Cash-strapped colleges could do much more to help themselves out of the red, simply by discovering exactly how much they spend, according to the National Audit Office.

The report on the financial health of Scotland’s further education colleges (TESS June 18) suggests colleges are taking financial decisions largely in the dark because of an alarming absence of detailed information.

The NAO said that 40 of the 43 incorporated colleges were heading for a deficit of pound;15 million. It also warned that cost-cutting was still essential despite the Government’s injection of pound;214m into the sector over the next three years.

The report found the colleges had limited information on costs and their systems are “largely underdeveloped”. A survey of 41 of the colleges found that none had a consistent college-wide system which would allow them to identify the full costs of teaching, support and other activities, or the full costs of individual courses.

Almost 50 per cent of the colleges said they had no costing processes at all. The remainder reported that they were only at the stages of having “some form” of costing process in place or under development.

The auditors were critical even of colleges with relatively well-developed costing systems which, they said, tended to concentrate on staffing costs. “None of the colleges reported recharging for the use of capital assets such as accommodation or teaching equipment, even though expenses relating to these items are part of the cost of teaching and other college activities,” the report states.

The colleges told the NAO that detailed costings would not be beneficial, and the best approach was to focus on key processes and activities and the deployment of staff.

But the report countered that the absence of full data leads colleges to make unrealistic assessments about their actual costs, which means the planning is inadequate.

The report adds that the situation also prevents “informed decisions about developing new, and closing old, courses; contracting or widening the portfolio of courses or improving the quality of services provided.”

The NAO calls on the new funding council to set up a “performance management support unit” to help colleges control costs and has in the meantime developed a “benchmarking framework” for implementing best practice. It acknowledges that it should not focus simply on costs but on “a broader perspective encompassing all the major factors contributing to college success.”

The report says the reasons for cost variations are complex. The size and location of colleges are potential causes, but explain less than 10 per cent of the variation.

The NAO accepts that a number of these factors are outwith colleges’ control, particularly where an adverse position was inherited from the education authorities. Colleges are also forced to run unviable courses to comply with the statutory duty to provide “adequate” FE and to meet community needs. Varying ability levels among students can also require greater staff input.

But wide variations in costs are caused by factors which are within the colleges’ control, the report states. The unwelcome news for lecturers is that some of the most spectacular improvements in unit costs, commended by the NAO, have been achieved by staff “restructuring”, larger classes sizes, longer teaching hours and using outside agency staff. Three colleges reduced their unit costs by 30 per cent or more using some of these measures.

Aberdeen College was quick off the mark to announce the report had commended it highly as a “centre of best practice”, although no colleges are actually named.

Even Aberdeen, however, has a pound;3.5m deficit. But it says this is “notional” because of accounting rules which require all colleges to include future pension costs over the entire lifetime of retired staff. Aberdeen also says the deficit is more than offset by the value of its assets which are put at pound;26m.

A recent benchmarking study carried out by an independent firm concluded that Aberdeen College’s unit costs were the lowest of the 350 British colleges on its database. The college says it has cut its senior management costs by 70 per cent since 1991 and middle management costs by over half.

CASE STUDY One college, described as “a relatively large general further education college” has achieved the highest growth, the lowest unit costs and the lowest average staff costs of any college.

These achievements were met by: l reducing the number of teaching departments, and heads of departments, from 22 to 8;

* using support staff for administrative tasks instead of more expensive teaching staff;

* employing 30 new “instructordemonstrators” to replace lecturers; lusing an outside agency for temporary lecturers, achieving annual savings of pound;350,000 a year out of a pound;9.5m teaching-staff budget;

* increasing lecturers’ working hours from 32.5 to 35 a week;

* setting department heads productivity targets for increasing the student head count per full-time member of staff;

* devolving staff and consumables budgets to teaching departments;

* introducing a performance management system covering all staff and including individual staff targets linked to departmental and college targets.