Government-funded research shows rising costs for nurseries and childminders

Childcare providers’ hourly costs have risen more than can be explained by inflation, rises to the minimum and national living wage, and pension contribution changes.

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The findings come from a 118-page report published by Frontier Economics and commissioned by the Department for Education, which surveyed in detail the costs of 120 early years settings between March and July 2018.

The Early years providers cost study 2018 involved in-depth interviews with a randomly selected sample of providers, balanced against provider types and each region in order to ensure sufficient sample sizes for each region and type of provider.

It shows a snapshot of a typical week, with most of the data collected during the summer term when occupancy is typically at its highest and, consequently, total income is at its highest and hourly delivery cost is at its lowest.

A total of 278 providers were approached to take part in the study and the final sample was 120 settings who provided complete data.

The report includes an analysis of:

• the cost and income structure for different types of early years providers
• revenue sources, including parental fees and funding levels
• the reasons why costs vary across the early years market

It also includes a comparison with data collected in 2015 as part of the SEED cost and funding of early education report.

KEY FINDINGS

The findings show that staffing costs account for more than three-quarters of provider costs and are set to rise further with increases to the national minimum wage and national living wage and employer pension contributions in April.

Most settings have the same hourly parent-paid fee for all ages of children.

Combined with the higher average funding rate for free entitlement hours for two- year-olds than that for three- and four-year-olds, this means that settings with income from both parent fees and free entitlement funding receive, on average, 14p more per hour for free entitlement hours than parent-paid hours for two-year-olds and 74p less per hour for free entitlement hours than parent-paid hours for three- and four-year-olds.

Other key findings, on average:

• 77 per cent of costs were staffing costs,13 per cent of costs were ‘venue-related’, and 10 per cent were for other items
• 54 per cent of settings’ income is free entitlement funding, 41 per cent is parent-paid fees, and 6 per cent is from other sources

Hourly delivery cost for three- and four-year-olds

The mean average delivery cost for three- and four-year-olds is £3.98, ‘but there is substantial variation in the hourly cost across settings (with a wide 95 per cent confidence interval around the mean of £3.56 to £4.40 reflecting both the variation and the small sample size).’

Comparing the hourly cost for three-and four-year-olds between the SEED study in 2015 and the Childcare Cost Study 2018, researchers found a rise of 13 per cent in costs on average for all settings. (Figures for three- and four-year-old costs were based on 117 providers comprising 24 private providers, 18 voluntary sector, 26 nursery classes, 30 maintained nursery schools, and 19 childminders.)

Potential drivers for the variation were explored by the researchers, with one key driver being provider type.

This found that the hourly cost was highest for maintained nursery schools (MNS) driven by higher hourly staff costs. Childminders have higher hourly costs than other providers (except MNS), due to their low child-to-staff ratios and small group sizes. For any specific ratio and group size, childminders have lower costs than all other provider types. Staff session costs are notably higher for childminders, but core staff costs are lower than most other provider types.

Middle-sized settings (measured by the number of registered places) are associated with  higher hourly delivery costs, and there is some ‘weak evidence’ that nursery chains have lower costs.

The report said, ‘It is not clear why middle-sized settings have the highest costs, but it could reflect some discrete increases in core costs as settings initially grow followed by falling costs as size increases sufficiently to benefit from larger economies of scale.’
Area characteristics explain some of the variation in hourly delivery costs, London has a higher hourly cost than all regions, while the North East and the Midlands have the lowest costs.

There are some indications that the hourly cost is higher in less deprived regions, but there are no substantial differences between rural and urban areas.

Sector response

The Early Years Alliance said it was concerned that unless Government funding costs are increased to cover delivery costs many providers will be forced to put up fees for parents or close.

Neil Leitch, chief executive of the Early Years Alliance, said, ‘Yet again the Government’s own-commissioned research puts the scale of the crisis in black and white: hourly costs have risen more over the last three years than can be explained by inflation and the minimum wage and pension contribution policy changes.

‘Despite this, funding rates have been frozen by the Government throughout that time. Things are looking increasingly unsustainable and, with staffing costs making up over three-quarters of provider outgoings and due to rise significantly next month, the need for Government action on childcare funding has never been more compelling.

‘These findings – taken as snapshot of a small proportion of providers in the busiest term – are just the latest in a long list of studies which show the level of crisis in the early years.
Independent research from sector experts Ceeda – using a sample size ten times larger than today’s study - found almost two thirds of a billion pounds black-hole in childcare funding. This underinvestment is causing untold financial problems to childcare settings, and this will ultimately impact on families who will see prices increase, or childcare settings close for good. The Government knows this but continues to find ways to defy mathematics rather than increase funding.’

Responding to the findings, Liz Bayram, chief executive of the Professional Association for Childcare and Early Years (PACEY) said it ‘lays bare what we have been highlighting for a long time now, that the hourly rate most local authorities pay providers to deliver early years entitlement falls far short of the actual cost incurred’.

It showed that the hourly delivery cost for childminders was nearly as high as that of maintained nursery schools due to their statutory ratios, but they had not received any extra funding to reflect this.

Yesterday, maintained nursery schools were awarded extra funding of £24 million in stop-gap funding for the summer 2019 term, ahead of the spending review in the autumn.

‘Low funding rates, delayed payments and the inability to delivered funded hours to related children are all leading to more and more childminders leaving the profession,’ she said. ‘We hope this is finally the evidence needed to ensure the next Comprehensive Spending Review delivers the sustainable funding all early years providers need to ensure their future sustainability.’

Purnima Tanuku, chief executive of the National Day Nurseries Association, said the figures  did not 'ring true' with what their members told them.

'These figures on childcare costs within the sector make a mockery of true cost of delivering high quality early education and childcare,' she said. 'Only running costs have been considered, ruling out the importance of investing in staff and the environment where children learn, grow and develop.

'Ministers at the Department for Education and the Treasury cannot rely on the data from 24 private providers to make these types of decisions when there are over 24,000 nurseries and pre-schools across England.

'We have been told repeatedly by the minister that he will be taking a detailed look at the costs nurseries face but that work must be broader than just this research. We hope he has more plans to engage with the sector and looks at the real funding rates needed as he did when he announced extra support for maintained nursery schools.'

Petition

Last month, the Government said in its response to a parliamentary petition calling for an increase in early years funding in line with minimum wages rises, which has so far received more than 14,000 signatures, that it continues 'to monitor the market closely through a range of research projects which provide us with insight into various aspects of the provider market, such as the impact of the 30 hours policy, market size, workforce, pay and costs

The DfE said that the Early Years Providers Cost Study 2018 included a wealth of information that provides an insight into various aspects of the provider market. As it makes clear, there is no statistically significant change in the hourly cost between the two studies in 2015 and 2018, and the average hourly funding rate is still significantly more generous than the average hourly cost.

A DfE spokesperson said, 'Under our fairer funding formula, introduced in 2017, the total national average rate we pay to councils for three- and four-year-olds increased to nearly £5 per hour - significantly more than what this report tells us is the average hourly cost to providers.

‘This study is one of several pieces of research on various aspects of the provider market which we will be considering in the round as we approach the spending review, and we are looking closely at this additional evidence on the costs of delivering childcare.’

• Download the report here