Grant Budgeting Mastery: Cost Recovery vs Full Cost Allocation
Chronic underpricing is slowly killing UK nonprofits and social enterprises. You win grants that don't cover true costs, deliver excellent work while haemorrhaging money, then wonder why you're always broke. The solution isn't more funding—it's honest budgeting.
The Hidden Crisis
A 2024 sector study found 68% of UK charities systematically underprice their grant budgets, failing to recover full costs. Result? Organisational deficits masked as programme "success." Every grant you win at below-cost pricing pushes you closer to insolvency.
Why Organisations Underprice (And Why You Must Stop)
The logic seems sound: "If we ask for our true costs, we won't be competitive. Better to win some funding than none." This is how organisations enter death spirals.
Underpricing your work doesn't make you competitive—it makes you unsustainable. You're essentially subsidising funders with your reserves, staff goodwill, and delayed investment. Eventually, those run out.
The Real Cost of Underpricing
Short-Term Consequences
- • Staff stretched beyond capacity
- • Quality compromised due to resource gaps
- • Unpaid overtime becomes the norm
- • Equipment/infrastructure degrades
Long-Term Damage
- • Accumulated deficits threaten viability
- • Staff burnout and turnover escalate
- • Unable to invest in development
- • Reputation suffers when quality drops
Understanding Full Cost Recovery
Full cost recovery (FCR) is simple in principle: every project should bear its fair share of ALL costs required to deliver it—not just the obvious ones.
Your project needs a trained staff member to deliver? That's a direct cost. But that staff member also needs management, HR support, office space, IT systems, insurance, governance, and financial oversight. Those are indirect costs, and they're just as real.
The Three Cost Categories
| Cost Type | Definition | Examples | Typical % of Total |
|---|---|---|---|
| Direct Costs | Costs exclusively for this project | Project staff salaries, project-specific equipment, project travel | 65-75% |
| Indirect Costs | Shared organisational costs | Management, HR, finance, IT systems, rent, utilities, insurance | 20-30% |
| Strategic Costs | Investment in organisational future | Staff development, research, quality improvement, reserves | 5-10% |
FCR Reality Check
If your grant budgets consistently show 90%+ direct costs with minimal overheads, you're not being efficient—you're pretending central costs don't exist. Every project uses your infrastructure. Every project should pay for it.
Calculating Your Indirect Cost Rate
The foundation of honest budgeting is knowing your organisation's true overhead rate. This percentage represents how much indirect cost should be allocated to every £1 of direct cost.
Step-by-Step Calculation
Step 1: Calculate Total Indirect Costs (Annual)
Example Organisation:
- • Management salaries: £95,000
- • Finance & HR staff: £42,000
- • Premises (rent, utilities): £38,000
- • IT and communications: £18,000
- • Insurance & legal: £12,000
- • Governance (trustees, AGM): £5,000
- • General office costs: £15,000
Total Indirect Costs: £225,000
Step 2: Calculate Total Direct Costs (Annual)
- • All project staff salaries: £520,000
- • Project-specific materials: £85,000
- • Project-specific equipment: £30,000
- • Project-specific travel: £28,000
Total Direct Costs: £663,000
Step 3: Calculate Overhead Rate
Formula: (Total Indirect Costs ÷ Total Direct Costs) × 100
Calculation: (£225,000 ÷ £663,000) × 100 = 33.9%
Overhead Rate: 34%
Step 4: Apply to Project Budgets
For every project with £100,000 in direct costs, add £34,000 in indirect costs to reach true full cost of £134,000.
Typical Overhead Rates by Organisation Size
- Small organisations (<£250K turnover): 40-50% (higher percentage due to fixed costs spread over smaller base)
- Medium organisations (£250K-£2M): 30-40%
- Large organisations (>£2M): 25-35% (economies of scale reduce percentage)
If your calculated rate is significantly higher or lower than these ranges, double-check your cost categorisation. Outliers are possible but should be explainable.
Building Grant Budgets: The Full Process
Now you know your overhead rate, here's how to construct bulletproof grant budgets that recover full costs while remaining defensible to funders.
