Third Sector Scheme: code of practice for funding the third sector

Who is this Code of Practice for?

The 5 key principles and the associated guidance set out within this document are for the third (including voluntary) sector organisations, Welsh Government funding departments and other public sector funding bodies supporting the sector.

Why is it important to use the Code and its principles?

• To develop better public services in Wales through the development of equal partnerships with third sector stakeholders.
• To encourage consistency in the approach of public bodies funding the third sector. The Code also provides clear guidance on using the 5 principles.
• To encourage the development of better funding relationships to ensure the most effective use of public funds.

How to apply the principles?

This is a set of interconnected principles which are designed so that none has priority. There is no need to start in any particular place.

How the Code has been developed?

The Code of Practice forms part of the statutory Third Sector Scheme. It has been co-produced with both the third sector and public sector through the Funding and Compliance sub-committee of the Third Sector Partnership Council to ensure it is useful, relevant and up to date.

The Code will be reviewed on an annual basis.

Ensuring that we have meaningful engagement between funder and third sector organisation at the earliest opportunity and throughout the funding cycle (including policy development) will help to make our services better designed and delivered for end beneficiaries. This will also mean they are more likely to solve the right problem and deliver the right outcomes.

What are the benefits of this principle? 

Thinking for the long term

Developing relationships with your stakeholders across sectors will make policy development more efficient and effective for the longer term. As third sector organisations often work closely with end beneficiaries and service users, they are uniquely placed to understand and articulate fundamental, underpinning issues that need to be addressed.

Prevention

Early interventions to help individuals can stop problems occurring or getting worse and requiring acute action. This is good for the individual/s involved and can also save public bodies money down stream. These savings can be used on other objectives and priorities. The third sector has a trusted relationship with its end beneficiaries. These are often people who may not trust the public sector. Early engagement with these groups helps to reduce the need for acute action from public services.

Integration

Working closely with stakeholders in the third sector will help ensure our policy decisions and service design take into account the differing needs of all. This will create a truly joined up process, producing better outcomes. There is a risk that public sector funders often take a single issue-based approach to service delivery. To amplify the effectiveness of our multiple interventions, public bodies need to understand the impacts their activities can have on each other’s objectives. The third sector can often act as the glue between interventions because of their understanding of local needs and the lived experience of current and potential service users. Engaging them early allows stakeholders to come together and work together for the benefit of individuals and communities; enabling joined up processes and better agreed outcomes.

Collaboration

Acting together with others (from different sectors, and communities) helps us all meet our objectives better and bring fresh perspectives into service design. A strong transparent partnership with stakeholders, which is built on trust, will enable flexibility in the relationship and help all parties to adjust when changes are necessary.

Involvement

Involving all parties (including communities and end beneficiaries) in the policy development or funding process as early as possible will bring new ideas based on lived experience, and therefore better services which properly address the needs of the funder, the service providers and the service users. As they are already working closely with communities and end users, engaging early with the third sector can help this process of involvement and make it truly reflective of an area’s diversity.

How do we apply this principle?

To apply this principle, we need to build strong relationships with our stakeholders and have regular contact with them. This can be done in a number of ways, through stakeholder or consultation events, through application and assessment processes, and/or by establishing a regular monitoring routine or a regular meeting schedule.

Our funding relationships need to be developed in an environment of trust, transparency and creating a safe place for open conversation. Under the Third Sector Scheme, third sector organisations should be consulted early, openly and meaningfully on policy changes and on new policy developments. There should be a 12-week consultation period on such changes.

It is expected that a minimum 12-week notice period should be given before any policy changes or decisions are made which would lead to a previously unexpected continuation, withdrawal or significant reduction of funding. If funding is being withdrawn and redundancies are required, then the earliest possible notice should be given.

It is important to recognise that third sector organisations may need support to ensure that they have capacity to take part in dialogue around the funding cycle. It is also important that funding applications, tender processes and monitoring activities are proportionate to the value of the grant or contract.

