PI's: Overhead Costs
Value for Money: Overhead Costs
CPP 04: Overhead costs as a percentage of turnover
Rationale, Definition & Worked Example
Below you can find information regarding the rationale, definition and formula for this performance indicator. This includes a worked example to demonstrate how this indicator should be calculated.
Rationale
The key to successful benchmarking of these measures is allocating your costs in a consistent way. Cost allocation varies significantly between housing providers, meaning cost per property measures within financial statements are not comparable.
Organisations wishing to benchmark these high level cost per property measures need to ensure they are closely following the definitions.
However, responsibility for ensuring data accuracy of these measures falls to the housing provider.
The purpose of this exercise is effectively to split your total operating costs into five distinct areas:
However, the fifth category (other) includes items that are not benchmarkable (as they will vary depending on your operational portfolio) and as such are merely set aside for the purposes of this benchmarking exercise.
We are effectively benchmarking the costs of your core landlord functions that every landlord needs to carry out.
The exercise splits costs by tenure type to provide additional granularity and accuracy. For the purpose of these measures (and ease of data collation) we do not apply this split. Ie you need not be concerned by tenure type. Simply divide all costs into the five categories and divide them by all units in management.
To compare overheads we use adjusted turnover as a denominator, as it is entirely possible an organisation carries out significant activities that do not relate to units, such as floating support or wider role type activities. These functions will necessarily increase overhead costs, without increasing unit numbers. As such, a more accurate comparison uses adjusted turnover as a denominator for overheads.
The calculation for adjusted turnover is:
Turnover minus Turnover relating to units not managed (if any) minus Turnover relating to the sale of properties minus Turnover relating to amortisation of grant (following FRS102 provisions).
Organisations wishing to benchmark these high level cost per property measures need to ensure they are closely following the definitions.
However, responsibility for ensuring data accuracy of these measures falls to the housing provider.
The purpose of this exercise is effectively to split your total operating costs into five distinct areas:
- Housing management
- Responsive repairs and void works
- Major works and cyclical maintenance
- Overheads
- Other
However, the fifth category (other) includes items that are not benchmarkable (as they will vary depending on your operational portfolio) and as such are merely set aside for the purposes of this benchmarking exercise.
We are effectively benchmarking the costs of your core landlord functions that every landlord needs to carry out.
Employee and non-pay costs
Your non-pay costs should generally be fairly straightforward to allocate to the above five categories, using the guidance below. Your employee costs may be more difficult. We would expect the majority of employees to fall wholly into one of the above five categories. However, some staff (particularly in smaller housing providers) may carry out functions that cut across two or more of the categories. In this instance, the cost of these staff should be apportioned between the five categories based on the time they spend carrying out each role. For example, a call-handler taking calls relating to both arrears and repairs will need to have their cost split between housing management and responsive repairs and void works.Units and turnover
To scale your costs for benchmarking purposes, we divide them by the number of units in management.The exercise splits costs by tenure type to provide additional granularity and accuracy. For the purpose of these measures (and ease of data collation) we do not apply this split. Ie you need not be concerned by tenure type. Simply divide all costs into the five categories and divide them by all units in management.
To compare overheads we use adjusted turnover as a denominator, as it is entirely possible an organisation carries out significant activities that do not relate to units, such as floating support or wider role type activities. These functions will necessarily increase overhead costs, without increasing unit numbers. As such, a more accurate comparison uses adjusted turnover as a denominator for overheads.
The calculation for adjusted turnover is:
Turnover minus Turnover relating to units not managed (if any) minus Turnover relating to the sale of properties minus Turnover relating to amortisation of grant (following FRS102 provisions).