Stage 1: Define the Project Scope Precisely
Before pricing anything, nail down exactly what you're delivering. Vague scope leads to vague budgets leads to underfunding.
Scope Definition Checklist
Stage 2: Cost Direct Delivery Components
Work through each element systematically. Don't guess—use actual salary scales, real quotes, and evidence-based assumptions.
| Direct Cost Item | Calculation Method | Example Cost |
|---|---|---|
| Project Coordinator (0.8 FTE, 12 months) | Salary £32K × 0.8 × 1.18 (on-costs) | £30,208 |
| Workshop Facilitators (40 sessions × 3hrs) | 120hrs × £45/hr | £5,400 |
| Participant materials (60 people) | 60 × £25 per person | £1,500 |
| Venue hire (40 sessions) | 40 × £65 per session | £2,600 |
| Project-specific equipment | Quotes from 3 suppliers | £3,800 |
| Travel & subsistence | Evidence-based estimate | £1,200 |
| Evaluation & reporting | External evaluator quote | £4,500 |
| TOTAL DIRECT COSTS | £49,208 | |
Stage 3: Apply Indirect Cost Allocation
Using your organisational overhead rate (calculated earlier), add fair share of central costs.
Continuing example above (34% overhead rate):
Direct costs: £49,208
Indirect costs: £49,208 × 0.34 = £16,731
Total Full Cost: £65,939
This is the figure you should ideally present to funders. It represents honest pricing.
When Funders Won't Pay Full Cost
Reality check: not all funders accept full cost recovery budgets. Some cap overheads at 10%, 15%, or 20%. What do you do?
Strategic Options
Option 1: Accept and Find Match Funding
If Funder A will only cover 80% of full cost, seek Funder B to cover the remaining 20%. Combine restricted and unrestricted income to reach 100%. This is portfolio management in action.
Option 2: Reduce Scope to Fit Budget
If the funder's maximum is £50K but full cost is £66K, reduce project scope by 25%. Serve fewer people or deliver fewer hours—but maintain quality. Never reduce quality to fit budget.
Option 3: Transparently Show the Gap
Present full cost budget (£66K) alongside funder-constrained budget (£50K). In narrative, explain: "While our full cost is £66K, we recognise your £50K maximum. We will seek £16K from unrestricted reserves/other funders to enable full delivery."
Option 4: Decline the Opportunity
If cost shortfall is significant, match funding unavailable, and scope reduction unacceptable—walk away. Losing money on every grant you "win" is an express route to insolvency.
Presenting Budgets to Funders
How you present your budget affects whether funders accept it. Transparency and professionalism matter.
Budget Format Best Practices
- Line-item detail: Show component costs, not just lump sums. "Staffing £30K" tells nothing; "Project Coordinator, 0.8 FTE @ £32K inc. on-costs" shows calculation.
- Clearly label indirect costs: Don't hide overheads in inflated direct costs. Separate line for "Organisational overheads @ 34%" shows honesty.
- Include narrative justification: Brief explanations for significant items. "External evaluation: required for robust impact measurement and funder reporting."
- Show match funding: If seeking partial support, clearly indicate what you're asking this funder versus what's coming from elsewhere.
- Use funder's template: If they provide one, use it exactly as specified. Add supplementary detail if needed but respect their format.
Sample Budget Narrative
Budget Commentary Example:
"This budget reflects full cost recovery principles. Direct costs (£49,208) cover all project-specific expenditure. Indirect costs (£16,731, representing 34% of direct costs) reflect fair allocation of essential organisational infrastructure without which this project could not operate: management oversight, financial controls, HR support, premises, IT systems, insurance, and governance. Our overhead rate is calculated annually using ACEVO recommended methodology and verified by our independent auditors. We believe transparent, honest budgeting serves both funder and beneficiary by ensuring sustainable, high-quality delivery."
Staff On-Costs: The Often-Forgotten Element
When budgeting staff costs, never use bare salary. On-costs (employer contributions and associated expenses) add 15-20% to the headline figure.