The Welsh Government is committed to working with the sector to identify areas of expertise and support organisations and individuals to take the lead in or contribute to the implementation of new policies. Funding mechanisms will be designed with this aim in mind, and the funding of the third sector infrastructure bodies, in particular, will include building the capability of third sector organisations at all levels to ensure effective delivery of their services.

Ensure we are basing our funding decisions on a broad consideration of social, cultural, environmental and economic value outcomes.

Funding decisions should be based, where possible, on a shared identification and analysis of the issues, the outcomes we want to see and the potential ways of achieving them together. This means not always basing our funding decisions solely on the financial and competitive processes. Having a broader consideration of social, cultural and environmental value and outcomes with a greater emphasis on partnership working and collaboration where appropriate. The third sector is key in this sense as they are value driven, motivated by social, cultural or environmental objectives and committed to reinvesting their surpluses to further their social aims and for the benefit of people and communities in Wales.

What are the benefits of this principle?

Thinking for the long term

The third sector brings an in-depth understanding of communities’ changing needs that helps us to set the right outcomes for the future. Working with the sector can also deliver a broader set of outcomes (beyond the original activity), than other funding routes. They can bring flexibility and innovation, supporting local wealth preservation, skills creation and good quality local employment. This often enables individuals to change their lives and reduce their long-term reliance on public services.

Prevention

The third sector offers so much more than simple service delivery. The sector reinvests surpluses into additional support for their beneficiaries. They provide social, cultural, economic and environmental benefits that may not be realised when working with organisations from other sectors.

Integration

Public sector bodies will get much more than they pay for, a third sector partner may employ those further from the labour market, they may involve volunteers who will gain transferable skills, or they may invest their surplus to produce environmental benefits.

Collaboration

Third sector organisations hold existing relationships of trust with communities, enabling the realisation of positive outcomes for those who may be frequently excluded from mainstream services, as well as with other stakeholders such as health professionals. Tools like social return on investment can make these additional benefits more visible and demonstrate the wider value for money achieved.

Involvement

Research and evidence shows third sector organisations have a deeper understanding of the needs and experiences of communities which is gained by working closely with beneficiaries. By involving the third sector early in our service design, we can also utilise the lived experience of those beneficiaries. This helps us to tackle the right problems from the start.

How do we apply this principle?

Building a good relationship with your stakeholders and ensuring you have early and continuous dialogue with the third sector when developing policy, demonstrates the funder’s recognition of added value and fresh ideas the sector can bring to the table.

We need to recognise that there can be a challenge between the available budget and what outcomes can be achieved. If the budget is limited, then we must be realistic in expectations around the level and amount of activity which can be delivered and the impact on the end beneficiaries. Through open and effective conversations, this can be determined, and we can take on board each organisation’s situation, priority needs and realistic costs to deliver an activity.

Setting objectives that are Specific Measurable Achievable Realistic and Time-limited (SMART) will enable effective monitoring of performance. This becomes increasingly important if grants are awarded on a longer-term basis which requires benchmarking to be undertaken before extending the funding agreement.

With procured funding methods, robust consideration of non-financial factors in the bid scoring and contract awards process is vital, alongside the financial, to ensure real value for money in its broadest sense.

Where a grant is the appropriate funding mechanism consideration of longer-term funding, if appropriate, will enable outcomes to become embedded in the community being supported. Which in the long term could result in cost savings as it allows for a preventative agenda to be adopted. 

Ensure funders consider all options and choose the appropriate mechanism(s) that will effectively deliver agreed outcomes throughout the funding period.

Co-operation between Welsh Government and other funders will result in better outcomes for people and communities in Wales. In many cases these are through formal funding relationships to ensure the effective distribution of public funds and realisation of agreed outcomes. By choosing an appropriate mechanism the sector is strengthened, and wider social benefits can be generated.

What are the benefits of this principle?

Thinking for the long term

Using a mechanism which supports long-term investment, both in terms of time and resources, benefits both funder, funded body and community over the life of the funding and into the future.

