2. Welcome Formula Funding Fundamentals Date 24th February 2010
Presented to European Colleagues
By Alex Cook
Welcome

3. Why Formula Funding? 01

4. Why a formula funding system?
Outline of why and how a formula funding system encourages efficiency, and how to ensure that efficiencies are reclaimed (i.e. rates reviews) and therefore funding kept in line with average actual costs

5. Why a formula funding system?
Equality
Same rates payable for same activity
Logical, measurable allowances for additional costs associated with learner/provider/employer characteristics
Efficiency
Control of costs remains with funding body
Regular reviews supported by data on activity, rather than audit of costs
Flexibility
Frees provider to deliver what is best for learner rather than constraining them to what can be claimed
Equality
Link to average actual costs
Efficiency
Formal data is standardised, easily analysed, and rates can be adjusted fairly systematically
Alternative is full audit of accounts in respect of funded activity – increased accounting bureaucracy and costs
Drives expensive providers down to average
Flexibility

6. Why a formula funding system?
The logical efficiency
Provider delivers a qualification
Provider records activity delivered to learner in standard data returns
Provider gets paid at standard rates
Provider controls costs to not exceed standard rates
Data analysed across all providers
Average activity determined
Standard rates reviewed
Any surplus reclaimed by reduction of standard rates
Any required additional costs built into standard rates
Standard rates mean that provider doesn’t have a ‘spend spend spend’ mind-set
Provider income based on qualifications delivered – volume and mix
Income predetermined, so focus on expenditure
Focus on expenditure means tendency is to get best value for money – minimum required expenditure for maximum impact (think of performance measures to control)
Any efficiencies delivered reclaimed by rates review
Because income is set, the only reason a provider would incur more cost than the standard rates provide would be because they couldn’t deliver the qualification otherwise – hence a rates increase is necessary.

7. Choose your Principles02

8. Choose your Principles
LSC principles – fund on basis of relative cost
Others possible: outcomes
targets/incentives/priorities
However, ESF requires base in cost…

9. Choose your Principles
Principles of Funding Learning
The funding provided to schools, colleges and other providers should reflect the directly incurred costs of efficiently delivered provision (with an appropriate contribution to overheads) within the national funding framework and rates.
All LSC-funded providers should:
claim funding at standard learner number (SLN) rates to reflect the costs of delivery and ensure that multiple funding for provision is not claimed;
ensure that duplication of provision in a learner’s programme of study is avoided and, where this occurs because of an overlap in learning aim content, adjust the funding claimed to reflect the degree of overlap;
consider guided learning hours (glh) as the key driver of costs incurred when determining the level of funding claimed in 16–18 and adult learner-responsive funding systems;
consider costs of delivering provision and assessment in the workplace (together with any associated glh) as the key driver of costs incurred when determining the level of funding claimed in the employer-responsive funding model;
discuss with the LSC partnership team what funding should be claimed in circumstances where the calculation of funding to be claimed results in a level of funding that is clearly well in excess of the costs incurred;
discuss with the LSC partnership team what funding should be claimed where providers wish to make provision that is in the best interests of their learners but the funding arrangement is viewed as a barrier;
LSC funding clearly based in cost of efficiently delivered provision
Various political pressures on this, but the question is always ‘what does that mean for the costs of delivery?’

10. Choose your Principles
Other possible funding principles
Priorities/Incentives
These can be built into the formula whilst still maintaining the rates based on average costs, but it would be possible to base funding on them directly if they were measurable in all cases
Outcomes
Again, can be built into the formula whilst still basing rates on average costs, but could be used to set rates directly as well
Key question – what do you want to buy?
You get what you measure, so be careful!
For example, funding purely on basis of outcome may get lots of outcomes related to qualifications that are very cheap to deliver relative to other qualifications

11. What do your principles exclude?
If formula funding pays for provision
then it doesn’t pay for:
Capital expenditure
Student Support
Capacity building/Start-ups
Careers advice
Anything else not linked to the funding principles!

12. Determine your formula03

13. Determine your formula
Build a formula that mirrors your principles
i.e. if the principle is funding based on cost then formula must distribute funding as cost is incurred

14. Determine your formula
Frequency of payment
How to stage payments over time
Think about links to data
Milestones are more complex (and harder to forecast) than time
Frequency
Weekly, Monthly or Annual?
The shorter the time period, the more responsive to withdrawal
The longer the time period, the more stable/predictable

15. Determine your formula
Encouraging preferred behaviour
Achievement element
Fundamentally a part of the standard rate – not a bonus
Full standard rate only earned when learner achieves – hence encourages providers to get learners on most appropriate qualifications
Fees/Employer Contributions
A proportional reduction for lower-priority provision which requires an external contribution (learner or employer)
An assumption – not a requirement for collection (although highly likely that not collecting it makes provision unviable)

16. Determine your formula
Balancing timings
Think cash-flow
Too back-loaded and provision is unviable to start up
Too front-loaded and behaviour is driven towards recruitment rather than retention or achievement
Tips!
Keep bulk of standard rate paid over time, rather than to encourage behaviour
Salaries generally paid monthly, so cost incurred by providers fairly linear
Pay standard rate over time on a fairly flat profile if possible – the value of the additional complexity isn’t generally worth it
If you drive behaviour too strongly with timings then you get into a difficult cycle:
Like steering a ship – small inputs don’t seem to make much difference in the short term, but if you make large inputs to get a quick response you end up correcting and counter-correcting forever!

