Studies are reviewed which contribute information on the costs and benefits of different forms of residential service for people with severe mental handicaps including ordinary housing, larger community services and traditional hospitals. Costs do vary but variation is not always easy to explain, particularly within services of the same type. Moreover, the common expectation that there are diseconomies arising in small scale provision is not borne out in general. Research of service quality has shown better outcomes associated with ordinary housing than with larger and more traditional provision, covering such issues as developmental growth, engagement in community and domestic daily living activities, social contact, quality of the environment, choice and variety of activity. The cost effectiveness advantage of ordinary housing services over traditional hospitals can be concluded. However, this conclusion needs to be qualified by a degree of caution. Housing services have continued to decrease in size and decisions concerning the level of staffing have considerable implications for costs. In addition, more attention needs to be given to ensure that staff input results in outcomes for service users.