Why Core Costs Are Always Political

TL;DR Every charity needs to pay rent, run payroll, maintain IT systems, and keep the lights on. These "core costs" or "overheads" are essential to delivering any programme or service. Yet funders have historically resisted paying for them, preferring to fund visible, named projects instead. This creates a structural sustainability crisis that has been debated for decades and remains unresolved. If you are entering the charity sector, understanding why core costs are political -- not just financial -- is one of the most important things you can learn.

Why this matters

Walk into almost any charity in the UK and ask the finance director what keeps them up at night. The answer, more often than not, will involve some version of: "We can raise money for projects, but we can't cover the costs of actually running the organisation."

This is not a niche accounting problem. It is a structural fault line that affects staffing, governance, strategy, and organisational survival. It shapes how charities budget, how they report to funders, and how they talk about themselves to the public. It is, without exaggeration, one of the defining tensions of the voluntary sector.

The 5 things to know

1. Core costs are the costs of existing as an organisation

Core costs -- also called overhead costs, indirect costs, or central costs -- are the expenses that keep an organisation functioning regardless of which programmes it runs. They include:

Premises: rent, utilities, maintenance, insurance
Finance and administration: payroll processing, accounting, audit fees, legal costs
Governance: trustee expenses, board support, regulatory compliance, annual reporting
IT and infrastructure: systems, software licences, data protection, cybersecurity
Human resources: recruitment, training, staff wellbeing, employment law compliance
Leadership and management: CEO and senior management time spent on strategy, partnerships, and organisational development

None of these are optional. A charity without functioning finance systems cannot account for grants. A charity without IT cannot communicate with beneficiaries. A charity without governance cannot meet its legal obligations. Core costs are the foundation on which all programme delivery rests.

2. Funders have historically preferred to fund projects, not organisations

The dominant model in UK charity funding -- particularly from trusts, foundations, and government -- has been project funding. A funder awards money for a specific, time-limited activity: a two-year youth mentoring programme, a research project, a capital build. The budget covers the direct costs of that activity: project staff, materials, travel, evaluation.

What it frequently does not cover, or covers inadequately, is the organisation's share of core costs. The project needs an office to operate from, an HR system to employ staff through, a finance team to manage the budget, and a CEO to provide oversight. But the funder's budget template may not include lines for these, or may cap "overheads" at an arbitrary percentage -- 10% or 15% being common limits.

This creates a paradox: funders want professional delivery of high-quality programmes but are reluctant to pay for the organisational infrastructure that makes professional delivery possible.

3. The "overhead myth" has done real damage

The idea that a charity's quality can be judged by how low its overhead ratio is -- the percentage of total spending that goes on administration rather than "the cause" -- has been extraordinarily persistent and damaging.

This myth, often reinforced by media reporting and charity rating platforms, suggests that a charity spending 5% on overheads is inherently better than one spending 20%. It treats administrative spending as waste rather than investment. It ignores the reality that effective programmes require effective organisations, and effective organisations cost money to run.

The overhead ratio tells you almost nothing about impact, efficiency, or value for money. A charity could have very low overheads because it underpays staff, skips proper governance, runs outdated IT systems, and defers building maintenance. That is not efficiency; it is organisational decay.

For a deeper exploration of this debate, see our analysis at The Overhead Ratio Myth.

4. Restricted funding makes the problem worse

The distinction between restricted and unrestricted funding is central to the core costs problem. Restricted funds can only be spent on the specific purpose for which they were given. Unrestricted funds can be spent on whatever the charity's trustees decide is most needed.

Most project grants are restricted. Most core costs need to be paid from unrestricted income. When a charity has plenty of restricted project funding but insufficient unrestricted income, it faces a situation sometimes called "the starvation cycle": it can deliver programmes but cannot maintain the organisation that delivers them.

This is why unrestricted funding is so prized and why the source of unrestricted income -- individual donations, trading revenue, legacies -- matters so much strategically. For a full explanation, see our guide on What Is Restricted vs Unrestricted Funding.

5. Full cost recovery is the proposed solution -- but it's hard to implement

Full cost recovery (FCR) is the principle that every funded project should include a fair contribution to the organisation's core costs. If a project uses 15% of the charity's office space, 10% of the finance team's time, and 5% of the CEO's capacity, the project budget should include those costs.

The concept has been promoted by the Charity Commission, NCVO, and ACEVO for over two decades. The Charity Commission's own guidance states that charities should understand their full costs and seek to recover them. In practice, implementation remains patchy.

The barriers are real. Funders resist because it increases the cost of each grant. Charities struggle to calculate their true overhead allocation accurately. Small organisations lack the financial systems to do the analysis. And the competitive dynamics of grant applications mean that inflating your budget with "overheads" can feel like a disadvantage when you are competing against organisations that absorb those costs elsewhere.

For a deeper discussion, see Full Cost Recovery.

Common misunderstandings

"Core costs are waste." This is the overhead myth in its purest form. Core costs are not waste; they are the cost of organisational existence. Without them, there is no organisation to deliver programmes. The question is not whether to incur them, but how to fund them sustainably.

