Building standards fee income and re-investment in service delivery: review

Executive Summary

Introduction

1. In July 2017 there was a change to building standards fee levels to increase income from building warrant applications and associated fees paid by users of the system to achieve full cost recovery for verification. The fee increase was expected to deliver approximately £3.5 million in additional funding which was split broadly as £2 million to support investment in the local authority building standards service and £1.5 million to cover the overall running costs of Scottish Government Building Standards Division (BSD).

2. Following the Grenfell Tower fire in 2017 and subsequent establishment of a Ministerial Working Group (MWG) to address issues of compliance and fire safety, the Building Standards Futures Board is leading a programme of work to drive forward the transformation of the building standards system in Scotland. The introduction of some of the proposed changes identified by the Futures Board will have implications for the cost of delivering the building standards service in the future.

Study Aims

3. The purpose of the study is to review building warrant fees in Scotland and to consider how fees are used to support the delivery of the verification service and how verifiers invest in their service to meet the requirements of both the Operating Framework and Performance Framework. The study is intended to determine how the future requirements for building standards verification can be delivered and determine if there is a need for an increase in fees to support the changes.

Approach to the Study

4. There were three main components to the research:

• Analysis of published data and data held by BSD.
• Stakeholder engagement including an online survey of Scottish local authorities, consultations with Local Authority Building Standards Scotland (LABSS) and Local Authority Building Control (LABC) and consultations with eight Scottish local authorities and four English building control departments.
• Modelling of different options for changing fee rates.

Number and Characteristics of Building Warrants

5. The number of building warrant applications has fluctuated at around 38,000 per annum over the last six years with an average of 9,300 amendment to warrant applications per annum. Domestic warrants account for approximately 80% of the warrants issued. Almost 50% of warrants issued are in the lowest value of work band (£0 to £10,000).

Building Warrant Fee Income and Expenditure

6. A comparison of 2016/17 and 2018/19 shows there was an increase in fees of almost £8.45 million or 32% between these two years (from £26.6 million to £35 million). Allowing for changes in the volume of building warrant applications, almost all (£8.43 million) of the increase was attributed to the increase in fee levels. Hence, at the Scotland level, the fees increase more than achieved the objective of delivering an additional £3.5 million in income. In 2021/22, building warrant fee income had reached £35.4 million.

7. All but two authorities saw their income increase following the 2017 fees increase and, for most authorities, the change in income was driven by the fees increase.

8. In 2021/22, total verification costs (staff, non-staff and other verification related investment) were £26.2 million with staff costs (£23.4 million) accounting for almost 90% of these costs. Staff costs are the dominant cost in verification expenditure and also the most consistent across authorities in terms of what is covered by the category. However, there is some inconsistency in the way authorities allocate and account for other components of verification costs and the total verification cost of £26.2 million makes no allowance for general overheads.

Balance of Verification Income and Expenditure

9. Since 2017/18, income from building warrant fees has exceeded the total direct cost of providing verification services in Scotland. In 2021/22 the surplus of income over direct verification costs was £9.2 million. However, this measure of direct verification costs does not include any allowance for general overheads in authorities attributable to the delivery of the service (e.g. office costs, many IT costs, HR etc). A figure of 30% of direct staff verification costs is used as a broad estimate of typical overheads in Key Performance Outcome 5 (KPO5) in the verifier Performance Framework. If 30% is applied to the total direct verification costs of £26.2 million, total costs would be £34 million in 2021/22 yielding a surplus of income over expenditure of £1 million.

10. There is considerable variation across authorities in the extent to which building warrant fee income covers the costs of delivering the verification service. The majority of authorities receive more building warrant fee income than they spend, but there are several authorities every year which have operated the service at a deficit i.e. more has been spent on verification than has been received in building warrant fee income before any overhead costs.

Key Performance Outcomes (KPOs)

11. KPO1 seeks to minimise the time taken to issue a first report or building warrant or amendment to a building warrant and is split into two parts with the following targets:

• KPO1.1: 95% of first reports (for building warrants and amendments) to be issued within 20 days.
• KPO1.2: 90% of building warrants and amendments to be issued within 10 days from receipt of all satisfactory information.

12. For Scotland as a whole since 2017/18, the 95% target of KPO1.1 has only been met once (in Q2 of 2020/21). Six authorities have achieved or exceeded the target every year while two authorities have been more than 10% points below the target throughout the period. However, most authorities have seen their performance improve since 2017/18.

13. For Scotland since 2017/18, the 90% target of KPO1.2 has only been met once (in Q4 of 2020/21), although there has been a general improvement in performance over time. Seven authorities have achieved or exceeded the target every year while one authority was more than 10% points below the target throughout the period.

