The True Cost of Delivering Public Services

You can download the full survey data below.

Learn more about the breakdown of survey respondents and methodology in the appendix.

Survey respondents told us it’s been a long time since their income from government met the true costs of delivering services.

• 40% said their grants and contracts never covered their true costs.
• 44% said their grants and contracts have not covered their true costs since at least 2020.
• 1 in 10 (10%) said that their grants and contracts have been underfunded for over a decade.

This is not a new problem, but it has been made much worse by high inflation. The inflation rate (referred to as the Consumer Prices Index, or CPI) first rose above the Bank of England’s 2% target in May 2021. It peaked at 11.1% in October 2022.

Despite this, since April 2021:

• only 17% of survey respondents received increases to all or a majority of their grants or contracts
• 44% reported not receiving any increases at all
• 39% said a minority of their grants or contracts had increased.

The average increase reported across all grants and contracts from 2022 to 2023 was 2.7%. In April 2023, the annual CPI inflation rate was 8.7%. If an organisation received anything less than an 8.7% increase to their grants and contracts, this represents a cut to their funding.

The problem gets worse over time. If organisations receive below-inflation increases or no increases for many years, their income will continue to fall further behind the costs of delivering their contracted services.

What inflation means for charities and voluntary organisations

Organisations have been telling us for many years that their grants and contracts have not been keeping up with inflation. This is a problem because prices are constantly rising.

From 2010 to 2020, inflation averaged 2% per year. While this sounds low, it had a large impact on prices in the decade leading up to the cost of living crisis. A good or service that cost £100 in 2010 would cost £121.60 in 2020 – an increase of 21.6%.

You can use the Bank of England’s inflation calculator to see how much prices have changed over time.

If, for example, an arts charity spent £1,000 per month on art supplies in 2010, it would have had to spend an additional £215.97 each month to purchase those same supplies in 2020. That’s an extra £2,591.64 per year, just to maintain the same level of service.

The organisation would have to find that additional funding somewhere. Perhaps through increased donations, more applications to funders, or charging people to access art classes. All of these present different challenges.

And that’s without considering wages, which ideally rise with inflation. Other operational costs also rise along with inflation, such as energy bills, building maintenance works, and IT services.

The unique challenge of delivering public services

Inflation can be problematic for all voluntary organisations. Particularly when it rises very quickly, as it has done since early 2021.

But it can present unique challenges for organisations that are delivering public services on behalf of public bodies. This is because public service grants and contracts often don’t account for prices rising over time.

When government purchases a service, it’s sensible to expect the money paid will, at a minimum, meet the costs of delivering that service.

However, public bodies seem to expect the voluntary sector to provide services at a low cost. Even if that means organisations must use their own charitable funding to fill the gap between what they’re being paid, and what it actually costs to deliver the services.

Charities and voluntary organisations received over £16bn from public bodies to deliver public services in 2020/21.

That may seem like a large figure, but almost three-quarters of survey respondents (73%) said they are not receiving enough funding to meet the demand for these public services.

This means people’s needs are not being met. This is particularly worrying because grants and contracts typically set a cap or target for referrals to a service. Many will already present an incomplete picture of the needs within a community.

For example, a homelessness service may be funded by the local authority to support 20 people. But this doesn’t necessarily mean that there are only 20 people who need support in the charity’s local area. That number is likely to be much higher.

Underfunded grants and contracts are forcing organisations to further restrict people’s access to support and services. Our survey found that:

• 39% of organisations are reducing the number of referrals they will accept
• 39% are reducing staff numbers, either through restructuring or not recruiting vacant posts
• almost a quarter (23%) are changing the types of referrals they will accept. For example, no longer offering a service that addresses multiple overlapping challenges, or a service that is provided over a long period of time
• 15% are reducing their opening hours.

People and communities are losing access to support and services, often without knowing. Services are mostly still available, but at reduced capacity, as charities don’t want to close their doors entirely.

This is particularly concerning in the wake of the covid-19 pandemic and during the cost of living crisis, which have driven new and increased needs for many people.

Diverting and subsidising funding

87% of survey respondents are managing underfunded grants and contracts by subsidising with other funding. This includes:

• donations and legacies (67%)
• enterprise and trading income, for example from charity shops and cafes (25%)
• new or increased charges for people using their services (15%)
• income from investments (15%)
• reserves (11%)
• other charitable income, for example from trusts and foundations (8%).

Only four organisations (1%) said they are subsidising some of their public service delivery with surplus income from other grants and contracts.

Voluntary sector organisations often find it difficult to achieve ‘full cost recovery’ from their public sector contracts, let alone surplus. Even though that surplus would be reinvested in services and innovation.

When grants and contracts don’t cover the true costs of delivering services, charities must divert income from other sources to prop up public services that should be funded by government. This means charities can’t:

• deliver other services that aren’t funded by grants or contracts
• build up their reserves and financial resilience
• invest in expanding their services to meet communities’ needs
• invest in innovation to find better and more efficient ways of providing their services.

