The cost of residential care for looked-after children in England has reached crisis levels. Total spending climbed to £3.1 billion in 2023-24—up from £1.6 billion in 2019-20. This near-doubling in five years represents one of the fastest cost increases in any area of public spending.
Behind these stark figures lies a complex story of market failure, systemic pressures, and structural challenges that threaten the sustainability of children's care provision. Understanding these cost drivers is essential for providers, commissioners, and policymakers seeking viable solutions.
The Scale of the Cost Explosion
The National Audit Office's September 2025 report documents the trajectory. Between 2019-20 and 2023-24, average costs per child in residential care increased by 33%—from £239,800 to £318,400 annually. This increase far outpaces general inflation, suggesting systemic market problems rather than simple cost-of-living adjustments.
The rate of increase is accelerating. Between 2022-23 and 2023-24 alone, costs rose 12%. If this trajectory continues, the sector faces annual expenditure exceeding £4 billion by 2026-27—an unsustainable burden for local authority budgets already under severe strain.
Regional Cost Variations
Cost increases aren't uniform. Some local authorities face particularly acute pressure. In certain areas, individual placements cost more than £500,000 annually. At the extreme, some specialist placements exceed £1 million per child per year—with 36 such placements recorded as of September 2025.
These ultra-high-cost placements typically involve children with highly complex needs requiring intensive one-to-one or even two-to-one staffing ratios, plus specialist therapeutic input. While numerically small, they represent significant budget pressure and highlight capacity shortages for the most challenging presentations.
What's Driving Costs Up?
Multiple intersecting factors create upward cost pressure:
Supply-Demand Imbalance
Despite rapid expansion—4,000+ registered homes as of 2024-25, up 15% in one year—demand continues outstripping supply. The 9% decline in foster care households between 2020-2024 means more children require residential placements. With 2,165 fewer fostering households and complex needs increasing, the pressure on residential care intensifies.
This supply shortage gives providers pricing power. Local authorities competing for scarce places have limited negotiating leverage, particularly for urgent placements or children with complex needs that fewer homes will accept.
Increasing Complexity of Needs
The proportion of children's homes supporting complex needs jumped from 66% in 2023 to 80% in 2025. These children require more staff, higher staff-to-child ratios, specialist training, and therapeutic interventions—all of which increase operational costs.
Only 16% of homes can support children with complex health needs, yet demand for such placements grows. This capability gap means the few providers who can support very complex presentations command premium rates.
Workforce Costs and Turnover
With 29% annual staff turnover, homes face continuous recruitment and training costs. Agency staff usage—though now subject to tighter regulation—adds expense. Pay rates must compete with other sectors, yet 14-16% of staff in some provider categories earn below the National Living Wage.
The 2025 workforce census shows 46,330 staff employed sector-wide—up from 39,300 in 2023. This 18% workforce expansion in two years represents significant investment, all reflected in placement costs.
Market Structure and Profitability
The private sector now operates 84% of children's homes. This consolidation brings both efficiencies and challenges. The National Audit Office notes that profit margins in the sector—while difficult to measure precisely due to complex corporate structures—are substantial enough to attract continued investment despite cost pressures.
However, the relationship between profit and cost inflation is complex. While providers must cover legitimate operational costs, the market's structure—with limited transparency and high barriers to entry—enables pricing that commissioners struggle to challenge effectively.
Property and Geographic Factors
The concentration of 26% of homes in the North West reflects property cost economics. Lower acquisition and operational costs in certain regions enable providers to achieve better margins. However, this geographic mismatch forces expensive out-of-area placements, adding transport and family contact costs.
Impact on Local Authority Budgets
For local authorities, soaring residential care costs create impossible choices. With finite budgets and statutory duties to provide appropriate placements, something must give. Commissioners report:
- Reduced spending on preventative services to fund placement costs
- Drawing down reserves to maintain provision
- Accepting placements far from children's home areas to secure lower rates
- Carrying significant overspends in children's services budgets
The Institute for Government's October 2025 performance tracker notes that while the number of looked-after children has remained relatively stable, placement costs continue rising—suggesting market dynamics rather than demand increases drive the crisis.
Key Concern: The NAO warns that rising costs may force local authorities to use cheaper, potentially inappropriate placements or reduce investment in services that prevent children entering care in the first place—creating a vicious cycle.