14. KPO4 relates to understanding and responding to the customer experience. The target is to achieve a minimum rating of 7.5 out of 10. For Scotland, a rating of 7.5 was achieved in 2020 with ratings in the other years (7 to 7.4) just falling short of the target. Fourteen authorities have consistently achieved the target rating while two authorities have consistently scored less than 6.4.

15. Generally, the authorities which met the KPO1.1 and KPO1.2 targets also have good customer satisfaction scores.

16. KPO5 is concerned with maintaining financial governance and the target is for building standards fee income to cover indicative verification service costs as defined by verification staff costs plus the 30% allowance for overhead costs. For Scotland as a whole, the target of building standards related fee income covering verification staff costs plus 30% has been achieved in every quarter since the start of 2017/18 except for Q2 in 2020/21 (the only quarter where KPO1.1 was achieved).

17. For individual authorities there are a range of results. There are a few authorities where building warrant fee income has never exceeded verification staff costs. Whereas there are authorities where building warrant fee income exceeds staff costs by a considerable amount e.g. income is almost twice staff costs. The authorities where income is considerably greater than staff costs are authorities which tended to perform less well under KPO1, suggesting that these authorities may be understaffed and underdelivering on the service.

Grant Aided Expenditure

18. Prior to the 2017 fees increase, local authorities received £5.3 million in general revenue grant. As part of the income arising from the 2017 fees increase was to provide funds for BSD, there was a £1.5 million downward adjustment to the local government finance settlement following the fee increase. Hence, the amount of general revenue grant local authorities received from the Scottish Government for building standards was reduced from £5.3 million to £3.8 million in 2018/19.

19. This level of funding is allocated to local authorities using grant aided expenditure (GAE) calculations. It is important to note that the GAE allocation for building standards is not a budget or a spending target and local authorities make their own decisions about the allocation of funds across services to reflect local needs having fulfilled their statutory obligations.

20. The statutory obligations relating to building standards for which fees are not charged include enforcement and maintenance of the building standards register. The majority of authorities responding to the online survey stated that they do not receive any income from the GAE allocation and they are expected to fund enforcement activities and the building standards register from their building warrant fee income. The survey also found that almost half of respondents were expected to make a contribution to their finance department from their building warrant fee income to cover the reduction in GAE allocation to the authority.

Reinvestment in Building Standards Service

21. Across Scotland, an additional £8 million in annual income was delivered following the 2017 fees increase. Approximately 60% of authorities responding to the survey reported that additional income had been available to invest in the service. The investment of four authorities was primarily related to staffing and represented approximately 16% of the additional fee income of these authorities. There was also some investment in training and technology. However, the survey results suggest that the majority of additional fee income has not been reinvested in the building standards service.

22. The effects of these investments has enabled some authorities to provide a better verification service and meet KPO targets, deliver efficiency and productivity improvements and develop skills and competencies.

23. Consultations with eight authorities allowed more in-depth discussion of the effect of the fees increase on individual building standards services and found that it is difficult to draw general conclusions across all authorities as specific local circumstances were often the key drivers for investment in the service. For example, three authorities made considerable investment in the service, but this was to address issues of poor performance and the investment would have occurred without the fees increase, although the increase was beneficial. Cost savings were key issues in two authorities where the majority of additional income was used to support savings or services elsewhere in the council. Recruitment difficulties were the main challenge for two authorities who had access to funds but were unable to recruit staff with the necessary experience/skills. Where fee income does not cover verification costs, the increased income was able to reduce the amount of funding from the authority.

Certification

24. When fees increased in 2017, changes were made to certification discounts. The change in discounts was to encourage greater use of certification and it was hoped to lead to an increase in the number of certificates submitted.

25. For all certification schemes, the effects of Covid are clear with reductions in the number of certificates submitted in 2020/21. However, the effect of the change in discounts has been mixed for the three certificate of design schemes, with take-up of both energy schemes lower than they were before the increase. The structural scheme has seen uptake increase in 2021/22 following four years of declining numbers.

26. The effect of the change in discounts has been more positive on the certificate of construction schemes with the number of certificates increasing in both schemes in the years before Covid. However, while the drainage, plumbing and heating scheme has recovered well from Covid, the electrical installations scheme is now (2021/22) at a lower level than 2016/17.

27. The survey identified that the structural scheme is the scheme where the value of the discount forgone is least likely to cover the verification costs. Examples were provided of projects where the building warrant application was submitted with structural calculations and, as an external engineer had to be used, the fee for the engineer was greater than the fee for the building warrant.

28. It was suggested by local authorities that certification could be encouraged by better communication of the scheme benefits to users, increased KPO target times for applications without a certificate and a surcharge for non-certified work (although it was recognised that this may be complicated to administer).

