Building standards - building warrant fee model: research project

4. Sources of Funds and Transition from Current Fee Model

4.1 Introduction

4.1.1 As discussed in paragraph 3.2.9, the statutory elements of the building standards service are intended to be funded from the general revenue grant provided to local authorities from the Scottish Government rather than from fees. The level of this funding has been £5.3 million since before the last fees increase.

4.1.2 The verification service should be funded from building warrant fees and Table 3.3 and 3.4 showed that the future cost of delivering the service in 2024/25 is estimated to be between £41.8 and £44.9 million. This represents an increase of £12.0 to £12.8 million over 2021/22 costs.

4.1.3 One key question for the research is whether the additional funds required for 2024/25 have to be fully financed from fees or whether there is some ‘surplus’ in the system at present which can help towards these additional costs. It should be noted that some of the increase will be funded from ‘inflationary drag’. This will occur as general increases in building costs push some building warrant applications into a higher value of work band and therefore incur a higher building warrant fee. This is considered further in the model in Section 5.

4.2 Building Standards Income and Expenditure

4.2.1 The Scottish Local Government Financial Statistics (SLGFS) provide a comprehensive overview of the financial activity of Scottish local authorities. Table 4.1 shows the trend in building standards income and expenditure for Scotland over the period 2017/18 to 2021/22. Income from building standards was greater than expenditure in all years, except 2020/21 when the figures were in balance.

Source: SLGFR various years

4.2.2 The Table shows that for Scotland, the total cost of the building standards service is met by the fees from building warrants. The expenditure on building standards in Scotland in Table 4.1 includes the cost of delivering the verification service, local authorities statutory role and other services carried out by the building standards department.

4.2.3 BSD collect more detailed information on verification income and expenditure. Table 4.2. provides a summary of building warrant fee income and verification costs in Scotland for the period 2017/18 to 2021/22. Verification costs are estimated as verification staff costs plus 30% as per KPO5.

Source: BSD Quarterly Returns

1. Verification staff costs plus 30%.

4.2.4 Building warrant fee income (Table 4.2) averages approximately 90% of gross service income (Table 4.1). Gross service income includes income related to non-verification activities (e.g. income from licensing work, safety at sports ground, copy plans etc.) while BSD return data is fee income related only to building warrants.

4.2.5 Table 4.2 suggests that there is approximately £5 million of “surplus” fee income ‘in the system’ which could potentially be used to cover any increase in costs associated with delivery of the service in the future.

4.2.6 However, as stated in paragraph 4.1.1 local authorities receive £5.3 million in revenue grant to cover building standards statutory duties. Since 2018/19 the amount received from Scottish Government has been reduced (or top sliced) by £1.5 million to £3.8 million, with the 2017 increase in fee rates providing the outstanding £1.5 million. This downward adjustment was to release £1.5 million of funding for BSD building standards related activities following the 2017 fees increase.

4.2.7 The Part 1 research found that 81%^[10] of authorities responding to the survey stated that their building standards department does not receive any GAE income. Only three respondents (19%) reported receipt of this income from their authorities although two of the responses were qualified. One respondent was ‘not aware’ of receiving the funds while another was not able to confirm the position with the finance team.

4.2.8 It is estimated^[11] that the staff costs of non-verification activities in local authorities is £3.2 million in 2021/22. Whilst non-verification activities will primarily be statutory duties, some authorities also to have to fund activities related to licensing and safety at sports grounds from their fee income. Table 4.3 takes the surplus fee income from Table 4.2 above and sets out the costs of non-verification activities to determine whether there is sufficient fee income to cover all the costs of the building standards service.

Source: BSD Quarterly Returns

1. Non-verification staff costs plus 30%.

4.2.9 Table shows that building standards fee income has been sufficient over the last five years to cover the total cost of the service, although the surplus of income has reduced considerably since 2019/20. The average surplus over the five year period is £1.75 million.

4.2.10 This suggests that there is some ‘surplus’ in the system which could be used to fund some of the additional costs identified in Tables 3.3 and 3.4. While Table 4.3 shows that the average surplus over the five year period was £1.75 million, the last two years have returned a much lower surplus. The modelling assumes that there is £1 million already in the system which can be used to fund some of the additional costs of the building standards service in future years. This level of surplus can be changed in the model.

4.2.11 The assumed level of surplus has been used to reduce the additional funds required to deliver the existing verification service i.e. Box 1 in Figure 3.2 which covers existing local authority and BSD activities.

4.3 Transition from Current Fee Model

4.3.1 While the surplus of fee income currently in the system can reduce the amount of funds required to run the service in the future, the increase in funds between 2021/22 and 2024/25 is still substantial - £11.8 million with the 30% overhead uplift and £11 million with the 20% overhead uplift.

4.3.2 To deliver this additional funding will require a ‘step-change’ in fee rates and delivering the necessary service will also require additional resources and changes to legislation. The model therefore adopts a number of assumptions to deliver a more phased approach to the delivery of the new verification service. The following assumptions have been made:

• Box 1: Existing local authority verification activities and BSD activities. Additional staff are forecast to be required to deliver the existing service in 2024/25 and beyond. It is assumed that all additional funding for this component of the model will be required in 2024/25 and the subsequent years.
• Box 2: Additional local authority activities. These activities primarily relate to stricter compliance procedures. It is recognised that authorities will have to grow their workforce and that will take time. It is therefore assumed that none of the funds for this activity are required in 2024/25, 50% are required in 2025/26 and 100% are required in 2026/27.
• Box 3: Building Standards Hub. Following a successful pilot project it is expected that the building standards Hub will be operational during 2024/25. Hence all funds associated with this activity will be required in 2024/25 and subsequent years.
• Box 4: High-Risk Buildings. The legislation for the introduction of compliance plans for HRBs may take longer to enact than the 2024/25 start year of the model. However, to allow authorities to move towards the full implementation of the compliance plan in 2026/27, it is assumed that 25% of funds are required for implementing compliance procedures in 2024/25, 50% in 2025/26 and 100% in 2026/27. No fees for HRB pre-application meetings are required until 2026/27.

4.3.3 Applying these assumptions yields the additional funds required to be raised through fees in each of the modelled years. Table 4.4 provides details for the 30% overhead uplift scenario.

4.3.4 The phased approach to implementing the proposed changes to the building standards system reduces the funds required in 2024/25 from £11.8 million (Table 3.3 less £1 million surplus) to £6.7 million. For 2025/26, the phased approach requires £10.1 million compared to £13.4 million. The largest individual component in every year is the additional funds required to deliver the existing service. The increase in the cost of delivering the existing service includes the additional staff numbers forecast and the effects of inflation.

4.3.5 Table 4.5 provides the results when the overhead uplift is 20%.