Independent research commissioned by the Pre-School Learning Alliance (PLA) reveals that the average hourly cost of providing a funded place for a three- and four-year-old is £4.53, compared to an average funding rate of £3.88.
This is a funding shortfall of 18 per cent, rising to 21 per cent when the cost of unpaid staff hours is taken into account, the equivalent of £425 per child per year.
For two year-olds, the average hourly costs of providing a place is £5.97, compared to an average funding rate of £5.19, a funding shortfall of 15 per cent. This rises to 18 per cent when taking into account the cost of unpaid staff hours or £470 per child per year.
This means that for every four children that access a free place, providers are having to fund a fifth child themselves.
The study, ‘Counting the Cost’, carried out by research consultancy CEEDA, is based on the costs of delivering more than 180,000 hours of early education and childcare for 5,635 funded and non-funded children in 100 good and outstanding PVI settings over a two-week period (23 June - 4 July 2014).
The findings are based on minimum spending only - what providers have to spend to cover the costs of the scheme, and do not include any allowance for profit or investment in provision. Nor do they allow for the cost of attending training courses, of hiring graduate leaders or paying staff a living wage.
The publication of the study is in response to a comment made by the childcare and education minister Sam Gyimah during an interview with Nursery World in September, in which he said he was ‘happy to look at evidence of under-funding if there is hard data’.
It follows years of campaigning by the sector to raise awareness among Government of the shortfall in free entitlement funding.
Additional data obtained by the Alliance through a Freedom of Information Request (FOI), reveals that out of the 126 single local authorities that responded, a third are passing on all the free entitlement funding they receive from the Government.
A further third of local authorities reported actually funding providers at a higher rate than they receive from Government, on average six per cent more.
A number of local authorities that are making up the shortfall in funding themselves said it was not a sustainable approach, and unless Government funding increases, they will have to reduce their rates.
Within their FOI, the Alliance also asked local authorities whether they have made changes to their PVI base rate since implementing a Single Funding Formula for three- and four-year-old places.
Thirty per cent said they had made no changes and five per cent have lowered their base rate.
Less than half of local authorities have increased the base rate of PVI funding by more than two per cent in the last three to four years.
Neil Leitch, chief executive of the Pre-School Learning Alliance, said this meant that the vast majority of providers have actually had to endure a real-term decrease in funding.
The Alliance also asked local authorities how often they have collected data on costs from local providers since the Early Years Single Funding Formula (EYSFF) was first introduced.
Seventy per-cent reported not having collected any data on costs since the introduction of the formula in 2010.
However, a number of local authorities said the reason for not increasing funding or collecting up-to-date information on costs is because the level of funding they receive from Government hasn’t changed.
The Alliance is warning that unless this funding gap is addressed, providers may be forced to charge more for additional childcare hours to stay float, which will mean increased childcare costs for parents.
Mr Leitch said, ‘This research demonstrates what we in the sector have been saying for many years now - Government funding for the free entitlement offer does not meet the cost of providing places.
‘Chronic underfunding has left us with a free entitlement scheme in crisis, one where many childcare providers are reliant on fundraising and the work of volunteers just to stay afloat.
'We currently have a situation where central Government is blaming local authorities for not passing enough funding onto providers, and local authorities are blaming central Government for not providing enough money in the first place – and all the while, providers are caught in the middle, trying to keep their businesses afloat and provide high quality care and education while only receiving 80 per cent of the money needed to do so. This simply cannot continue in the long term.
‘If this continues, childcare providers may be forced to choose between increasing fees or facing possible closure'
He added, 'I would expect this study to prompt the childcare and education minister to initiate a full and thorough review of the early years funding system, and in particular, the level of funding available to PVI providers.
'It is vital the Government accepts the reality of the situation and recognises that significant investment into the early years sector is needed to address a problem that has gone on for far too long. It simply cannot continue to expect more for less.
'The Alliance is committed to continuing to push for fairer funding from Government, and so we will continue to do so, whether by conducting further in-depth research or through continued discussions with wider government such as the House of Lords Affordable Childcare Committee.'
A Department for Education spokesperson said, 'This report has been totally overblown. It is nonsense to suggest that childcare has been underfunded. The cost of childcare is falling in real terms and we have increased annual funding for early education by over £1bn since 2010.
'We are doing more than any other Government to tackle the cost of childcare, with a record amount of money going to support the youngest children.
'As a result of our plan for education more families than ever before are now eligible for free childcare.'
Purnima Tanuku, chief executive of the National Day Nurseries Association (NDNA) said, 'NDNA's own nursery survey evidence which goes back several years paints a similar picture to the Alliance of nurseries subsidising free places to the tune of hundreds of pounds per child.
'The figures reported by NDNA members show an average loss of £900 per child, per year on three and four-year-old places and £600 per child, per years on two-year- old places. This shortfall is then fuelling the fees for parents as nurseries are forced to make up these losses on the extra hours parents buy over and above their free sessions.
'With the political spotlight currently focused on childcare and all parties calling for more parental support, a radical reform of the flawed childcare funding system is desperately needed. Free hours are a real benefit for hard working families but any increase in free nursery hours must be thoroughly costed before they can be put in place. High-quality, affordable childcare is good for children, parents and the economy and must be a priority for investment.'