Prevention

Consideration of all options for a funding programme ensures the efficient and effective use of public funding. By selecting the most appropriate funding mechanism we can create stability and enable organisations to move towards a model which helps to prevent the need for more acute services.

Integration

One of the third sector’s strengths is the ability to offer a range of solutions to meet multiple objectives. For example, mental health support through volunteering benefits not just the volunteer but the recipient and wider community.

Collaboration

Working with the third sector and other stakeholders, where appropriate, in developing the funding mechanism has the potential to allow other funders to complement rather than duplicate activity and create added value.

Involvement

It is essential to ensure that all organisations have equitable access to funding opportunities and that application processes are appropriate for the target audience. This helps to ensure that funding processes are truly inclusive.

How do we apply this principle?

Consider simple changes, which can have significant impact. For example, avoiding large procurement lots, when more, smaller lots could offer much more diversity in bidders, leading to fresh ideas and innovation in delivery.

Using longer-term funding agreements, where appropriate, can reduce administrative burdens and help funded bodies provide a better service. Longer contracts or awards enable more effective planning, and mean organisations can offer better contracts to staff, helping to recruit and retain expertise.

Longer term contracts enable a degree of stability. We should also consider recognition of wage growth and other inflationary impacts. Smaller third sector organisations are particularly at risk of not factoring these into bids. This can lead to issues with long term delivery as the contract progresses.

We should recognise that some organisations may need to have funding recognised as core, rather than project funding. 

Recognising the full costs of the delivery of services is vital (Full Cost Recovery). third sector organisations need to be open and transparent about these costs, and funders need to be clear and consistent as to which costs can be included. We understand that different organisations will have different views on this calculation, this is why funders should outline exactly what they expect. Both third sector organisations and funders have a responsibility to ensure these costs will be met. If this is not achieved, then unfunded costs will have to be borne by the organisation or another funder. Failure to address these costs could place service delivery at risk. 

Consideration should be given to whether payment in advance is appropriate. Although it is Welsh Government policy to pay our funding in arrears, there is a mechanism to allow payment in advance where third sector organisations meet eligibility criteria. 

Funders should adhere to the prompt payment policies of their individual organisations. Welsh Government best practice is to pay within 10 working days of receipt of a correctly addressed, valid invoice or 20 business days for a grant claim. 

Funding should, where possible, allow third sector organisations to become real living wage employers. This could mean that services cost more in the short term, but the quality and consistency of the service is likely to be higher and offer greater value for the money in the long term.

Once funders have identified the correct funding mechanism, it should offer flexibility and allow both parties to respond to social or economic changes.

Ensure fairness of access for all, creating a funding environment that is proportionate, remove barriers to inclusion and builds support.

Our communities need a range of accessible services to meet a variety of individual and collective needs; a range of differing provisions allows us to meet the differing needs of users in order to achieve equal outcomes. We must therefore ensure fairness of access to funding with funding practices that are proportionate, remove barriers to inclusion and build support for organisations who find it more difficult to engage. We must create a funding environment that promotes trust, transparency and mutual respect that results in an eco-system of varied services. This should also encourage collaboration where appropriate.

What are the benefits of using this principle? 

Thinking for the long term

This is about ensuring we help to build resilience in our third sector service providers. Providing access to longer term funding agreements can help organisations plan better and avoid the stop start nature of services funded on an annual basis, which third sector organisations have unequal ability to absorb. This provides better value for money and prevents the loss of experienced practitioners due to funding uncertainty.

Prevention

In order to take preventative action, we must understand what our communities need and the risks they are facing. Working with a variety of partners, with a range of different perspectives will ensure we are considering the best options for now and the future. Ensuring our policy development and funding opportunities are as inclusive as we can make them will help us to achieve this.

Integration

Many third sector organisations have been established to help deal with specific problems. They are trusted by local people and through local networks can often help public sector bodies and public services to reach those in need. This makes our services more effective.

