Part 3: Setting the fees

Charging fees for public sector goods and services.

In this Part, we discuss in more detail the three principles described in Part 2, and the steps and matters that we expect public entities to consider in setting fees.

The circumstances under which a public entity charges fees for goods or services can vary. An entity could charge fees for two different goods or services, with different legal authorities and separate policy justifications and cost structures.

Therefore, this Part does not set out a single standard that entities must adhere to when setting fees. Instead, it considers the basic information that an entity ought to have, so that it can set fees lawfully, give due attention to efficiency considerations, and satisfy the need for public accountability.

We expect that, in setting a charge, the public entity will consider four main questions:

  • What legal authority does it have to charge fees?
  • What is the justification for charging a fee?
  • Is it clear how the costs have been calculated?
  • Are the entity's decisions, charging system, and revenue and costs for that system clearly documented and transparent?

What legal authority does the entity have to charge fees?

When considering the authority to charge a fee, the entity has to understand the purpose and scope of its authority to charge. The entity also needs to know whether the fees are consistent with this authority and within its scope.

If necessary, the entity should seek legal advice on these matters.

Purpose and scope of authority

A fee must be consistent with both the purpose and scope of the legal authority.

Some entities have authority to charge fees under different sections of one statute, and under different statutes. The legal authority can differ both substantially and subtly between the different provisions.

Some cost elements could be recoverable under one empowering provision, but not under another. For example, for one service there could be enough authority to include the costs incurred for related policy advice or investigatory and regulatory activities, but for another the authority could be more limited. It is important to check the precise terms of each empowering provision.

For example, the empowering provision for local authorities to charge fees for various services, including certificates, permits, and consents, in the Local Government Act 2002 provides that fees must not recover more than the reasonable costs incurred by the local authority. Fees charged by a local authority under section 36 of the Resource Management Act 1991 for resource consents and other services are also to be fixed in the manner set out in the Local Government Act, and must follow the special consultative process set out in the Local Government Act.

A public entity's overall sources of funding may be relevant to the interpretation of its statutory authority to recover costs through charging fees.

The entity's understanding of its legal authority should be fully documented, perhaps in a policy manual or similar background document or file.

What is the justification for charging?

If a public entity is authorised – but not obliged – to charge a fee, the entity should consider its justification for charging. If the entity considers that charging a fee is justified, the entity also needs to decide what proportion of its costs it aims to recover. That is, does the entity understand what it is seeking to achieve, or to avoid, in setting fees?

Judgements about the justification for charging a fee are for the entity to make, based on sound information and assumptions. The discussion in the Treasury Guidelines about identifying the options for charging fees, options for who to charge, and objectives for charging, can help entities in making these judgements.

The entity needs to be aware that its reasons and decisions are open to review by the Regulations Review Committee, the courts, and the Auditor-General.

Is it clear how the costs have been calculated?

The fees for a particular good or service should reflect the costs estimated to be incurred by the public entity in producing that good or service.

Establishing the cost of a good or service involves:

  • identifying the different goods or services being produced;
  • identifying the resources used in producing each good or service;
  • estimating the volume of each good or service to be produced in a given period; and
  • estimating the volume and cost of resources required to produce each good or service in that period.

As an entity considers its cost structures, it should consider:

  • issues of efficiency, including administration and collection efficiencies (the transaction costs in managing a fee charging regime should not be out of proportion to the sums involved); and
  • how to deal with capital expenditure, fixed assets, and depreciation (see paragraph 3.34).

Once all this information has been gathered, the entity is in a position to decide what fees to charge for each good or service.

The entity should continually consider:

  • its authority to charge fees and the context for the charging; and
  • how much it has invested in the process used to allocate costs and set fees – the more goods or services it charges for and the more revenue it generates, the more thorough and considered the analysis should be.

Identifying what is being produced, and the resources used in its production

An entity should identify the range of goods and services it produces before it decides how they should be grouped for costing and charging purposes. They should be grouped on a reasonable and logical basis. At times, it may be more practical to divide complex products into smaller components; sometimes it may be easier to group several related products together for costing purposes.

Once the goods and services have been identified and grouped logically, the entity needs to determine and cost the resources used in producing them. These resources will usually be a mix of labour, materials, overheads, fixed assets and related costs, and any other relevant costs.

The entity should ensure that its cost analysis identifies the costs incurred in related functions or roles of the entity, so that a clear choice can be made about whether to allocate these costs to the production process and to recover them through the fees it charges.

For example, an entity that regulates a profession or occupation might charge an annual practising fee to its members. The entity could also have a role in providing ongoing education or training to the industry's members, the costs of which it recovers from the members. The entity will need to ensure that its cost analysis appropriately identifies all likely or reasonably expected costs from all of its functions and roles.

