The direct, indirect and unfunded costs of taking a small business grant through to delivery

The true cost of a grant project includes more than the invoices shown in an application. English businesses should count application work, match funding, cash flow, ineligible expenditure, reporting and continuing operation before deciding whether an opportunity is worthwhile.

What to take away

• Count application work, match funding, cash flow, ineligible costs and aftercare before deciding if a grant is worthwhile.
• An award described as 50 per cent funding may only cover half of eligible costs, subject to a cap.
• Grant payments in arrears can force a business to finance suppliers and wages for weeks or months.
• VAT recoverability and grant eligibility depend on the transaction, activity, applicant and agreement.
• Include licences, servicing, insurance, staffing and evaluation costs after the funded period ends.

Application costs

Record the time spent checking eligibility, collecting quotations, building forecasts, negotiating with partners and approving the submission. Add paid accountancy, legal, technical or grant-writing support where used.

Treat these as decision costs unless the live scheme expressly permits them in the claim. Do not backdate work or assume that an award will cover activity completed before its authorised start.

Use a simple calculation: hours multiplied by the person's internal hourly cost, plus third-party fees and necessary expenses. Internal cost is not the same as the price charged to customers. Apply one documented method consistently.

Direct project costs

Direct costs can be traced to a project activity. They may include staff assigned to the work, a contractor, materials, equipment, software or testing. Eligibility still depends on the programme.

For each line, record the description, quantity, rate, quotation, supplier, timing and evidence needed. A heading such as "technology" is too vague for control. Identify the licence, device or service and explain its role.

The Cabinet Office Model Grant Funding Agreement includes defined funded activities, eligible expenditure and evidence provisions. It is a central government model, not a substitute for the applicant's scheme rules or signed agreement.

Indirect and management costs

Projects use finance, management, premises and systems even when those resources are shared. Some schemes permit a calculated overhead; others restrict it or provide a fixed method. Follow the stated basis.

Keep project management and compliance visible. Somebody must review suppliers, maintain records, monitor milestones, answer funder questions and prepare claims. If these hours are not eligible, they still belong in the commercial cost.

Match funding and unsupported costs

An award described as 50 per cent funding does not necessarily pay half of the whole project. It may pay half of eligible costs, subject to a cap. The business funds the balance, every ineligible item and any excess above the cap.

Map each project line to its funding source. Confirm that cash, loans or third-party contributions are available when required and allowed by the programme. Declare other support where requested. The government's grant-agreement guidance expects central government agreements to address eligible expenditure, reporting and double funding.

Cash flow cost

If grant payments arrive in arrears, the business may finance suppliers and wages for weeks or months. Model the monthly bank movement and the lowest cash point. Include interest and facility fees if borrowing is genuinely expected, but check whether those finance costs are eligible before adding them to a claim.

Business.gov.uk guidance recommends a 12-month cash flow forecast and distinguishes payment timing from invoice timing. Extend the model when the project or payment tail lasts longer.

VAT and tax

Show VAT separately. The current GOV.UK VAT page gives a standard rate of 20 per cent for most goods and services, but recoverability and grant eligibility depend on the transaction, activity, applicant and agreement.

Grant tax treatment also depends on the facts. HMRC's grant and subsidy guidance distinguishes revenue and capital grants. Ask a qualified accountant to assess the proposed award and related expenditure.

Costs after the project

Include licences, servicing, insurance, staffing, data retention, asset conditions and evaluation after the funded period. Test whether the result remains affordable when the grant stops.

The decision total should therefore be the application cost plus the full delivery cost plus finance and aftercare, less only funding that is sufficiently certain and permitted. No internal links are active in this cost guide. Finance and tax reviewers must approve it before publication.

Before you act

• Record time spent on eligibility, quotations, forecasts and partner negotiations.
• Apply one documented method for internal hourly costs consistently.
• Map every project line to its funding source and confirm availability.
• Model monthly bank movement and the lowest cash point.
• Show VAT separately and check recoverability with a qualified accountant.
• Test whether the result stays affordable once the grant stops.

Common questions

What costs should a business count beyond the invoices in a grant application?

Application work, match funding, cash flow, ineligible expenditure, reporting and continuing operation. Record time spent checking eligibility, collecting quotations, building forecasts, negotiating with partners and approving the submission, plus paid accountancy, legal, technical or grant-writing support where used.

How should a business treat application costs when claiming?

Treat them as decision costs unless the live scheme expressly permits them in the claim. Do not backdate work or assume an award will cover activity completed before its authorised start. Calculate hours multiplied by internal hourly cost, plus third-party fees and necessary expenses.

What should be included in the total decision cost of a grant project?

The decision total should be the application cost plus the full delivery cost plus finance and aftercare, less only funding that is sufficiently certain and permitted. Include licences, servicing, insurance, staffing, data retention, asset conditions and evaluation after the funded period.