Collaboration

Encouraging and facilitating collaborative bids can help smaller or less experienced organisations to access funding through grants or contracts, ensuring all third sector organisations can benefit from public funding. This principle is aimed at reducing the barriers to accessing funding. This will lead to a more effective, vibrant, diverse and resilient third sector in Wales.

Involvement

Involving groups whose voices are seldom heard and those with specialist knowledge of our target beneficiaries leads to new ideas and better, more inclusive services.

How do we apply this principle?

Funding departments should carefully consider what their funding needs to achieve, who are the beneficiaries, who are the potential service deliverers and what are the best ways to reach both? Can all potential applicants be reached through existing stakeholders, does the funding opportunity need to be advertised in a new way, such as through Funding Wales, or other similar online platforms; or through an existing public or third sector network.

If this is a new round of existing funding, can access to it be improved to bring in new applicants who may have new ideas? Can its application process be simplified to help smaller third sector organisations apply? We must ensure that our funding processes are proportionate and do not create unintended barriers which prevent access by some groups. Can a small grant scheme or smaller procurement lots be included.

Are partnership applications allowed or can they be. Partnerships or collaborative applications can be a way of helping less experienced organisations to gain access to funding. These organisations can also gain valuable experience to help them apply on their own next time. If partnership applications are allowed or encouraged, does the application process and timeline facilitate the development of such partnerships?

Grassroots third sector organisations can often engage beneficiaries who would not work with larger organisations or the public sector. This may be because of a language barrier, a mistrust of larger institutions or a bad experience in the past. If we want truly inclusive funding programmes which produce the best outcomes, we should do everything we can to involve everyone by making funding accessible to these grassroots organisations.

It is good practice to ensure that all your stakeholders can access funding. Reasonable adjustments such as offering easy read versions of application forms and scheme guidance can help some groups access funding.

Funding Managers should, where applicable, ensure that all third sector organisations involved in a funded project or contract are fairly funded for their contributions, including those contributing to referral pathways; challenging applicants where this is not clear in applications or tenders. Similarly, clarity should be sought on if and how applicant organisations have got pre-agreement with stakeholder/community-based organisations for any activities they are referenced against within the project or service design e.g. for referral pathways, publicity and even delivery. Reviewing budgets to ensure they reflect such partnerships is integral.

Ideally, this principle should be considered at the same time as Early and Continuous Dialogue.

What happens if funding levels change?

Any increases in funding levels, due to the cost of living or inflation, should be applied fairly, equitably and as soon as possible to third sector funding recipients where appropriate.

When funding is under pressure or is to be reduced, then funding departments may also have to reduce funding to third sector organisations. As much notice as possible, ideally a minimum of 12 weeks, should be given when there are plans to reduce funding.

Ensure that if evidence or circumstances support the need, both funder and funded organisations can suggest adjustments for joint agreement.

Things will sometimes change during the lifetime of your funding relationship (especially if it’s long-term). There needs to be a willingness, where appropriate, from both the funder and funded organisation to jointly consider re-evaluation of outcomes, activities, timings, and funding patterns if evidence, or circumstance, suggest a need. This should be achieved through an agreed and robust process which is decided at the start of the funding agreement.

What are the benefits of being flexible?

Thinking for the long term

Allowing flexibility in funding relationships, where we can, will enable those relationships to grow and develop for the long term. Being as flexible as we can, will also help our service delivery to adapt throughout its life cycle. This will help us deliver better, more effective services.

Prevention

Preventative action is all about identifying problems early and taking appropriate action to make sure that they are tackled before they become worse. Flexibility can be key to helping to adapt our policies, funding arrangements and our services to meet changing needs.

Integration

Flexibility in our funding arrangements will help us to ensure that we are able to complement other activity in our policy areas and avoid duplication of effort. We can use this flexibility to make sure we don’t undermine or offset the effects of other services being delivered to our beneficiaries but bring added value and improvements.

Collaboration

Flexibility is essential when working with other organisations. It helps to ensure that everyone gets what they need from the arrangement and stays jointly focused on the same positive outcomes. It also helps us to work better with each other and to understand how our actions are impacting on others.

