Fairfax County officials said yesterday that they may have to reduce by half the number of people who work for the county's construction oversight agency because of a significant slowdown in building.

The Department of Environmental Management monitors all construction projects in the county to make sure they meet state and local regulations. Under a 2 1/2-year-old county policy, the agency's operations are supposed to be financed by developers through license and permit fees.

Because new development has fallen sharply, so has revenue. As a result, the agency has more people than it needs to do the work and cannot pay for itself.

According to county officials, the agency finished the budget year Saturday about $7 million in the red. If supervisors do not reduce staffing and approve other cost-cutting measures, the agency will have a deficit of about $21 million in the fiscal year that began Sunday.

Fairfax County Executive J. Hamilton Lambert said the county is "evaluating all avenues" on how to cut expenses. The agency employs 461 people and was expected to collect about $39 million in fees this year; according to recent projections, the agency will collect only about $18 million, which would support only 243 workers.

"We don't know where the bottom is, but we do know the decline in commercial and residential development is going to continue for some time," said Lambert, who attributed the decline to oversupply.

"Obviously, the last thing we want to do is lay off employees," Lambert said. He said the county would try to shift agency employees to other county jobs and not hire replacements for people who retire. As a last resort, he said, the county is considering layoffs.

County Personnel Director Cornelius O'Kane said 50 to 80 building agency employees have volunteered to move to other departments, and about 40 transfers should be approved by next week.

Supervisor Joseph Alexander (D-Lee) said it is unclear whether other county agencies can absorb so many workers, but he does not think people will be laid off.

"We cannot afford to go down the road to oblivion" in the agency, Alexander said, noting that cutting 218 jobs would "emasculate" it.

A county staff report says that severe reductions in services could be avoided for $4 million more than the estimated $18 million the agency will take in this year. With a budget of $22 million, the building agency could have 335 workers, 126 fewer than today but 92 more than an $18 million budget funded solely by developers.

According to county figures, the agency expects about 720 plans to be submitted this year for various subdivision sites and public improvements. That would be about 500 fewer than last year and more than 900 fewer than the one-year high of 1,672 in 1988. Similarly, 122,900 building, electric and other permits were issued in 1988, but only 70,661 are expected this year.

The agency is consolidating some offices, which will save about $600,000, and a review is underway to determine how many people are needed to perform such critical services as building inspections. The county staff has been directed by a board subcommittee to meet with developers to determine what other services could be curtailed.

"We have a natural concern when cutbacks take place that reduce services and cut down the speed to process permits," said Thomas C. Hicks III, president of the Northern Virginia Chapter of the Association of Industrial & Office Parks. Nonetheless, he said, the county is "demonstrating sincere concern in having the development industry participate in solving a mutual problem."