Call for independent review after DfE response to funding queries

Following calls for clarification, the DfE has provided a response to questions on how employee on-costs, profit and the National Living Wage have been factored into its analysis of childcare delivery costs.

In the months following publication of the Government review of childcare costs, (1) independent research agency Ceeda and the Pre-school Learning Alliance have been appraising the methodology used and seeking clarification on key points. Here we share a round-up of recent feedback from the DfE and the issues it raises. Under-calculations on staff costs, plus a lack of clarity about how some costs are reflected in the new national funding rates mean that we believe an independent review is essential to enable the sector to thrive and successfully deliver the 30-hour policy.

Has the review fully accounted for employee on-costs?

To capture the full cost of employing a member of staff it is necessary to factor time lost to sickness, training, holiday entitlement and maternity/paternity leave.

The question: What per cent of employee time has been attributed to: A) sickness; B) participation in training; C) annual leave and D) maternity/paternity leave in the DfE delivery cost model?

The response: The DfE declined to provide a breakdown of these calculations, instead confirming that: ‘The “representative” costs include an overall additional allowance to cover all “on costs” – with the exception of employer pension and national insurance contributions, for which separate uplifts are provided.’(2)

The ‘overall additional allowance’ factored in the DfE model is 10 per cent of staff contact hours, inclusive of absence for training, sickness and holidays, as reported in the review (1, p86). This clarification suggests employee on-costs have been significantly underestimated, given that statutory holiday entitlement alone accounts for 12 per cent of employees contracted working hours (see table).

The DfE further noted that ‘…research on these costs does not provide a single consistent view. On costs vary across providers, as reflected in the review.’(2)

Notwithstanding variance in employment terms and benefits, employees’ statutory entitlements apply across the sector and must be assumed as a starting point in any costing model. Published official statistics can also provide a robust indication of employee on-costs (see table) for the purposes of cost modelling.

PVI childcare settings are classified as ‘Child day-care activities’ within the standard industrial classification ‘Human Health and Social Work Activities’. The UK Commission’s Employer Skills Survey (3) reports that an average of 5.3 days per employee in this sector is spent participating in training; approximately 2 per cent of full time working hours. This is in line with averages reported by childcare providers in Ceeda’s original ‘Counting the Cost’ study, commissioned by the Pre-school Learning Alliance in 2014 (4).

Turning to illness, early years staff lose more hours to sickness than the labour force average due to the nature of their working environment, the gender profile of the workforce and regulations relating to infection control within settings. Official ONS estimates indicate 3.2 per cent of working hours are lost to sickness in the occupational category ‘Caring, leisure and other services’, the largest occupational grouping in early years. The average across all sectors in 2013 was 2.6 per cent for women and 1.6 per cent for men (5).

The National Living Wage

We also explored how the impact of the National Living Wage (NLW) has been accounted for.

The question: How are forthcoming NLW rates and future wage inflation factored into the model given that the report notes cost estimates are based on 2013/14 wage rates inflated to 2014/15 salaries? 

The response: The DfE confirmed the NLW was not factored in costs published in the review, but was considered in the setting of national funding rates. However, it declined to provide any detail on how these adjustments have been calculated, saying:

‘The uplifted national average rate which will come into force from April 2017 is substantially higher than the hourly cost at statutory ratio identified though the review. The additional funding is intended to cover the impact of the National Living Wage and future wage inflation, as well as other factors such as surplus margin; additional support for disadvantaged children; and the cost to local authorities of administering the system.’(2)

Management, administration and supporting roles

Understanding management, administrative and supporting roles in early years settings is an important element in factoring costs. In order to provide an estimate of administrative and management time, the DfE review adapted data published in Ceeda’s original study (4) of delivery costs. However, the usage of the data as described in the DfE review report (1, p86) was inconsistent with the original study methodology. We asked the Department to look again at this aspect of the analysis. The DfE said:

‘All the assumptions are clearly stated as “representative scenarios,” subjected to sensitivity testing and wide variation. The sensitivity tests are shown in the report.’(2)

Return on investment

The creation of profit or surplus is necessary to attract and retain investment in the early years sector, improve quality and ensure long-term sustainability.

The question: Is there any uplift for the generation of profit/surplus in the ‘representative costs per contact hour’ or the announced average national funding rates?

The response: The DfE said that, ‘the representative costs per contact hour do not include an uplift of profit/surplus. The announced average national funding rate does include a margin for providers to generate a surplus. We have estimated an average surplus margin of 5 per cent - but this will of course vary from provider to provider depending on their particular business model. We believe that this is a fair return for providers, whilst also being fair to tax payers.’ (2)

This would suggest childcare providers can look forward to receiving an average 5 per cent return on the funded provision they deliver post April 2017; however, this seems unlikely in the context of concerns raised here.

From reviewing delivery costs to setting national funding rates

In summary, clarification received from the DfE indicates that costs published in the review excluded any profit/surplus, were based on 2014/15 pay rates and underestimated employment on-costs. Questions around the extent to which administrative and management time were properly accounted for remain unanswered.

Perhaps the most important question of all is what happened next? How did the Department move from its published evidence base to new national funding rates which are said to account for:

• National Living Wage increases and future wage inflation
• A profit margin of 5 per cent for providers
• Additional support for disadvantaged children
• The cost to local authorities of administering the system?

This vital piece of the jigsaw is unavailable, unpublished and therefore unaccountable.

In our view, the clarification received from the Department on specific points of the review methodology gives serious cause for concern. The aim of the review was to establish the cost of delivering high quality early education and childcare; however, it would appear from the clarification provided by the Department that the resulting analysis fails to reflect employers’ statutory obligations. We invite the Department to be more explicit about its analysis of on-costs and to show how a 10 per cent on-cost allowance is sufficient to maintain a motivated, skilled and well qualified early years workforce.

It is also concerning that the published review did not share detail of the Department’s forecasts of delivery costs inclusive of the National Living Wage and related wage inflation, an omission that leaves an analytical black hole between the published review and announced funding rates.

How these costs will be tracked in the future is unclear given the DfE’s assertion that:

‘We are confident in the analysis of the review and we do not intend to engage in an ongoing process of updating it, but we will of course continue to monitor the delivery of the free entitlement.’(2)

Given the concerns raised above, it is clearly essential that an independent review is commissioned to fully evaluate the costs of delivering high quality childcare in different parts of the country, repeated at scheduled intervals in order to monitor changes in the cost base. Failure to do so will have a significant impact on the sector’s ability to deliver free entitlement places in years to come.  

1. DfE (2015) Review of childcare costs: the analytical report. Reference DFE-00295-2015
2. DfE (2016) Department for Education letter to Ceeda dated 03/02/2016
3. UK Commission’s Employer Skills Survey 2013: UK Results. Evidence Report 81 January 2014, Table A.4.8
4. Ceeda (2014) Counting the Cost: An analysis of delivery costs for funded early education and childcare.  
5. ONS (2014) Office for National Statistics (2014) Sickness Absence in the Labour Market, February 2014