An entity will generally not be authorised to explicitly build up a reserve from its fees for no reason other than to have funds generally available in case they may be needed in the future. As discussed earlier, given the nature of forecasting demand and costs, we recognise that an unintentional over-recovery could occur. A surplus can arise for many reasons, including because the actual demand varied from that forecast. An unintentional surplus differs from one brought about by an entity that has set fees with the intention of creating a general reserve.

It is also important to differentiate between the deliberate building up of a general reserve and prudent financial management, which includes reasonable provision for all likely foreseeable costs. An entity should consider all likely costs that could occur within the forecast period when performing a costing analysis. What is reasonable will depend on the circumstances of each entity.

Costing the use of resources

Cost is a monetary measure of the resources used in producing something. Sound methodologies that identify the cost of resources, and allocate the costs to individual goods or services, are essential aspects of good charging practice. The entity should have a system in place to collate the cost information. The type of systems developed should take account of the context and should be in proportion to the level of revenue and costs that the entity needs to track.

In identifying the resources, and hence the cost, involved in providing the forecast volume of goods or services, the entity has to use the best information available to it and make reasonable assumptions about prospective information.

It could be appropriate to use sampling to determine standard rates. A standard rate is the average amount of resource expected to be used to produce or contribute to a particular good or service, such as the standard labour or materials cost for each item. A standard rate could be appropriate where fluctuations in the amount of resources used are small. Equally, if costs will vary depending on the way in which a good or service is delivered (for example, the cost may be significantly cheaper if the service is delivered online), the entity may need to consider whether that is significant enough to be reflected through the costing or fee setting process.

Some types of costs

Typical costs that are incurred in producing goods or services are outlined below.


  • The cost of labour includes remuneration costs (such as salaries, wages, and superannuation), and other employment-related costs such as fringe benefit tax and ACC levies.
  • Time is often an appropriate basis for allocating labour costs to different activities. If employees work on more than one good or service, the entity will need to determine how to allocate their time. The entity could gather this information by recording the time spent by employees on different goods or services, by determining this on a sample basis, or by an informed estimate.


  • The average quantity of materials required to produce something can be determined based on past experience, estimates if there is no historical information, or a practice run. The quantity of material includes any usual scrap or wastage.
  • Where volumes and costs of materials used in a given period are already known, the standard material cost for an item could be determined by dividing the estimated total material cost by the estimated number of individual items produced in the period.


  • Overheads include all services received or purchased from other divisions or sections of the organisation, or from third parties (such as rent, telephone, and travel costs).

Fixed assets, depreciation, and other costs related to capital:

  • It is generally not appropriate to include capital expenditure (the purchase of fixed assets, such as land, buildings, other physical construction, and equipment) in the calculation of costs for setting fees. Recovering the costs in the year they were incurred can treat current and future consumers inequitably – one group will be paying for something (such as an enhanced IT system) that they may not get the benefit of, which will not usually be appropriate.1 Also, these capital expenditure costs are recovered through depreciation.2
  • Accordingly, the cost of a good or service should include depreciation charges on the relevant fixed assets. Depreciation is calculated based on either the purchase cost of the asset or the asset's fair value, depending on the accounting policies of the entity.
  • Other costs include the capital charge that the Treasury levies on certain types of entities, such as departments, based on the level of taxpayers' funds held by these entities. Where levied, the capital charge represents a cost to the entity and should be included in the cost calculation.

In determining their costs, entities should be careful to avoid including expenses funded through other means in their analysis for charging fees.

Direct and indirect costs

The costs discussed above can have a direct or indirect relationship with the goods or services being produced. Direct costs – those that can be traced to a single product (such as labour costs to provide a service or the materials that go into making a good) – should be allocated to that product. Other direct costs can include the costs of external services, depreciation, and the capital charge levied by the Treasury.

Conversely, some costs can contribute to producing a product but are not incurred exclusively for that purpose (like rent or electricity costs). Indirect costs should be allocated to goods or services being produced based on the extent to which the indirect cost contributes to, or was caused by, the good or service. Where a causal relationship is not readily identifiable (such as the salaries of chief executives) the costs should be allocated systematically across the various goods or services. Possible allocation bases include their relationship with direct costs, number of staff, volume of service, and office space used.

The method of allocating costs should be formulated at the top level of the entity, to ensure that all relevant indirect costs of the organisation are included and only charged once. However, managers directly in charge of the activities concerned, as appropriate to the entity, should make the actual assessment of costs.

It is the relationship of a cost to the good or service that will usually determine whether or not it is a direct cost. The type of cost, or the part of the organisation that incurs the cost, is less relevant. However, this might not always be clear, and there is scope for the entity to decide the most appropriate analysis. For example, legal costs could be treated as direct costs if they can be specifically identified with the particular good or service, or it may be more practical to allocate them as part of the indirect overhead costs.