Involvement

Using flexibility to make small changes to encourage involvement from a more diverse group of stakeholders can help us to get the best results from our limited resources.

How do we apply this principle?

Flexibility is a key component of any good funding relationship. Funders want to ensure services / funded activities are meeting the needs of beneficiaries. It is vital that the funding relationship allows an open and safe space for both funders and service providers to regularly review how the funded service is working. We recognise that flexibility is not appropriate or possible in all circumstances.

Flexibility over the life of a project can give funded organisations the confidence (including confidence and trust in the funder) and ability to adapt and innovate as their knowledge and lived experience informs their practice and service delivery, leading to better (and potentially more cost-effective) outcomes for end-users.

Building in flexibility to the purposes of grant can ensure that when things change, funding agreements can be altered to take this into account. This allows us to respond to changes in demand and not waste money on continuing to offer services which are no longer required.

A perceived lack of flexibility can mean risking the service not being delivered. For example, if something changes which means that a service is no longer deliverable, we should consider whether adjustments can be made which will allow the service to continue.

Good relationships are vital in ensuring that flexibility in funding is possible. Without a strong, meaningful and continuing dialogue between funder and funded body then the trust necessary to consider (or request) flexibility does not develop. This may prevent third sector organisations from bringing up issues or result in a lack of confidence in speaking openly and productively.

Key definitions

For Welsh Government grant managers and policy officials reading this document, please ensure you also refer to Grants Centre of Excellence guidance.

When considering your funding mechanism, you may want to consider Procurement or Grant Funding: Signposts to Deciding.

What is hypothecated and un-hypothecated grant funding?

Grant funding is either sometimes classified as hypothecated and un-hypothecated:

• Hypothecated grant is ring fenced, project focused and has to be spent in accordance with the specific purposes agreed at the grant award stage.
• Un-hypothecated grant is not ring fenced and receiving bodies can spend it at their discretion -this includes Revenue Support Grants paid to local authorities. Very few grants are awarded on an un-hypothecated basis.

What is project funding?

Project funding can be used for revenue costs e.g. salaries and day to day running costs, and/or capital costs e.g. costs associated with the development or purchase of capital items such as buildings. Funding for project activities is time limited. Where a distinct project is time limited (often less than 12 months) and outside the cycle of a financial year, three months’ notice of funding prior to project commencement will not always be realistic or desirable.

What is core funding? 

An organisation has 2 types of costs. Direct or fixed costs which do not change with the number of projects or services delivered, e.g. rent or business rates. Overhead or variable costs are those which change when the number of projects or services delivered increase or decrease e.g. staff costs.

Core funding is the contribution a funder makes towards overhead or every day running costs of an organisation.

Eligible and ineligible costs should be clearly set out in the grant scheme guidance or related documentation.

Full cost recovery

Full cost recovery means securing funding for all the costs, involved in running a project, direct and overhead, involved in running a project. This means apportioning a proportionate share of an organisation's direct costs to the overall cost of delivering the project.

As each project will have different demands on each component of the organisation’s overheads it is recommended a separate calculation for each project is undertaken.

Not recovering the full costs of a project creates a deficit which has to be met through additional fundraising or through subsidy from an organisation’s unrestricted funds.

As a starting point for more information on full cost recovery visit The Knowledge Hub.

Social value

Social value is the recognition that activities have an impact on social, economic, cultural and environmental factors. Many of these impacts are difficult to quantify and monetise.

There are many ways to measure the impact, but all measure the change the activity has on those who are experiencing it. As such it is a useful tool for both outlining a case for additional funding as well as identifying areas of greatest impact.

As a starting point for more information on social value visit. Social Value Cymru.

Procurement

The Welsh Government’s definition of procurement is the process whereby organisations meet their needs for goods, services, works and utilities.