17. Set your rates 04

18. Set your rates Rates must mirror your principles
Determining average cost can be difficult
Use of proxies (activity/glh)

19. Set your rates Costing can be very complex Remember your principles
Think about what you’re paying for
Approximately 75-80% of costs in education provision relate directly to staffing
Staff primarily teach learners
Hence using contact between staff and learners is a reasonable proxy for costs
But not every staff member is paid the same, so what about relativities?
We’re paying for delivery of provision – staff in front of learners

20. Set your rates Relativities Salaries
Salaries vary by individual which cannot be taken into account in a national funding formula based on average costs
However, generally higher salaries in certain sectors can be by creating a cost-weighting based on salary ratios by sector
Higher salaries in certain geographical areas can also be accounted for with a Postal/ZIP Code-based factor
Group sizes
Some subjects require smaller groups than others
If this can be systematically identified, then it can be built into the formula
Equipment/Consumables
Again, look for proxies for where this is the case – subject classifications

21. Set your rates Tips! Look for measurable proxies for cost
Recording and reporting actual costs is bureaucratic and expensive
Proxies can be reviewed periodically, and mappings refined
Don’t worry too much initially about precision
Remember formula funding is based on average actual cost
Once elements are determined they can be reviewed independently
New elements can be added to the formula as further differentiation of necessary costs are identified (the factors in the LSC methodology have evolved over about 15 years!)

22. Payment methodologies05

23. Payment methodologies
Payment on actuals
Wait for the data
Calculate funding
Pay the funding
Payment on profile, reconciled
Pay the allocation/contract value over time, but then reconcile as data comes in
Complex, but gets over initial cash flow problems
Reconciliation can be suspended for data issues, etc.
Payment on profile, forward adjusted
Pay allocation/contract value over time
Take variance between actual earned and allcoation paid into account in future allocations

24. Allow for exceptions 06

25. Allow for exceptions
Think about what bits of your principles cannot be replicated in your formula
Keep it simple (as simple as you can!)
e.g. Electronic invoices for costs not associated with the learning aim

26. Allow for exceptions What if standard rates don’t reflect costs?
Put in a manual check – the whole formula funding system relies on standardisation
Exceptions are exceptional! Don’t allow then to become the norm
Mechanisms
Manual claims – think how this links to contractual commitment
Automated claims – think of controls needed, but can be allocated against allocation/contract value
State what exceptions you are prepared to allow
Be robust! Remember funding is on average cost and therefore exceptions are where costs are significantly and persistently different to standard costs for defined learners

27. Checks and balances 07

28. Checks and balances Performance measures Success rates
Ensure that funding isn’t claimed when learners have no chance of succeeding
Timely success rates
Ensure that planned lengths of stay are compressed to increase rate of monthly funding
Contracting
Maximum contract values/allocations limit exposure and ensure any loopholes cannot be extensively exploited!
Contract/allocation lines structure expenditure and control provision
Inspection
Public quality assessments inform demand

29. Checks and balances Audit Audit the data, not the formula
Advantage of a formula funding system is that requirement for financial audit is reduced – no more counting bus tickets!
The data that drives the formula calculation needs to be audited (start dates, end dates, glh, activity, etc.) but this is relatively straight-forward (register checks, etc.)
Compliance evidence
Learning agreement – learner signature proves existence
Enrolment form – proves learner signed up for qualification funding claimed for
Attendance records – registers prove learner did not withdraw (or when they did!)
Achievement records – copy certificates or results list prove achievement of qualification funding claimed for

30. Checks and balances Measure what you fund on!
Whatever unit or measure you use to drive your funding, whatever your proxies for cost, get them reported to you
Systematically analyse the actuals and compare them to your funding rates to ensure that your rates are robust
Adjust where necessary

32. Welcome The LSC Funding Formula Date 24th February 2010
Presented to European Colleagues
By Alex Cook
Welcome

33. LSC Formula basics 01

34. Meeting the four principles
Established in advance
Rates initially based on expert advice on delivery
Annual review of rates
Fair
Based on average actual costs
Equitable
Same for all providers
Verifiable
Audit trail
Standardised supporting data
(Individualised Learner Record - ILR)
Standard rates determined relative to costs
Expert advice – Awarding Bodies recommended GLH for LR, SSC’s activity for ER