Building Control in England and Wales

29. Building control fees and services in England and Wales operate in a different manner to Scotland with a mix of public and private provision and local authorities setting their own fee levels. Local authority building control departments are subject to strong competition from Approved Inspectors (AIs) who account for approximately 40% of the work. Local authorities set fees within a framework which means they should achieve overall cost recovery and the cost of the fees should, broadly, reflect the cost of delivering the service.

30. The Regulations make clear that only certain building regulation functions may attract a charge and there is surprising variation in the share of chargeable activity in total costs. On average around 75% of total costs are chargeable costs with most authorities trying to increase the percentage by focusing on efficiency in the delivery of non-chargeable activity. LABC are currently in discussions with the Department for Levelling Up, Housing and Communities around extending the scope of activities where local authorities can charge fees.

31. The fees are set using an hourly rate which can vary across areas to reflect underlying staff costs and competition from the private sector. The total cost of delivering the service is based on the direct costs of staff time and recharges of other costs across the local authority to the building control department. There is considerable variation in the approaches adopted by local authorities in respect of charging for central overheads and debate between building control department managers and local authority finance teams as to what is a fair and reasonable charge.

32. Estimated fees are based on the expected time spent delivering specific services multiplied by the total hourly rate. Many authorities have based their charges on a model set of charges produced by LABC in 2011. As separate fees are quoted for plan checking and inspections, the schedules can run to several pages. Fee schedules can also be based on different parameters e.g. specific activity such as replacing a number of windows, floor area or value of work. Smaller domestic work tends to have fixed fees (e.g. garage conversion) and there tends to be a standard per dwelling fee for domestic new builds. There is some support for a national fee calculator for each project type where the only variable would be the individual local authority’s hourly rate. Some authorities increase charges every year in line with the consumer price index, while others review charges periodically.

33. The new Building Safety Act is creating, for certain works, a new Building Safety Regulator. This will apply to residential buildings over seven stories or 18 metres high. The Regulator will be funded from fees charged to applicants. The Regulator will then approach local authority building control departments to undertake the work. Local authorities will receive payment from the Regulator and will have to demonstrate competence/experience to undertake the work. Details are being finalised and it is not yet clear if there will be a central hourly rate for the work or if it will vary by authority.

Future Changes to the Building Standards System

34. There are several potential changes to the delivery of the building standards service which could impact on the resources of building standards departments. These include:

• A central hub: this was not anticipated to have a major impact on workload.
• Pre-application discussions: there is variation in the extent to which these are currently held and authorities were generally not supportive of charging for these. The exception was for High-Risk Buildings (HRBs) where charging could be appropriate as there is expected to be additional work.
• Compliance plan: this is a change which could have a significant impact on workload. It was also felt that more Construction Compliance and Notification Plan (CCNP) notices and stricter compliance procedures will lead to increased workload not only directly from carrying out increased checks, but also following up the number of defects found.
• Compliance plan manger: some authorities feel that, as this is the responsibility of the applicant, it will have a minimal impact on workload while others see the potential for increased workload in liaising with the manager.
• Pro-active enforcement: this is expected to lead to additional work.
• Monitoring HRBs: authorities consider this will lead to an increased workload, although it would be tied into the compliance plan and checks may be done anyway.
• Post completion enforcement: this could lead to a major impact on workload.

Costs Associated with Potential Changes to Building Standards Delivery

35. The role of the central hub is being developed through the Hub - Pilot, but BSD envisage that it will include a range of activities including education and training, digital support and expert support on specialist services such as structural engineering, fire engineering and energy. For the analysis in this report, it is assumed that the annual cost of the hub would be £750,000. This would provide for 5.5 FTE senior staff, 2 FTE admin staff and a research budget of £200,000.

36. If £750,000 was to be raised from fees, this would imply an increase in fees of just over 2% on current levels.

37. The other changes described in paragraph 34 above would arise at the local authority level and should be paid for through a change in fees. For most of the changes described, the survey found that a majority of authorities felt that there could be an increase in workload of between 10% and 50%. The research assumes that the potential changes will add 30% to local authority workloads.

38. As KPO5 targets building warrant fee income to be 130% of verification staff costs, this cost base has been adopted for the analysis. Applying the 30% uplift to verification staff costs plus 30% for overheads yields an increase in cost needed of £9.1 million. This level of additional cost would imply an increase in fee income of almost 26%^[1].

39. Combining the cost of the central hub and the local proposed changes yields an additional funding total needed of £9.86 million. This is equivalent to an increase in current fee income of almost 28%.

