Lee Stokes, a partner at accountancy firm HaysMac, outlines key considerations for school leaders in the current economic environment

The goalposts have certainly moved in recent months for independent schools following the introduction of VAT on school fees, loss of business rates relief, plus the increased employer National Insurance costs and National Minimum Wage increases taking place from this month. Any school looking to undertake a capital project will face a number of challenges in the current environment.

Schools embarking on a capital project will need to consider how they will ensure good governance and stewardship of the school’s assets. There has to be a clear business case for undertaking the project which should be aligned to your strategic plans. There also needs to be a robust challenge of whether the proposed capital spend is the right project for your school and if the school can afford it.

Once the project has been approved by the board, there will be certain practicalities that should be considered which include:

• Obtaining fee quotes from potential contractors, as required by the school’s financial procedures.
• Undertaking appropriate due diligence of the proposed contractors.
• Can the project be completed within an appropriate timeframe?
• Will additional financing be required to finance all or part of the project?

Careful project management

Careful monitoring of any significant capital project is imperative given the increased risks noted above and also potential uncertainties that may still lie ahead. Capital projects can easily get off track early in their life cycle which may result in budgets being exceeded or planned completion dates being missed, which could then lead to expensive and time-consuming disputes with building contractors.

Project dashboards can be a useful way to monitor key performance indicators for capital projects such as cash flow and project milestones to ensure that the project is still on track. These should be available on a timely basis to enable careful monitoring by project managers, but also provide sufficient information to identify any early warning signs that the project is not going to plan.

Any successfully managed capital project will contain an element of contingency costs included as part of the budget to allow for any future fluctuations in costs or unexpected delays in construction. There is a need to ensure sufficient clarity around all costs before any work is commenced to help reduce the need to dip into any contingency budget and any potential disputes with the building contractors.

Is additional financing required?

One of the key considerations for any capital project is how will the project be financed – can the project be financed from existing reserves or from a dedicated fundraising campaign, or will external finance be required to pay for part or all of the project costs?

If external finance is required, it’s worth remembering that there are certain responsibilities required under the Charities Act 2011 that the trustees of registered charities are required to consider. Section 124 of the Act requires charity trustees to take financial advice before entering into a commitment such as a bank loan when the loan is secured on the charity’s assets. This advice can be undertaken by an employee or governor of the school, but the advice must be obtained from a person who is reasonably believed by the school’s governors to be qualified with ability and practical experience of financial matters. The individual who provides the advice must also have no financial interest in relation to the loan on which he or she is providing advice. Three key issues must be considered by the advisor:

• Is the loan necessary in order for the governors to undertake the capital project?
• Are the terms of the loan reasonable having regard to the status of the school?
• The advisor will also need to advise on the ability of the school to repay the loan proposed on the terms included within the loan agreement.

The advice provided should be considered at a board meeting and consideration of whether the school should proceed with acquiring the external financing fully minuted. The minutes should record clearly agreed actions to enter into the loan agreement, if that is to be the conclusion of the discussions from the advice provided. This will help demonstrate good governance and appropriateness of the decision based on the information available at the time.

These are challenging times for schools and commercial contractors and so any financial projections should be appropriately scrutinised and challenged. Once the project has commenced it will be imperative that the progress of the project is carefully monitored to avoid significant cost overruns and delays in project completion.

LeeStokes