the standard set out in how trustees should make decisions that hold up.
Getting this right also changes what your applications look like. A budget that shows the true cost, with a clear and consistent basis for the overhead share, reads as a charity that understands its own finances. Under-asking reads the opposite way, and it’s one of the patterns behind why grant applications fail.
Charities are often reluctant to name their overheads, as though core costs were an embarrassment rather than the reason the work can happen at all. Funders who understand the sector are not surprised by them. They are surprised by budgets that pretend they don’t exist.
If the wider problem is that your income is entirely restricted and nothing covers the running of the charity, that is a structural question rather than a budgeting one – and a one-off strategy project is the shortest way to a plan.
