Funded early learning and childcare in private, third sector and childminding settings: delivery costs

Executive Summary

This report presents findings from a national data collection exercise commissioned by the Scottish Government to understand the costs of delivering funded Early Learning and Childcare (ELC) in private, third sector, and childminding settings. The study aims to provide up-to-date evidence to inform local sustainable rate-setting decisions.

Purpose and Context

Funded ELC in Scotland is a cornerstone of early years policy, designed to improve child outcomes, reduce the attainment gap, and support parental employment. The Funding Follows the Child framework underpins this provision, requiring that providers in the private, third and childminding sector receive a sustainable rate for delivering funded ELC. This rate should reflect the costs of delivery whilst supporting reinvestment in the service and enabling payment of at least the real Living Wage to staff delivering funded ELC.

This research supports delivery of the programme of reform set out in the joint Scottish Government and COSLA Sustainable Rates Review by gathering robust and reliable cost data to inform future local rate setting.

Methodology

The research was conducted by Diffley Partnership using tailored online surveys developed in collaboration with the Scottish Government and sector representatives. The survey instruments were designed to be proportionate and accessible, particularly for smaller providers and childminders. A total of 506 settings participated, including 342 day care of children services and 164 childminders. Of these, approximately 270 responses contained sufficient financial data to support cost per hour calculations.

The data collection ran from May to August 2025 and included piloting, validation checks, and follow-up engagement. The analysis focused on identifying consistent patterns across key cost domains, including staffing, premises, meals, and surplus requirements. Where appropriate, qualitative feedback was also reviewed to contextualise the findings.

Key Findings

The mean cost per hour of delivering funded ELC across all day care of children services was estimated at £6.42, with a median of £6.00. Costs varied by provider type, with third sector settings reporting the highest mean cost at £6.72, followed by private providers at £6.16. Meanwhile, an estimated mean cost of £6.39 was calculated for childminders. These figures reflect core operational costs but do not account for capital investment or enhancements to quality that providers might pursue if funding allowed.

Staffing emerged as the single largest cost driver for day care of children services, accounting for approximately 77% of total operating costs on average. Median hourly pay ranged from £18.00 for managers to £10.00 for staff working towards qualifications. Pension contributions averaged 4.91%, with most providers contributing around the statutory minimum of 3%. Providers consistently reported challenges in recruiting and retaining staff, particularly in comparison to local authority settings offering higher pay and better conditions.

Respondents were asked whether they currently pay at least the real Living Wage to staff in their service, in line with Living Wage accreditation requirements. The majority of day care of children services (88%) indicated that all staff receive the real Living Wage, while 8% reported that only staff delivering funded ELC are paid at least the real Living Wage. Meanwhile, 4% stated that they do not currently pay the real Living Wage to staff.

Childminders were asked to report whether they paid themselves at least the real Living Wage. Response to this question was limited but of those who responded 37% reported that they did pay themselves at least the real Living Wage while 63% reported that they did not.

Fees for non-funded hours were broadly similar across age groups, with slightly higher charges for under-3s. The median weekly fee for children aged 3 and over was £285. Meal costs averaged £2.99 for childminders and £3.76 for day care of children services, but many providers felt the funded allowance was insufficient to meet nutritional standards, particularly under new guidance. Providers also reported that shorter sessions tend to carry a higher hourly cost due to fixed overheads.

Operational characteristics varied significantly across provider types. Childminders, on average, typically operated for 46 weeks per year and offered more flexible hours, while day care of children services operated for 50 weeks and served larger numbers of children. Premises arrangements also differed, with childminders more likely to own their premises and private day care settings more likely to rent at commercial rates.

Day care of children services reported a wide range of surplus requirements to remain financially sustainable. While 21% indicated a need for a surplus of 0–5%, a further 55% required margins between 6–20%, and 6% required 30% or more. These figures reflect the diversity of business models and financial resilience across the sector.

Provider Perspectives

Qualitative feedback revealed widespread concern about funding parity between local authority and funded providers in the private, third and childminding sector. Many participants felt that the principle of Funding Follows the Child is not being upheld in practice, with local authority settings perceived to receive higher hourly rates and more generous support. This was seen to undermine sustainability in the private, third and childminding sectors, particularly in relation to staffing and quality of provision.

Staffing costs were consistently cited as the most significant pressure. Day care of children services described struggling to offer competitive wages and losing staff to council-run nurseries. There were calls for national pay frameworks and standardised funded rates to enable parity across sectors. Rising costs across wages, utilities, food, insurance, and compliance were described as outpacing any increases in the sustainable rate.

Concerns were also raised about governance and transparency, particularly the role of local authorities in setting rates while also operating their own services. Some providers suggested alternative models, such as direct funding to parents or national standardised rates, to reduce local variation and perceived bias.

Providers highlighted the increasing number of children with additional support needs and the lack of dedicated funding to support their inclusion. This was described as placing additional strain on staffing and resources, particularly where 1:1 support was required but not funded.

Additional issues raised included the adequacy of meal and snack funding, administrative burdens, volatility in rural and small settings, and infrastructure costs. Several providers also expressed concern about sector morale and the need for greater recognition of their role in delivering national ELC ambitions.

Limitations

The report acknowledges several limitations. Providers submitted financial data based on different accounting periods, which introduces inconsistencies, though this is accounted for in the analysis. A substantial proportion of providers declined to share detailed financial data, particularly childminders, citing concerns about fairness and competition. Many reported that their costs reflect what they can afford to deliver under the current funding model, rather than the true cost of high-quality provision. The estimates also do not capture investment in quality improvements or strategic development, though this is partially accounted for by asking for an estimate of return on investment (ROI)/surplus needed to be sustainable.

Conclusion

This data collection exercise provides a detailed snapshot of the costs associated with delivering funded ELC in Scotland. The findings highlight variation across provider types and operational models, as well as the pressures facing the sector in relation to staffing, premises, and financial sustainability. While the dataset offers valuable insights to inform future discussions on rate-setting and funding arrangements, it also reflects the complexity of the landscape and the diversity of experiences among providers.

These findings will provide up to date evidence for policymakers, local authorities, and sector stakeholders as they consider how best to support the delivery of sustainable ELC across Scotland.