Staff and volunteers are the bedrock of the voluntary sector. Without them, organisations wouldn’t be able to deliver their services.

Worryingly, 83% of survey respondents told us that underfunded grants and contracts are making it more difficult to recruit and retain staff. 38% are also seeing an impact on volunteer recruitment and retention.

We asked organisations to tell us whether grant and contract underfunding is impacting their ability to pay staff the national minimum wage and/or the voluntary real living wage.

• 45% of respondents said it’s becoming more difficult to pay the national minimum wage without subsidising, or it will become more difficult within the next year.
• 58% said it’s becoming more difficult to pay the real living wage without subsidising, or it will become more difficult in the next year.

National minimum wage

The national minimum wage is the minimum hourly minimum rate of pay that workers are legally entitled to. On 1 April 2024, it’s set to rise from £10.42 per hour for all workers aged 23 and over, to £11.44 per hour for all workers aged 21 and over.

Around 5% of all workers in the UK, and 4.5% of workers in not-for-profit organisations, are paid the national minimum wage. Staff are more likely to receive the national minimum wage in some of the sectors where voluntary organisations deliver public services, including social care and childcare.

Organisations across the voluntary sector are having to subsidise the national minimum wage because their grants and contracts don’t cover it.

The majority of respondents in the following subsectors reported finding it more difficult to pay the national minimum wage because of underfunded grants and contracts.

• Social care
• Employability
• Youth services
• Housing and accommodation
• Homelessness support
• Support for people in the criminal justice system
• Mental health services
• Support to asylum seekers & refugees
• Community transport
• Carer support
• Substance use and addiction

A minority of organisations in each of the other subsectors said that it is becoming more difficult to pay the statutory minimum wage without subsidising from other funding.

Voluntary real living wage

The voluntary real living wage is set by the Living Wage Foundation. It’s based on the cost of living. It’s currently £12 for workers outside of London, and £13.15 for workers in London.

A majority of respondents (61%) said that it is becoming more difficult to pay the real living wage without subsidising from other funding.

Volunteer recruitment and management

When it comes to volunteering, the picture is more complicated. In some cases, organisations are saving costs by cutting back on volunteer management and support. This makes it more difficult to recruit and retain volunteers.

22% of respondents said they are responding to grant and contract underfunding by taking on more volunteers. Almost a quarter (23%) said they are expanding the duties of their volunteer roles.

Changes to volunteer roles, recruitment and management need to be carefully considered and managed.

Our Time Well Spent 2023 research found volunteer satisfaction rates have fallen since 2019. A higher proportion of volunteers also feel their roles are becoming too much like paid work, or that organisations have unreasonable expectations of them.

Our Time Well Spent 2023 research revealed there has been a rise in public sector volunteers since 2019.

However, while satisfaction was high among public sector volunteers (87%), they tended to be less satisfied than those volunteering for civil society organisations (94%). This difference was also found in our 2019 Time Well Spent research. You can find more detail in our volunteering in the public sector report.

Volunteer recruitment, retention and management require budget and resources. Engaging more volunteers is often not an effective way of increasing capacity or reducing costs.

Volunteers are increasingly concerned about the cost of volunteering. Reimbursing volunteers’ expenses can help address this barrier, but again this costs money.

Our survey found that underfunded grants and contracts are forcing charities to withdraw from public service delivery altogether.

This means there is a shrinking market of available providers, so commissioners have less choice when commissioning services. This drives down quality and innovation as remaining providers have less incentive to stand out.

• 31% have decided not to bid for a new grant or contract, or are considering not bidding.
• Just over a quarter (26%) have decided not to re-tender for the service that they currently deliver or are considering not re-tendering.
• 12% have handed back a grant or contract before it finished, or are considering doing so, despite the legal and financial implications. Organisations only take this step when the alternative is shutting their doors for good.

In many cases, charities are the only ones delivering specialist services. If they withdraw from public service delivery people may be left with significantly less support.

This charity is certainly not alone in making these difficult decisions.

We asked respondents to tell us about their relationships with commissioners. We wanted to explore the interaction between better commissioner relationships and increased funding for grants and contracts.

Encouragingly, 69% of respondents said that they have good or very good relationships with at least some of their commissioners. This includes relationships that are collaborative, strategic and open, with shared and well-defined goals.

30% of respondents said at least one of their relationships with commissioners is poor or very poor.

This included relationships feeling ‘top down’ or commercially driven and failures in communication.

The majority of respondents have at least one good relationship with their commissioners. However, good relationships with commissioners don’t seem to translate into funding for charities’ services.

57% of organisations that reported none or a minority of their contracts had been uplifted described their relationships with commissioners as 'good' or 'very good'.

No matter the proportion of contracts that were uplifted, a similar proportion of organisations reported poor, neutral, and good relationships with their commissioners.