35. Funding Models
There are 3 funding models/ streams under Demand Led Funding:
Learner Responsive
- Adult Learner Responsive
- Employer Responsive

36. Funding Models 16 –18 Budget 19+ Budget School/college/ provider-based
Employer-based
16-18 offer, part of entitlement
16 –18 Budget
Provision funded through strategic commissioning without in/end-year reconciliation
Apprenticeships (funded through employer-responsive model)
Provision funded through strategic commissioning with in/end-year reconciliation
Train to Gain service: TtG funds, NVQs in workplace; Apprenticeships 19+ (funded through employer responsive model)
19+ Budget

37. Funding Formula The funding formula is applied to
each learning aim taken by each learner:
Funding =
SLN ×
National rate
Provider Factor +
Additional Learning Support
(ALS)
Programme Weighting
Disadvantage Uplift
Area Costs Uplift
Short Programme Modifier
Success Factor
ALS not mentioned in the previous section
Allows for costs associated with learners as opposed to learning aims

38. Standard Learner Numbers
Standard Learner Number (SLN) Values are a measure of the volume of activity associated with a qualification, learning aim, learner, contract, allocation, or any other set of training or education
Whilst SLNs gives a robust measure of volume of learning, the relative cost of that learning must also be taken into account by the funding formula. The Provider Factor (and component Provider Factor Weightings) is the measure that reflects the relative cost of provision

39. Standard Learner Numbers Employer Responsive
SLN Values are based on activity costing work, driven by costs of delivery in the workplace
Standard SLN values and sector weightings apply to all learning aims in the Employer Responsive model
Each of the aims within an Apprenticeship is given an SLN value:
NVQ
Apprenticeship Element
Key Skills
Technical Certificate
combined

40. Achieve SLN Instalment
SLN Values,
Annual SLNs and SLN Instalments
May
Jun
Jul
Aug
Sep
Oct
Nov
SLN Value
Annual SLN (year 1)
Annual SLN (year 2)
Achieve SLN Instalment
On Prog SLN Instalment
‘Achieve SLN Instalment’ refers to the SLN Instalment that forms the achievement element.
‘On Prog SLN Instalment’ refers to each of the ‘On Programme’ SLN Instalments which are the monthly proportion of the SLN Value after removing the achievement element. Note that two On Prog SLN Instalments are generated in the first month of a programme to recognise the higher costs at enrolment.

41. Start SLN will be counted when a learner is deemed to have started.
A learner is deemed to have started a learning aim once they have remained on that learning aim for the period of time defined in the table below:
Learning Aim Length
Start Period
>= 24 weeks (long course)
6 weeks
2 to 24 weeks
2 weeks
<2 weeks
1 learning engagement

42. Fully Funded Learners
Fully funded learner – Learners eligible for fee remission and LSC pays full standard rate
Learners for whom providers can claim fee remission and are therefore fully funded by the LSC are:
All year olds
Adults on Skills for Life (excluding ESOL), first full level 2, on first full level 3 (other than Apprenticeships)
Income-related benefits, other specific groups
For full list, see Section 4 of the Learner Eligibility Guidance

43. Co-Funded Learners
Co-funded learner – learner/employer contributes to cost of provision.
- Adults not in fully funded categories
- Likely to be lower priority provision
The expected fee or employer contribution is currently 50%

44. Provider Factor
The Provider Factor includes the following drivers of relative cost:
Programme Weighting Factor (All)
Disadvantage Uplift (not TtG)
Area Costs Uplift (All)
Short Programme Modifier (Learner Responsive only)
Success Factor (Learner Responsive only*)
* Employer responsive model handles success based on in-year data - through monthly payments and a 25% payment on achievement

45. Provider Factor Weightings
Provider Factor weightings are the elements of the provider factor applied at individual learning aim level.
The Provider Factor is a single figure at provider level based on historical data
The Provider Factor is used in determining allocations and payments for the Learner Responsive model
Provider Factor weightings based on current data are used in determining payments in the Employer Responsive model

46. Programme Weighting
The programme weighting factor (PWF) reflects the fact that the cost of delivering learning aims of a similar size can vary.
The PWFs:
Learner Responsive
A (1.0)
B (1.12)
C (1.3)
D (1.6)
E (1.72)
F (1.4) – Basic Skills
G (1.92) – Specialist Resource only
Employer Responsive
A (1.0)
L (1.2)
C (1.3)
Employer Responsive Model also includes the other PWFs for Technical Certificates.

