Understanding Full Cost Recovery
Full cost recovery (FCR) means that every project your charity delivers should contribute to the true cost of running your organisation. This includes direct project costs like staff salaries and materials, but also a proportionate share of indirect costs: rent, utilities, IT systems, HR, finance, insurance, and senior management time. The concept was championed by ACEVO (the Association of Chief Executives of Voluntary Organisations) and New Philanthropy Capital, and has gained significant traction across the UK funding sector. Without FCR, charities effectively subsidise funders — using reserves, cutting corners, or burning out staff to deliver projects at below their real cost. Over time, this undermines the very organisations that funders rely on to create social impact.
Why Overheads Matter
There is a persistent myth in the charity sector that overheads are wasteful and that a higher proportion of spending on "the cause" is always better. This is wrong. Good governance, financial management, HR support, safeguarding systems, and quality assurance all cost money — and they are all essential to delivering safe, effective services. A charity that skimps on management is more likely to experience safeguarding failures, financial mismanagement, and staff burnout. The Charity Commission itself recognises that well-run charities need adequate infrastructure. NCVO research shows that charities consistently under-recover their overheads, with many absorbing 15 to 25 percent of project costs from their own reserves. This is not sustainable. Funders who refuse to pay overheads are, in effect, asking charities to subsidise their grant-making.
Calculating Your Full Costs
To calculate full cost recovery, start by listing all your organisation's indirect costs: premises, utilities, insurance, IT, finance and audit, HR, governance, communications, and senior management time. Total these costs for the year. Then calculate the proportion attributable to each project. The simplest method is to allocate overheads based on staff time — if a project uses 30 percent of your total staff time, it should bear 30 percent of your overheads. Other allocation methods include floor space (for premises costs) or direct cost ratios. NCVO provides a full cost recovery calculator that walks you through the process step by step. The key is to be consistent and transparent. Document your methodology so you can explain it clearly to funders. Most organisations find their overhead rate falls between 15 and 30 percent of total project costs.
The Core Cost Dilemma
Many charities face a painful gap between what it costs to run their organisation and what funders are willing to pay for. This creates the "core cost dilemma" — where essential functions like governance, finance, and leadership go unfunded because they do not fit neatly into project budgets. Some charities respond by charging overhead rates that are artificially low, which leads to chronic underfunding of infrastructure. Others avoid the conversation entirely and simply absorb the costs. The better approach is to be upfront with funders about your true costs. Include a clear overhead line in every budget and be prepared to explain what it covers. If a funder will not cover overheads, factor that into your decision about whether to accept the grant — sometimes the true cost of a restricted grant outweighs its benefit.
Presenting Overheads to Funders
When presenting overheads in a grant application, transparency is your greatest asset. Break your overhead allocation into specific categories rather than presenting a single lump sum. Instead of writing "overheads: 8,000 pounds," itemise it: "premises (2,000), IT and communications (1,500), insurance (1,000), finance and audit (1,500), management and supervision (2,000)." This level of detail reassures funders that the costs are real, justified, and proportionate. Explain your allocation methodology briefly — one sentence is usually enough. Reference the NCVO full cost recovery model or the ACEVO guidance if the funder is unfamiliar with the concept. Frame overheads as essential to project quality, not as an add-on. For example: "Effective supervision ensures our frontline workers maintain professional standards and stay supported in demanding roles."
Which Funders Accept Full Cost Recovery
An increasing number of UK funders accept and even encourage full cost recovery. The National Lottery Community Fund explicitly states that applicants should include overheads in their budgets. The Lloyds Bank Foundation has been a vocal advocate for funding core costs and has published research on the damage caused by under-funding infrastructure. The Esmee Fairbairn Foundation, the Tudor Trust, and the Lankelly Chase Foundation all accept overhead contributions. The Institute for Voluntary Action Research (IVAR) maintains a list of funders committed to flexible and full-cost funding. Some funders go further and offer unrestricted grants — funding that can be spent wherever the charity needs it most. Use Fundermatcher to identify funders in your cause area who have a track record of supporting core costs and infrastructure.
The Case for Unrestricted Funding
The ultimate expression of trust between a funder and a charity is unrestricted funding — grants with no conditions on how the money is spent. Unrestricted funding allows charities to invest in the areas of greatest need, whether that is upgrading IT systems, building reserves, investing in staff development, or responding to unexpected challenges. Research by the Charity Finance Group and IVAR shows that unrestricted funding leads to better outcomes, stronger organisations, and more effective use of resources. The movement towards trust-based philanthropy is growing in the UK, with initiatives like the Funder Commitment on Flexible Funding gaining signatories. As a charity, you can advocate for unrestricted funding by demonstrating strong governance, transparent reporting, and clear impact. When funders trust your organisation, they are more willing to trust you with how the money is used.