If you aren’t calculating the extra costs for each of your employees, and including them in your care fees, then you are likely paying an extra 20% or more of your overall staff costs.
This extra employer cost should be included in your fees.
On top of that, commissioners expect you to calculate these costs and will question the accuracy of your fees if you don’t.
It’s vital that you add these costs to ensure this significant cost is covered by your care fees.
If you don’t know how to calculate this significant extra cost then read this post as I’ll show you how.
If you are paying a carer the national living wage hourly rate of £10.42. How much is that hourly rate actually costing you?
It’s definitely not £10.42. It will be at least £12.11 and could easily be over £13.
Here’s why…
As an employer, your hourly cost is more than your employee’s hourly rate because you have to pay extra employer costs.
These extra employer costs are:
• On-cost – National Insurance, pension and an apprenticeship levy (if you have to pay it). NI is currently 13.25%, pension 3% and levy 0.5%.
• Cover Cost – the cost of extra shifts to cover annual leave, those on training or absent because ill or on maternity leave for example.
On-cost and cover cost percentages need to be added to hourly rates in order to reflect your true hourly cost.
On-cost
First you add On-cost to the hourly rate.
Most care providers don’t pay the 0.5% apprenticeship levy and therefore need to add an On-cost of 16.25% (NI and pension).
Going back to the NLW hourly rate of £10.42…16.25% of 10.42 is £1.69 – hence £12.11.
If you have a senior carer say on £12 and hour, with On-cost that would be £13.95.
That extra £1.95 an hour equates to an extra £35 for a 12 hour shift. For a 42-hour week, that’s an extra £81.90 for that one senior carer.
A nurse on £22.50 an hour will cost you £26.16 an hour with On-cost. That’s an extra £3.66 an hour or £43.92 a 12-hour shift and an extra £153.72 over a 42-hour week.
Add 16.25% an hour to all of your staff hourly rates (and to your salaried staff) and you can see how this very quickly adds up and really shouldn’t be ignored.
Cover cost
How many days a year do you need to cover for staff on holiday, on training or off sick or for some other reason? How much does that costs and how do you spread that cost across your clients?
Take holidays – if the majority of your staff have 5.6 weeks holiday then a carer on an average of 3.5, 12-hour shifts a week (2 shifts one week and four the next) will need to be covered for 19.6 days or say 20 shifts. For office staff working 8 hours a day, 5 days a week that would equate to 28 days holiday.
Rather than work this out for all your different shift patterns, I would work out all holidays based on 8 hours a day, 5 days a week.
Of course, not all staff need to be covered when on training or off sick so only work this out for those you do need to cover for.
You need to cover for some staff like carers when they are on training. If for example a carer needs 7 training days to cover mandatory training each year and you employ 30 carers that’s 210 shifts a year that also need to be covered.
Once you’ve worked out all of these cover days you need to know how many days that is per Full Time Equivalent number of staff that you employ. That way you can apply the Cover cost percentage to every member of staff.
Divide the total number of days of cover for annual leave, training and so on for a year by the number of Full Time Equivalent (FTE) staff you employ to get an average number of cover days per FTE.
Now you want that as a percentage to add to your hourly rate.
Divide that average number of cover days per FTE by the number of days an FTE works on average in a year (minus the days you’ve calculated that they won’t be on shift) to get that percentage cover days per FTE. This is your ‘Cover Cost’ percentage.
Here’s the maths:
If total days worked = 200 and total cover days = 20
Then the percentage is Total Cover Days / (Total Days Worked – Total Cover Days)
= 20/ (200-20) = 20 / 180 = 11%
Cover cost can be a significant extra cost – 10% to as much as 25% depending on how you manage cover shifts – the last thing you want to do is have to pay this extra cost yourself.
Going back to the example hourly rates…
Recall, the carer on NLW of £10.42. With On-cost that rose to £12.11. Now add in this case 11% Cover cost and you have a real hourly cost of £13.44. £3.02 an hour cost on top of the hourly rate you pay.
The senior carer on £12 and hour, increased to £13.95 with On-cost. Add 11% Cover cost to that and you have an hourly cost of £15.48. A £3.48 an hour increase.
The nurse on £22.50 an hour will actually cost £29 an hour. That’s a 22.4% increase on your hourly rate.
On a £1million annual staff wage bill, extra employer cost at this overall percentage is an extra annual cost of £224,138.
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Not only is it vital that you calculate these extra employer costs for the sake of the financial health of your organisation. Knowing this will also add credibility and strength to your fee negotiations.
The Fair Cost of Care initiative that took place last year and the tool itself is helping commissioners reduce fees and save hundreds of thousands of pounds for their local authority. Even though the results are outdated and highly inaccurate, it’s not stopping commissioners successfully using the tool to try and catch care providers out.
They will quiz providers about their extra employer costs for example, and if you don’t know your On-cost and Cover cost percentages, and be able to demonstrate how you reached them, then they will use that against you.
If you don’t know your Cover cost how can you calculate average hourly rates and hence the cost of the care you provide? Instead, trust us to know this and trust that the fee we are willing to pay is fair for your region.
But calculate these costs and you take away their ability to tell you that your figures are wrong or that you don’t know so can’t justify your fee.
And if you calculate your Cover cost as I outlined here you are calculating it using the same method as used in the Fair Cost of Care tool.
To support what I’ve just said, here is an extract from the FCOC document concerning Cover Cost in which they use annual leave as the example. They talk in terms of weeks instead of days as I have, but the calculation is the same. Of course, you will need to include cover for training, sickness, etc as I outlined earlier.
Calculation of the percentage add on for cover costs has been adjusted so that the total number of working days is reduced in line with the number of non-workdays.
So, using the example of holiday, for each holiday year, a worker is entitled to 5.6 weeks (28 days in this instance as a minimum – some may pay more) leave according to the statutory minimum under the Working Time Regulations. When calculating holiday entitlement, you acknowledge that those 5.6 weeks (28 days in this example) of the year will not be worked.
The pay is therefore calculated as 52 weeks minus 5.6 weeks is 46.4 weeks. 5.6 divided by 46.4 is 12.07%.
Calculating your costs accurately is crucial for both managing your spend and setting fees that you can justify and defend.
But calculating these costs can also be a little overwhelming and so, if you’d like to see how to accurately calculate all of your costs in more detail and with examples and how to set accurate care fees then download my free report, 5 Steps to Make Your Care Business Financially Secure.
In addition to seeing exactly how to work out your costs and set accurate fees, in this report I also introduce you to a couple of tools that will make controlling your finances and setting fees a whole lot easier.
These tools come with a 30-day free trial and if you click the link to the tools from this report you can have them for half price.
Download 5 Steps to Make Your Care Business Financially Secure.
With costs continuing to increase and commissioners more determined to pay fees that fit their budget rather than meet your needs, it’s more important than ever that you are able to control your costs and set accurate fees you can justify.
