The grant paid for every cost you listed. That is exactly why your reserves fell.

A two-year grant of £48,000 for a youth project. Delivered in full, on time, with a monitoring report the funder described as exemplary. Every line of the budget was spent on what it said it would be spent on, and not a penny went astray.

At the end of it the charity's unrestricted reserves were £30,000 lower than when it started. Nothing went wrong. The budget was simply wrong from the day it was written, in the most ordinary way there is: it listed the costs the project could see, and none of the costs that made the project possible.

Two kinds of cost, and only one of them gets budgeted

Direct costs are the ones that would disappear if the project did. The project worker's salary, the venue hire, the materials, the mileage, the DBS checks for that project's volunteers. These are easy to identify and they are what almost every application form asks for.

Support costs are the running costs of the organisation that delivers it. The finance officer who processes the payroll and reconciles the restricted fund. The rent, heat and light. Employer's liability and public liability insurance. The accounting software, the IT, the phones. The payroll bureau. The independent examination. The trustee meeting that approved the bid and the six that monitored it.

None of those costs sit inside the project, and all of them go up when you take the project on. A charity that recovers only its direct costs is using money donated for its mission to subsidise a funder.

Full cost recovery is two sums

The method is not complicated. It is arithmetic that nobody does at bid stage.

1. Allocate every direct cost in full to the project it belongs to.
2. Apportion the support costs across all your projects on a basis that is fair and that you can explain.

The second step is the one that needs a decision, because there is more than one defensible basis and they give different answers.

The four apportionment bases

• People. Share support costs by headcount or full-time equivalents. The natural fit for governance, management, finance, HR and IT, because those costs scale with staff rather than with spending.
• Floor area. Share by the square metres each activity occupies. The right basis for rent, rates, heat, light and cleaning.
• Staff time. Share by hours actually recorded against each project. The most accurate and the most expensive to maintain, because it needs timesheets that people fill in honestly.
• Direct expenditure. Share in proportion to the direct costs of each project. Crude, simple, and perfectly acceptable for a small charity.

For a small organisation, picking one basis and applying it to everything is better than a sophisticated model nobody maintains. What matters is that the basis is reasonable, that it is used consistently from year to year, and that you can say out loud why you chose it.

Worked example

Illustrative figures for a charity with total annual expenditure of £320,000, eight full-time equivalent staff and three projects.

Apportioned by people: 2 ÷ 8 = 25% of £60,000 = £15,000.
Apportioned by direct expenditure: £72,000 ÷ £260,000 = 27.7% of £60,000 = £16,615.

Take the headcount figure. The full cost of Project B is £87,000 a year, not £72,000. The bid went in at £72,000 a year over two years, so the charity funded £15,000 a year — £30,000 across the grant — out of unrestricted reserves it had raised for something else.

The rate you should know off by heart

Divide total support costs by total direct costs: £60,000 ÷ £260,000 = 23.1%. That is this charity's overhead rate, and it is the single most useful number a small charity can carry into a funding conversation. Every bid can be sense-checked against it in ten seconds, and when a funder asks how the overhead figure was arrived at, you have an answer that came from your own accounts rather than from a guess.

Recalculate it annually from the signed accounts, and expect it to move when you take on premises, staff or an audit requirement.

You already produce this number. It just arrives too late.

The Charities SORP requires expenditure to be analysed between raising funds and charitable activities, with support costs allocated across those activities and the basis of apportionment disclosed in the notes. Any charity preparing accruals accounts is already doing this work.

The problem is timing. The apportionment is done once a year, months after the year end, by whoever prepares the accounts — and never gets back to the person writing bids. Pulling last year's support cost analysis out of the notes and turning it into an overhead rate takes an afternoon, and it turns a compliance exercise into a pricing tool.

Two things make this year a good time to do it. SORP 2026 applies to accounting periods beginning on or after 1 January 2026, and the scrutiny and accounts thresholds in England and Wales move for financial years ending on or after 30 September 2026. Our post on SORP 2026 and the new thresholds sets out both dates and who they affect.

What funders actually do with an overhead line

Three responses, and each has a right answer.

• The funder invites full cost recovery. Increasingly common, and the line is often called overheads, core costs or indirect costs. Put in your real figure with the basis stated in a sentence. Rounded, unexplained percentages are what get queried; a figure with a method behind it rarely is.
• The funder caps overheads at a percentage of direct costs. Say the cap is 15%. On £72,000 that gives £10,800 against a real cost of £15,000. Bid to the cap, and record the £4,200 gap as a known, approved contribution from unrestricted funds. A gap the board has agreed to is a decision. The same gap unnoticed is a deficit.
• The funder says it does not fund overheads at all. Then some support cost is genuinely direct and is in the wrong column. A project worker's supervision time, the DBS checks for that project's volunteers, the specific insurance uplift, the proportion of the finance officer's time spent on that grant's own reporting — all of these can be identified, evidenced and shown as direct costs of the project, because that is what they are.

Grant reporting: the accounts have to agree with the report

Full cost recovery only holds together if the money is tracked as a restricted fund from the first receipt. Every grant with a purpose attached is restricted, and it needs its own fund in the accounting system from day one, not a spreadsheet reconstructed at year end. Our post on restricted and unrestricted funds covers what turns a donation into a restricted one.

Three things make monitoring reports painless rather than painful:

• Code the apportionment as you go. If the support cost recharge only appears in the year-end journal, the interim report to the funder will not match the accounts, and explaining the difference is a worse conversation than getting it right monthly.
• Report against the budget you submitted, including the overhead line if the funder accepted one. Silently moving money between headings is the most common cause of a clawback request, and most funders will approve a variation if asked in advance.
• Reconcile restricted balances to cash. Restricted and unrestricted money sit in the same bank account and only the fund accounting keeps them apart. If restricted fund balances exceed the cash you hold, unrestricted money has already been spent on restricted work.

What to do this week

1. Take your last signed accounts and separate total expenditure into direct costs and support costs. The support cost note is usually already there.
2. Divide support costs by direct costs. That percentage is your overhead rate. Write it on the front of the bid template.
3. Choose your apportionment basis — people, floor area, staff time or direct expenditure — and write down in one sentence why. That sentence is what a funder or an examiner will ask for.
4. Apply it to every project currently running and find the ones where the funded amount is below the full cost.
5. Take those numbers to the next trustee meeting and get the subsidy approved as a decision, or repriced. Either outcome is better than the current one.
6. Before the next bid goes out, add the overhead line, with the basis in a sentence beneath it.

Where the pattern is charity-wide rather than project-specific, the answer belongs in the reserves policy as well — our post on how much a charity should hold in reserves covers how planned subsidy of funded work changes the target, and the funding guide puts full cost recovery in the context of the wider mix.

Where we help

We build the support cost analysis once, turn it into an overhead rate you can use on every application, set up restricted fund tracking so monitoring reports come out of the accounts rather than out of a spreadsheet, and prepare budgets that keep the organisation whole rather than just the project. It is included in our packages from £39 + VAT a month. Get started.