ABSTRACTThe number of children living in mental handicap hospitals has fallen substantially in recent years, but those who remain tend to be amongst those with the most profound handicaps. If the benefits of community care are to be extended to this group of children then new residential facilities will have to be sufficiently resourced to cater for their special needs. This article reports on the economic costs of one residential unit, the Dr. Barnardo's Intensive Support Unit (ISU) in Croxteth Park, Liverpool, which was established especially to accommodate young children with severe mental handicaps.The costs of care in the ISU are compared to the costs of caring for chidren with similarly high levels of disability in an NHS community unit. Although the ISU is found to be initially more expensive per child than the larger NHS unit it has succeeded in its policy of finding foster homes for its children. This success is not only likely to improve the welfare of the children but will also reduce the long‐term costs of their care.The unit has not been in operation long enough to ensure that all the costs of foster care are included. However, after three years, it does seem that ISU‐based care may be no more expensive than care in a larger NHS community u