What to Include in On-Costs
| On-Cost Element | Typical % of Salary | Example (£30K salary) |
|---|---|---|
| Employer National Insurance | 13.8% (on earnings above threshold) | ~£3,300 |
| Pension contributions | 3-10% (varies by scheme) | £900-£3,000 |
| Recruitment & training | 1-2% | £300-£600 |
| Cover for sickness/leave | 1-2% | £300-£600 |
| TOTAL ON-COSTS | ~18-25% | £4,800-£7,500 |
| FULL EMPLOYMENT COST | £34,800-£37,500 |
Conservative approach: use 18% as minimum on-cost multiplier. For senior roles or generous pension schemes, use 22-25%.
Common Budgeting Mistakes
❌ Forgetting Inflation
If you're applying in January 2025 for a project starting April 2026, use 2026 prices. Build 3-5% annual inflation into multi-year budgets.
❌ Optimistic Time Estimates
"The project coordinator will spend 40% of their time on this." Really? Account for email, meetings, unexpected issues. Be realistic about productive hours.
❌ Ignoring VAT
If your organisation isn't VAT-registered and can't reclaim, you pay VAT on purchases. That £1,000 item costs you £1,200. Budget the inclusive amount.
❌ No Contingency
Things go wrong. Prices rise. Equipment fails. Many funders accept 5% contingency budgets for complex projects. Use it.
❌ Invented Savings
"We'll use volunteers instead of paid staff to save money." Only budget volunteer time if you genuinely have reliable volunteers. Hope isn't a cost-saving strategy.
Negotiating Budget Revisions
Sometimes funders come back saying "we love this but our maximum grant is £X" (where X is less than your full cost budget). How to respond?
The Professional Negotiation Approach
Response Template:
"Thank you for your interest in supporting [project]. We appreciate your £X funding constraint. We have three options we'd like to discuss:
Option A - Reduced Scope: For £X, we could deliver [Y% of original scope], serving [Z fewer beneficiaries] but maintaining quality standards.
Option B - Consortium Funding: Your £X contribution combined with [£amount] we're seeking from [Other Funder] would enable full delivery as proposed.
Option C - Phased Delivery: Your £X funds Year 1, with our understanding that we'd submit a separate application for Year 2 continuation funding if outcomes are strong.
Which approach would align best with your funding priorities?"
Notice: you're offering solutions, not just problems. You're showing flexibility while maintaining honesty about cost implications.
Building Organisational Sustainability
FCR isn't just about individual projects—it's about long-term organisational health.
The Sustainability Equation
Sustainable organisation requires:
- ✓ 70%+ of projects funded at 90%+ of full cost
- ✓ Unrestricted income covering at least 6 months operating costs
- ✓ Annual surplus of 3-5% of turnover building reserves
- ✓ Investment in staff development and infrastructure
- ✓ Balanced portfolio (see our portfolio strategy guide)
If your budgeting practices aren't moving you toward these markers, you're subsidising impact delivery with organisational health—and eventually, that exchange bankrupts you.
Conclusion: Honest Budgeting as Strategic Imperative
Full cost recovery isn't selfishness—it's sustainability. Funders investing in your work deserve to know they're funding quality delivery, not propping up a financially precarious organisation through artificially cheap pricing.
And you deserve to build something that lasts. Every underpriced grant is a small act of self-harm. Stop it. Price your work honestly, negotiate from positions of strength, and walk away from opportunities that demand you subsidise them from your reserves.
The sector needs organisations that thrive, not just survive. That starts with budgets that tell the truth.
TL;DR: FCR Essentials
- ✓ Calculate your organisation's indirect cost rate annually
- ✓ Apply it consistently to all project budgets
- ✓ Include staff on-costs (18-25% on top of salary)
- ✓ Present budgets transparently with narrative justification
- ✓ When funders cap overheads, reduce scope rather than quality
- ✓ Walk away from opportunities that force below-cost delivery
- ✓ Build organisational reserves through consistent surpluses
Build Sustainable Grant Budgets
Crafty's platform helps you calculate accurate costs, apply appropriate overhead rates, and present professional budgets that funders trust and approve.
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