"A good charity keeps overheads below 10%." There is no evidence-based threshold for what constitutes an appropriate overhead ratio. It varies enormously by cause area, size, geography, and delivery model. A charity running residential care facilities will have fundamentally different cost structures from a grant-making trust or a campaigning organisation. Benchmarking against an arbitrary percentage is meaningless.

"Funders just need to be more generous." The problem is structural, not just attitudinal. Even well-intentioned funders face constraints: endowment income, spending policies, accountability to their own boards and regulators. Solving the core costs problem requires systemic changes to how the sector budgets, reports, and thinks about organisational sustainability -- not just bigger grants.

"Unrestricted funding solves everything." Unrestricted income is enormously valuable, but it is not unlimited. Most charities' unrestricted income comes from individual giving, trading, and legacies -- all of which require investment to generate. The solution is both more unrestricted income and better cost recovery on restricted grants.

How it works in practice

The typical underfunding pattern. A charity wins a three-year grant of £300,000 to deliver a community health programme. The budget covers two project workers, programme materials, evaluation, and a 10% overhead contribution (£30,000). But the project actually uses £15,000 per year in office space, £8,000 in finance and HR time, £5,000 in IT, and £4,000 in management oversight -- totalling £32,000 per year or £96,000 over the life of the grant. The charity must find £66,000 from elsewhere to subsidise the project's true costs. Multiply this across five or six funded projects, and the deficit becomes existential.

The starvation cycle in action. Year one: a charity wins several project grants but core costs are underfunded. Year two: it cuts back on IT investment and defers office maintenance to balance the books. Year three: systems start failing, staff turnover increases because the organisation cannot afford competitive salaries from its squeezed unrestricted budget. Year four: the quality of programme delivery declines. Year five: funders notice declining performance and reduce future grants. The underfunding of core costs has, over time, destroyed the capacity it was supposed to support.

What good practice looks like. Some funders now explicitly include core cost contributions in their grants. The National Lottery Community Fund allows applicants to include organisational overheads. Several foundations have moved to unrestricted, multi-year grants that allow charities to allocate funds where they are most needed. These approaches are growing but remain the exception rather than the rule.

What people disagree about

Whether overhead ratios should be published at all. The Charity Commission requires charities to report spending on charitable activities, fundraising, and governance in their annual accounts. Some argue this transparency is essential for public trust. Others argue that the categories are misleading and encourage the kind of overhead-minimisation behaviour that damages organisations. There is no consensus.

Whether funders bear the primary responsibility. Charity leaders often point the finger at funders for underfunding core costs. Funders counter that charities need to be better at articulating their true costs, building reserves, and diversifying income. Both sides have a point, and the blame game often obscures the structural nature of the problem.

Whether the sector should adopt more business-like financial models. Some advocate for charities to think more like businesses: pricing services to include overheads, building reserves, and investing in infrastructure. Others argue that the comparison is flawed because charities serve markets that cannot pay, and "business-like" thinking risks mission drift. This tension runs deep.

How much reserves are enough. Closely related to the core costs debate is the question of reserves -- unrestricted funds set aside for future needs. Charity Commission guidance says trustees should have a reserves policy, but there is no prescribed level. Some commentators criticise charities for holding "too much" in reserves; charities counter that reserves are the only buffer against the chronic underfunding of core costs.

FAQs

What percentage of charity spending should go on overheads?

There is no correct answer. The appropriate level of overhead spending depends on the charity's size, cause area, delivery model, and stage of development. A start-up charity investing in systems may legitimately spend 25-30% on overheads. A mature organisation with established infrastructure might spend 12-15%. What matters is whether the spending is proportionate, justified, and enabling effective delivery -- not whether it hits an arbitrary benchmark.

Why don't funders just give unrestricted grants?

Some do, and the trend is growing. But many funders have specific charitable objects, endowment restrictions, or accountability requirements that oblige them to fund defined activities. Foundation trustees have legal duties to ensure funds are used for their stated purposes. Government funders face additional public accountability pressures. The shift towards unrestricted giving requires cultural change, not just policy change, across the funding ecosystem.

What is the starvation cycle?

The starvation cycle is a term used to describe the pattern where funders' reluctance to pay for core costs forces charities to underinvest in their own infrastructure, leading to declining organisational capacity, which in turn leads to poorer programme delivery, which then leads to reduced funding -- creating a downward spiral. The concept was popularised by a 2009 Stanford Social Innovation Review article and has become a widely referenced framework in debates about charity sustainability.

Is the situation improving?

Slowly. There is greater awareness of the problem than a decade ago. More funders are offering unrestricted grants, multi-year funding, and explicit core cost contributions. The ACF's "Stronger Foundations" work and campaigns by infrastructure bodies like NCVO have pushed the issue up the agenda. But progress is uneven. Many funders still cap overheads, many government contracts still underfund infrastructure, and the overhead myth persists in public discourse. The structural incentives that created the problem have not been fundamentally changed.

Can we store cookies?