Options for Raising Fee Income

40. Four main options for raising additional income through fees were identified:

• Option 1 – Simple:
  • Option 1: simple pro-rata increase in current fee rates
  • Option 1a: simple pro-rata increase but with the option for authorities to charge for certain activities e.g. pre-application discussions, cost of checking structural calculations etc.
  • Option 1b: simple percentage uplift to fees but a change to the entry minimum fee and the ‘slope’ of fee rates to increase loading on the smaller, lower value projects.
• Option 2 – Bespoke: the introduction of different fee rates for HRBs where compliance plans are required.
• Option 3 – Project Types: the introduction of fees for specific types of work to better reflect delivery cost. This would be similar to the situation in England and Wales where authorities can specify the cost of warrants for different types of work e.g. extensions of different sizes.
• Option 4 – English Model: this option would delegate fee setting to each local authority.

Modelling the Options and Results

41. A spreadsheet model was developed to project fee income under alternative fee structures and scenarios. The core model estimates fee income from building warrant applications by type and value of work bands. It then makes an allowance for discounts provided for certification to determine total building warrant fee income net of certification.

42. All options have been modelled on the average number of building warrant applications over the last five years. Table 1 sets out the results for Options 1, 1a, 1b and 2. The Table shows the base level of fee income (based on current fees), the additional income (from the proposed changes) and total income for each option.

43. The Table shows:

• Option 1 (a flat increase of 28% across all values of work and type of application) yields additional income of £10.2 million.
• Option 1a (Option 1 but with the potential to charge for specific services) yields additional income of £12.2 million. This comprises £10.2 additional income from Option 1 plus potential discretionary income of £2 million. Charging for checking structural calculations and the building standards register add approximately £1m each in additional fees.
• Option 1b (varying the percentage uplift^[2] by value of work) yields an additional £10.3 million.
• Option 2 (different fee rates for HRB and non-HRB projects) yields an additional £10.3 million in fees.

44. Modelling Option 3 is beyond the scope of the research and would require agreement on the different types of project, assumptions about the proportion of building warrant applications accounted for by the different project types and a template for verification for each project type.

45. Detailed modelling of Option 4 is also beyond the scope of the research but some basic analysis was undertaken to determine the average cost of a building warrant in each authority if fees were set to recover costs. Average verification staff costs plus 30% per building warrant and amendment application was calculated and found to exceed average income per warrant in eleven authorities and, in some of these authorities, the excess is several hundred pounds.

Table 1: Summary of Modelling Results, £million

	Base Fee Income (Net of Cert. Disc.)	Additional Fee Income	Additional Fee Income (HRBs)	Total Fee Income
Option 1	34.4	10.2	-	44.5
Option 1a	34.4	12.2	-	46.5
Option 1b	34.4	10.3	-	44.7
Option 2	34.4	7.4	2.9	44.6

Note: Rows may not sum due to rounding

Option 1a comprises additional income of £10.2 million (Option 1) plus £2 million from additional discretionary charges

46. The advantage of Option 1 is that it is easy to implement and maintains a relatively simple approach to fees. Proportionately, all fee bands are treated the same and it continues with a system which is understood by customers. The disadvantage of this option is that there may still be an element of cross subsidy and, while some of the proposed changes to the delivery of building standards are focused on HRBs, HRB projects with the same value of work as a non-HRB project would pay the same fee.

47. Option 1a retains all the advantages and disadvantages of Option 1, but provides authorities with the opportunity to charge for specific activities, if they want. This could lead to different fees for the same project in different authorities, could discourage applicants for non-HRB projects to approach the authority for discussions and could add to the complexity of fees for users.

48. Option 1b would help to provide a greater contribution to cost recovery and all authorities would benefit as they all receive a relatively high proportion of lower value work. The disadvantages of this option would be a move away from the current position which acknowledges there is cross subsidy of low value projects and it may discourage applications for building warrants for low value work.

49. The advantages of Option 2 include tailoring the increase in fees to buildings where the requirements for building standards will be more onerous. The change in fees can be related to the change in workload and authorities would be able to recover some of the additional costs associated with the introduction of the compliance plan. The disadvantage of this option is that some HRBs may already pay a relatively high fee.

50. The advantages of Option 3 include the potential for fees to better reflect the actual cost of work and the removal of potential issues over the value of work as project types are defined by type. The disadvantages include its lack of “Inflation proofing” which would necessitate regular review, the need for a standard template for the level of inspection work by project type which would reduce the flexibility of authorities to tailor work to specific project requirements and it would be a major change from the existing approach.

51. Option 4 would allow authorities to set their own fees to cover their costs and reflect local circumstances. However, this could lead to local authorities adopting different approaches to fee setting and different fee levels across authorities. There could be problems in determining the actual cost to be recovered and oversight would be required to ensure authorities were only achieving full cost recovery and no more. Introduction of this Option would require substantial explanation to users.