47. Disadvantage Uplift The disadvantage uplift:
supports the policy and the costs of widening participation
is calculated using the learner’s home post code and other specified categories
increases funding for learners living in the most deprived super output areas
ranges from 8 to 32 per cent
LSC uses the Index of Multiple Deprivation (IMD) 2004

48. Area Cost Uplift The area costs uplift:
reflects that the costs of delivering provision in London, the South East and some other areas is significantly higher than in other parts of the country
is determined by the location of the provision
ranges from 20% for Inner London to 1% for West Sussex

49. Success Factor Success factor is (Success Rate / 2) + 0.5
0% success rate = success factor
50% success rate = success factor
100% success rate = success factor
College of 2 learners, 2 SLN
All weightings = 1, Value of SLN funding = £3,000
GLH weighted success rates
Based on standard FE success rates
Weighted using provider average glh/SLN for long, short & very short aims
Means success rate reflects relative size
Scenario 1
Scenario 2
Scenario 3
Learner 1
Withdraws
Achieves
Achieves
Learner 2
Withdraws
Withdraws
Achieves
Total SLN 2 2 2
Success Rate 0%
50%
100%
Success Factor
0.50
0.75
1.00
Funding
£3,000
£4,500
£6,000

50. Short Programme Modifier
Reflects the proportionately higher cost/hour of shorter programmes
Calculation is:
x (225 – total learner glh) - minimum value of 1
225
For example:
225 learner glh = 1 short programme modifier
90 learner glh = 1.18 short programme modifier
30 learner glh = 1.26 short programme modifier
9 learner glh = short programme modifier

51. Additional Learning Support
Learner Responsive
Low level ALS Formula (up to £5500)
16-18 model – using GCSE Maths and English
Adult Learner Responsive Model – level of study
60% allocated to providers
40% held in a regional pot to be distributed by the region
School sixth forms have same formula but all allocated, no negotiation
Above £5500 – allocation based on historical claims
Employer Responsive
Fixed monthly payments based on assessed need

52. Application of the formula02

53. Individualised Learner Record (ILR)
Standardised data return describing activity carried out by providers
Includes data to support funding, performance, quality, and more!
Single specification across all funding streams
In a format that can be read by the funding calculations with minimal translation/pre-processing

54. Other data sources Funding rates
Learning Aims Database
Provider lookup
Internal to LSC systems, provides some provider-level lookups for things like area costs
Postcode uplifts file
Postcodes mapped to disadvantage uplift factors and area cost factors for use in funding calculations

55. Funding Calculation module
Stand-alone
Developed separately as a custom application so can be embedded in both LSC systems and provider systems
Ability for providers to see their funding generated to assist in planning and monitoring provision internally

56. Rates methodology 03

57. Activity costs – Aggregate Level
Comments
Framework advice
Expected time to complete the framework
(months)
In terms of months as a guide to the level of assessor time over that period through a programme of regular visits
Assessor days
The total number of days that an assessor will spend with the learner (1:1 days)
This includes:
- NVQ assessment and support days,
- internal verification,
- key skills work-based 1:1 days,
- pastoral support and advice,
- entry activities.
Group-based hours
Group-based knowledge and skills
(hours)
- hours for underpinning knowledge,
- hours for key skills.

58. Activity costs – Detailed (1)
Comments
Framework advice
Time to complete
Expected time to complete the framework
(months)
In terms of months as a guide to the level of assessor time over that period through a programme of regular visits
NVQ assessment and support
Assessment and support time
(1:1 days)
Assessor time in the work place for 1:1 observation, assessment and portfolio development
Internal verification
(days)
Based on a pro-rata 1 day of 1:1 internal verifier time per learner per year
Up to 1 day per 12 months of programme
Underpinning knowledge and skills
Group-based knowledge and skills
(hours)
Group-based hours for developing underpinning knowledge and skills – sometimes specified as part of the technical certificate but not always delivered in the number of hours suggested
Work-based support
The number of 1:1 days with an assessor allocated to knowledge and skills development
Key skills
Key skills delivery
Group based time or 1:1 time or a mix of group- based, 1:1 and some self directed learning
Either 60 hours or 1 day per key skill

59. Activity costs – Detailed (2)
Learner support and review
Regular review of progress
(days)
Based on a review of about ¼ day per learner every 3 months (about 1 day of 1:1 time per learner per year)
Up to 1 day per 12 months of programme
Learner support and advice
Based on an average of around 1 day of 1:1 time per learner per year - pro-rata
The entry programme
Entry activities
This includes 1:1 time with a member of the provider team for interview, assessment, individual learning plan, enrolment forms a framework induction and a work based induction – probably as part of the first visit
Up to 1 ½ days
Group-based induction
(hours)
The number of hours for any group based induction as part of the framework entry programme

60. Activity costs model Inputs
Activity from expert recommendations, ILR, or any other source
Parameters
Costs per unit of activity
Hourly rate for technical/group-based work
Assessor salaries
Fixed costs
Non-achievement adjustment
Etc.
Output
Cost of delivery of framework/qualification
Derived SLN and related Programme Weighting