Government Response and Reform Efforts
The government has announced significant funding:
- £270 million Children's Social Care Prevention Grant (2025-26, extended to 2028-29)
- £557 million for broader social care reform (2025-26 to 2027-28)
- £563 million capital funding for new provision (2021-2029)
These investments target both immediate capacity expansion and longer-term systemic reform. The capital funding specifically aims to increase local authority-operated provision, potentially introducing more competition and moderating market prices.
Regulatory Measures
New statutory guidance introduced in late 2024 restricts excessive agency staff use—one cost driver. Ofsted's September 2025 prioritization policy considers geographic need when processing applications, potentially moderating the concentration that drives placement costs up through supply-demand imbalance.
However, regulation alone cannot solve structural market problems. Unless supply increases in areas where children live, commissioners will continue paying premium rates for scarce placements.
Strategic Responses for Providers
For registered providers, the cost crisis presents both challenges and strategic opportunities:
Operational Efficiency
Digital care management systems enable significant efficiency gains. Streamlined documentation, automated scheduling, integrated compliance tracking, and data-driven resource allocation all reduce administrative overhead—allowing staff focus on direct care while controlling costs.
Providers using integrated platforms report 15-20% reductions in administrative time, directly impacting the bottom line while improving staff satisfaction and retention.
Strategic Workforce Investment
While higher pay increases costs short-term, reducing the 29% turnover rate delivers substantial savings. Recruitment, training, and agency cover costs often exceed the investment needed for competitive pay and supportive working conditions.
Providers who successfully build stable teams can accept more challenging placements confidently, commanding appropriate rates while delivering consistent quality.
Capability Development for Complex Needs
The 80% of homes supporting complex needs represents market response to demand. Providers who invest in specialist capabilities—therapeutic approaches, trauma-informed care, mental health support—can differentiate themselves and justify sustainable pricing based on outcomes rather than just competing on cost.
Only 16% of homes handle complex health needs. Building this capability creates competitive advantage in an under-supplied market segment while genuinely meeting critical need.
Enhanced Commissioner Relationships
Transparent, data-driven engagement with commissioners builds trust and supports sustainable pricing. Providers who can demonstrate outcomes, efficiency, and quality through robust data are better positioned to negotiate appropriate rates than those relying on opaque pricing.
Digital platforms that generate real-time performance dashboards, outcome metrics, and compliance evidence support these conversations with commissioners increasingly demanding value demonstration.
The Path Forward
Addressing the cost crisis requires coordinated action across multiple fronts:
Increase Appropriately Located Supply
Capital funding must prioritize geographic areas where children live but homes are scarce. More local provision reduces transport costs, supports family contact, and increases commissioner choice—all moderating cost pressure.
Improve Market Transparency
Better data on provider costs, profit margins, and outcomes would enable more informed commissioning and evidence-based pricing. Current opacity disadvantages commissioners and enables excessive pricing.
Restore Preventative Investment
The vicious cycle of cutting prevention to fund placement costs must be broken. Early intervention and family support prevent escalation to residential care, reducing both human cost and financial burden.
Build System Capability
Expanding the specialist workforce, enhancing foster care capacity, and developing community-based alternatives all reduce pressure on residential care—moderating costs through genuine alternatives rather than forced placement choices.
Conclusion: Sustainability Requires System Change
The near-doubling of residential care costs to £3.1 billion in five years is unsustainable. Without intervention, projections suggest £4 billion+ annual costs by 2026-27—consuming ever-larger shares of children's services budgets and crowding out preventative work.
For providers, the challenge is delivering quality care while maintaining financial viability in a market characterized by systemic supply-demand imbalance, increasing complexity, and workforce pressures. Success requires operational excellence, strategic capability development, and transparent commissioner engagement.
For the system overall, addressing cost inflation demands expanding appropriately located capacity, improving market transparency, restoring preventative investment, and building specialist capabilities. Band-aid solutions won't suffice—structural market reform is essential.
The stakes are high. Current cost trajectories threaten both financial sustainability and care quality. Children in residential care deserve stable, therapeutic environments delivered by well-supported staff. Achieving this while controlling costs requires evidence-based strategies, efficient operations, and genuine system-level collaboration.
Take Action: If you're working to control costs while maintaining quality, discover how OVcare's platform helps providers streamline operations, reduce administrative burden, and demonstrate value to commissioners through data-driven performance tracking.
Sources:
- National Audit Office, Managing Children's Residential Care (September 2025)
- Ofsted, Annual Report 2024/25 (December 2025)
- Department for Education, Children's Homes Data (2025)