Definition
This is the total cost of overheads divided by adjusted turnover as a percentage. The numerator must include:
Adjusted Turnover = (Statement of comprehensive income Turnover + DLO internal turnover – First tranche home ownership sales Turnover – Non-social housing properties built for sale Turnover)
DLO internal turnover: Whether or not you have an in-house maintenance DLO could significantly affect this indicator; there will be associated overheads but no corresponding turnover. An adjustment is therefore made for the notional turnover generated by this business, being the schedule of rates or equivalent value of the repairs carried out for your own organisation. As a rough check, we would expect the internal turnover to be in the region of 150- 200% of the corresponding staff costs of the internal workforce. This adjustment should only be made if the DLO is part of the entity being benchmarked.
- Total cost of all staff directly engaged in overhead (back-office) functions, including their national insurance, pensions and on-costs.
- All non-pay costs relating to overheads
Overheads direct staff includes:
- Chief executive and PA
- Corporate services directors and PA
- Office managers
- Corporate support officers
- Front-of-house receptionists
- IT staff
- Finance staff (including rent and service charge accountants)
- Insurance officers
- HR and payroll processing staff
- Performance management and business improvement staff
- PR and marketing staff (including any graphic designers)
- Company secretary and other corporate governance staff
- All staff engaged in housing management as detailed under direct cost per property of housing management
- All staff engaged in management or delivery of responsive repairs and void works as detailed under direct cost per property of responsive repairs and void works.
- All staff engaged in management or delivery of major works and cyclical maintenance programmes as detailed under direct cost per property of major works and cyclical maintenance.
- All estate services contractor-side staff, such as caretakers, concierges, groundsmen, cleaners etc.
- All care and support staff
- All staff carrying out wider-role functions, such as community investment, financial inclusion, regeneration etc.
Overhead non-pay costs include:
- Office rent and/or depreciation
- Other office premises costs (utilities, cleaning, maintenance, furniture, fixtures and fittings)
- Office supplies (such as stationery, printing, postage, refreshments, books and periodicals)
- Finance costs (including audits fees and payroll processing)
- General business insurance liability premiums (but exclude property insurance premiums which go to other)
- IT costs (including hardware and software purchase and depreciation, and telephone costs)
- HR costs
- Recruitment
- Staff training costs
- Corporate board and governance costs (including payments to board members, committee costs and training costs)
- PR and marketing costs (including graphic design and website)
- Corporate membership and subscription fees
- Tenant survey costs
- Consultancy fees relating to central corporate management (but stock condition survey costs are included in major works and cyclical maintenance).
- All housing management costs as detailed under direct cost per property of housing management
- All responsive repairs and void works costs as detailed under direct cost per property of responsive repairs and void works
- All cost relating to major works and cyclical maintenance programmes as detailed under direct cost per property of major works and cyclical maintenance
- Estate services (contractor side) costs
- Costs relating to care and support
- Other costs eligible for service charge
- All costs relating to wider role type activities (such as area regeneration, financial inclusion, employment and training)
- Reconciling items such as
- One off redundancy costs
- One-off pension deficit funding
- Loan fees and financing arrangements
- Charges for bad debts
- Charitable donations
- Depreciation of housing stock
- Impairment
- Cost of sales
- And any other costs that are not part of your ongoing operating expenses.
Adjusted turnover is
The calculation for adjusted turnover is:Adjusted Turnover = (Statement of comprehensive income Turnover + DLO internal turnover – First tranche home ownership sales Turnover – Non-social housing properties built for sale Turnover)
DLO internal turnover: Whether or not you have an in-house maintenance DLO could significantly affect this indicator; there will be associated overheads but no corresponding turnover. An adjustment is therefore made for the notional turnover generated by this business, being the schedule of rates or equivalent value of the repairs carried out for your own organisation. As a rough check, we would expect the internal turnover to be in the region of 150- 200% of the corresponding staff costs of the internal workforce. This adjustment should only be made if the DLO is part of the entity being benchmarked.
Formula
Total overhead costs ÷ Adjusted turnover × 100
Where:
A = Total overhead costs
B = Adjusted turnover
CPP 04 = (A ÷ B) × 100
Worked Example
Total overhead costs = £1,000,000
Adjusted turnover = £8,000,000
Calculation:
£1,000,000 ÷ £8,000,000 × 100 = 12.5%