Annex 2: Estimating Business Compliance Costs - Hypothetical Example
To estimate compliance cost arising from any additional regulatory measure it is necessary to first estimate the incremental change in compliance costs for a typical business; then multiply this estimate by the number of businesses the regulatory measure applies too. This will provide an estimate of total additional compliance costs incurred by business in complying with the new or amended regulation. This approach can be applied to impacts on more than one particular types/classes of business (for example, small, medium, and large, rural or urban business etc).
For example, a (hypothetical) regulatory measure could require all engineering firms to report, in a prescribed format, the quantity of a particular hazardous chemical kept on their premises as at 1 October each year. Most firms would already have such information as part of their normal record keeping requirements. Therefore the compliance cost requirement for each firm would include the additional staff time needed to collect this information from existing systems and complete the form on 1 October each year.
Consultation with business might indicate the additional compliance cost for business (or each type of business). Alternatively, an estimate could be made of these costs. For example, this industry might have 15,000 small businesses, 1500 medium sized businesses, and 50 large businesses. One-off costs could include training of staff to complete the form. If an average of 15 minutes training was required to competently complete the form for all types of businesses, and average clerical wages in this sector was $12 per hour, the cost would be $3 per business. This figure should be multiplied by the number of businesses to derive total one-off compliance costs (See Box below).
In addition, ongoing costs could include the time taken to acquire the relevant information, complete the prescribed form and transmit it to the regulator. We could assume that it would take an average of 10 minutes for a small business to acquire the relevant information and complete the form, an average of 15 minutes for a medium sized business, and 20 minutes for a large business. These cost estimates could be multiplied by the number of business in each class to estimate total ongoing compliance cost.
The results of this hypothetical example are provided in the following table, showing that this proposal is estimated to increase total compliance costs of the engineering manufacturing sector by $84,500. This comprises $49,650 one-off compliance costs and $34,700 ongoing annual compliance cost.
Example: Estimating the Compliance Cost of Regulation ($)
| Type of Compliance Cost | Small Business | Medium Business | Large Business | Total |
|---|
| One-off Costs | 45,000 | 4,500 | 150 | 49,650 |
| Annualised one-off costs | 7324 | 732 | 24 | 8,080 |
| Ongoing Costs (annual) | 30,000 | 4,500 | 200 | 34,700 |
| Total Industry wide annual costs | 37,324 | 5,232 | 224 | 42,780 |
This example shows that even small increases in compliance cost for individual businesses can result in significant economy-wide increases in business costs.
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