Allocating indirect costs might not always be straightforward, but the entity should make a reasonable and logical assessment of indirect costs and their allocation against goods or services. This should take account of the type of entity and its overall structure, to determine what level of cost allocation is appropriate. The context could suggest that a comprehensive allocation of overheads is not appropriate or necessary (for example, for a relatively small service line in the context of a large entity).

Estimating the volume to be produced in a given period, and the volume and cost of resources required to do so

The entity should estimate the future demand for each good or service in the period for which it is carrying out the analysis. Sometimes this can be accurately forecast from previous experience; at other times it will be less clear and the entity will need to make assumptions about the different factors that might affect the demand.

Once the entity has information about the forecast volume, it can estimate the required resources and their costs.

When quantifying the costs of the resources that will be needed to meet the expected demand, the entity should take into account fixed and variable costs:

  • fixed costs are stable within a certain volume range and change only when significant changes in volume occur; and
  • variable costs change continuously with changes in volume.

The entity will need to make assumptions about the prices that it expects to pay for the resources that it will need to produce the goods or services. The entity should make reasonable and logical assumptions about the level of resources needed to produce the goods or services, based on the best information known and on anticipated changes (such as inflation).

The entity will need to determine a logical period on which to base the cost analysis. If the entity usually carries out reviews every three years, that could be an appropriate period. The analysis will also depend on the extent of information available about future costs and forecast demand. Whatever period the entity chooses for the analysis, it should review the analysis at least every three years.

Determining the basis for setting and charging fees

Once an entity has identified its cost structures and individual cost components, and has estimated the volume of demand and therefore the costs that will be incurred, it can decide how to set its fees. At this point, it will need to factor in any policy choices that have been made about the proportion of costs to be recovered through the fees.

The fees will need to include GST.

Deciding how to set the fees

Fees can be expressed as a monetary amount for each good or service produced, or each unit of resources (such as an hourly rate), or a combination of resources (such as an hourly rate plus materials).

The appropriate basis for charging a fee will depend on the nature of what is being produced. If the goods or services are standardised, it may be as simple as dividing the total costs by the estimated volume to be produced. However, if the costs incurred in producing individual goods or services vary significantly, an average cost might not be the best method. More specific charges may be needed according to what is being provided.

The fees should, wherever possible, be set before the goods or services are produced. If not, the incentive for management to control costs could be reduced. In addition, consumers should know the fees in advance so that they can decide whether they want to incur the costs associated with the goods or services.

Are the entity's decisions, charging system, and revenue and costs for that system clearly documented and transparent?

A public entity that charges fees should have:

  • a documented approach to its charging system that refers to the legal authority for charging, the scope of the charging ability, its rationale for charging (with appropriate reference to the Treasury Guidelines), and any other sources of revenue including revenue from the Crown, along with its approach to costing;
  • a sound cost-allocation process appropriate to the entity and the fees;
  • for each charge-setting exercise, a clear audit trail showing the assessment of costs incurred and forecast demand, and how the fees have been arrived at; and
  • a record of its consideration of the principles and questions contained in this guide – with the extent and level of detail depending on the scale and significance of the goods or services being produced and their cost.

An entity that has this information will be able to demonstrate to external reviewers that it has a rational and reasonable process for identifying the costs of its activities and setting its fees.

Monitoring revenue from fees charged

Once the entity has set the fees to be charged, it should monitor and record the revenue generated from its fees. It can do so using memorandum accounts or a similar method.

Treasury instructions outline the circumstances in which memorandum accounts are to be used by government departments. The Treasury updates these instructions periodically. The current version is the online edition of the Treasury Instructions 2007, available from the Treasury website.

The Treasury Instructions 2007 state that, except where government departments have obtained approval for alternative arrangements from Treasury, government departments must use memorandum accounts to record the accumulated balance of surpluses and deficits incurred in providing goods and services for which they charge fees.

The Treasury Instructions 2007 also state that government departments must present their memorandum accounts in their statements of intent and annual reports. This disclosure should include a summary of movements in each memorandum account, opening and closing balances, and comparative information.

Where an entity (whether or not they are a government department) uses memorandum accounts, it is good practice for the entity to:

  • Provide a separate line item for each group of fees, based on the legal authority for the fees. For example, information about fees established under separate statutory provisions should have separate memorandum accounts.
  • Show in each account an opening balance, the movements during the period, and a closing balance. This will indicate whether over- or under-recovery is occurring.
  • Give an explanation of the characteristics of each account, and provide the basis for charging.
  • Where over- or under-recovery is occurring, give an explanation of what the entity is doing to smooth year-by-year variations in the fees charged.

The memorandum account starts with an opening balance and is adjusted each year by the end-of-year surplus or deficit for the fees covered by the memorandum account.

1: Treasury Guidelines, page 20.

2: Depreciation is a term used to describe the consumption of service potential embodied within an asset during the asset's useful life.

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