Welsh public sector procurement is a powerful lever with ability to affect sustained change to achieve social, economic, environmental and cultural outcomes for the well-being of Wales. The Wales Procurement Policy Statement (WPPS), sets out the principles which should be followed when undertaking a procurement using public funding.

The Welsh Government provide further information on how public sector procurement should be conducted and joint bidding for public contracts.

Compliance with the Code of Practice

Before bringing any matter to the Third Sector Partnership Council (TSPC) Funding and Compliance sub-committee, organisations are asked to consider the Welsh Government’s complaints process.

The Funding and Compliance sub-committee of the Third Sector Partnership Council is responsible for considering compliance with the Code. The sub-committee will review concerns to identify any systemic issues raised by third sector organisations.

Compliance with the Code is referenced in Welsh Government Grant Minimum Standards. The Minimum Standards are internal guidance to support Welsh Government grant managers, drawn from reliable evidence, experience and best practice in grants management. As described, they are the minimum standards Welsh government grant managers are expected to work at. Many grant managers will therefore adapt and build on them, as appropriate, to reach the highest quality delivery of grant funding.

Organisations can contact the sub-committee either through thirdsectorqueries@gov.wales or via funding@wcva.cymru.

All Welsh Government departments must comply with this Code of Practice.

The Welsh Government seeks to promote and influence best funding practice and advocates that other bodies funding the third sector organisations adopt the principles of this Code.

Where the Welsh Government has provided hypothecated funding or funding through a framework agreement, grant recipients will be required to comply with this Code of Practice.

In January 2025 the Welsh Government Cabinet reaffirmed commitment to the Third Sector Scheme and this Code of Practice.

The Welsh Government must operate within the principles outlined in Managing Welsh Public Money.

Bodies who must accordingly comply with the Code in respect of hypothecated or framework funding include:

Local government: County Councils and County Borough Councils 

• Blaenau Gwent County Borough Council
• Bridgend County Borough Council
• Caerphilly County Borough Council
• Carmarthenshire County Council
• Ceredigion County Council
• City and County of Swansea
• City of Cardiff Council
• Conwy County Borough Council
• Denbighshire County Council
• Flintshire County Council
• Gwynedd Council
• Isle of Anglesey County Council
• Merthyr Tydfil County Borough Council
• Monmouthshire County Council
• Neath Port Talbot County Borough Council
• Newport City Council
• Pembrokeshire County Council
• Powys County Council
• Rhondda Cynon Taf County Borough Council
• Torfaen County Borough Council
• Vale of Glamorgan Council
• Wrexham County Borough Council

Welsh Government sponsored bodies

• Arts Council of Wales
• Local Democracy and Boundary Commission for Wales
• National Library of Wales
• National Museum Wales
• Natural Resources Wales
• Qualifications Wales
• Sports Wales

National Health Service

Local health boards

• Aneurin Bevan University Health Board
• Betsi Cadwaladar University Health Board
• Cardiff and Vale University Health Board
• Cwm Taf Morgannwg University Health Board
• Hywel Dda Health Board
• Powys Teaching Health Board
• Swansea Bay University Health Board 

NHS trusts

• Public Health Wales
• Velindre University NHS Trust
• Welsh Ambulance Services NHS Trust
• Llais: your voice in health and social care

Fire and rescue authorities

• Mid and West Wales Fire and Rescue Service
• North Wales Fire and Rescue Service
• South Wales Fire and Rescue Service

National park authorities

• Bannau Brycheiniog National Park Authority
• Pembrokeshire Coast National Park Authority
• Snowdonia National Park Authority

Educational bodies

• The Education Workforce for Wales (previously General Teaching Council for Wales)
• Estyn
• Higher Education Funding Council Wales
• Qualification Wales

Other public authorities

• Audit Wales
• Auditor General for Wales
• Public Services Ombudsman for Wales
• Social Care Wales
• Welsh Revenue Authority

Commissioners for Wales

• Children’s Commissioner for Wales
• Older People's Commissioner for Wales
• Welsh Language Commissioner
• Future Generations Commissioner for Wales