Implementing Full CostA new way of thinking and acting

Ljubljana November 19, 2009

Bea Krenn PhD. Adviser EU research fundingPieter-Jan Aartsen, Corporate controllerUniversiteit van Amsterdam

Agenda

I. Introduction

II. Preliminary considerations

III. Relevant environment - external and internal

IV. Basic steps in preparation Full Cost

V. Ways to implement Full Cost

VI. Provisional conclusions

VII. Questions

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Knowledge Transfer Office UvA-AMChttp://www.english.uva.nl/knowledgetransfer

Funding team EU research EU education

NL research

Legal advisers

Business Developers

Corporate Control

Project controllers at Faculty level

II.Preliminary considerations

Full Cost: a matter of transparency Accountability towards national and European tax payers

Common reporting language

Inevitably: reflecting national setting individual universities

Main objective: showing value for money

Showing the need for university contribution to externally funded research projects

Creating a sound basis for negotiations about covering costs

III.Relevant environment external and internal

National setting universities

Ties universities - national government Control and management structure Funding principles Boundaries financial responsibility Accounting principles

Setting Dutch universities

“Withdrawing” national government Development towards private enterprise structure:

Final responsibility: executive board Limited influence on decision-making by employees / students Also exploiting private activities (sometimes in separate legal entities)

National funding principles (output oriented): Education: # students, # Ba/Ma degrees

(weighting factors per discipline) Research: # PhD, % of Education budget

Tendency to increase competition based funding (quality assesments) to shrink fixed amounts

Financial responsibility 1997: abolishment cash-based system 2008: Obligation to apply general (national) accounting principles

Developments in NL All public Dutch universities: intention to implement FC

Phasing is different

Empowered by Dutch Association of Universities

Voluntarily (no requirement ministry of Education)

Dutch ministeries have adopted FC in contract conditions (SISA)

Trying to pull on board Dutch Research Council!

Internal environment Organizational conditions (UvA)

Strong support for transparency by board / management (2006) Establishing climate for cost-(recovery) related decisions Full scope responsibility Faculty deans

Concentrating financial and academic policy in one hand

Rationalizing internal budget allocation Tendency to relate costs to performance

awarding “preferred behaviour”

Budgeting is about numbers, not (in first place) about € € is derivate: university heart pulses elsewhere

Sound information system to accommodate principles of cost and budget allocation

IV.Basic steps in preparation Full Cost

Denominate primary activities in university

Analyze cost drivers (primary and secondary)

Design cost allocation scheme

Denominate main activitiesReason of existence universities:

Teaching

Research

Valorisation (Intellectual Property)

Other activities Care for patients (hospitals – faculty of medicine) Guardianship cultural heritage (museums) Consultancies

Analyze cost drivers

Teaching & Research: Primary cost driver Time spent by academic staff (# hrs / # fte)

Support and facilities: Secondary cost drivers Time spent by support staff (# hrs / # fte)

Use of space and housing facilities (# sqm)

Use of ICT-facilities (# workstations)

Administrative support (k€ revenue, k€ costs, # headcount, # used)

Use of university library (# fte academic staff)

Student support and facilities (# students)

Use of dedicated research facilities (time used / % cost increase )

Design cost allocation methodology - I

1) Separate all direct costs

a) Direct project costs

b) Exclusively (directly) teaching- or research-related costs

2) Allocate remaining overhead costs:

a) Collect these costs in cost pools;

representing separate support tasks / departments;

b) Allocate them via appropriate keys / indicators / cost drivers;

(sqm / fte / income / total budget);

c) in one (“simplified model”) or in more steps;

d) mainly to available productive time of all academic staff.

(per department / faculty)

Design cost allocation methodology - II

3) Calculate hourly rates of academic staff, taking into account available “productive time”, discerning two components:

a) Direct personnel costs - one rate per homogeneous salary group (UvA: 18)

b) Indirect overhead costs - different rates (in €, not in % sal. increase), depending on

• Cost structure academic discipline α, β, γ, medicine, etc.)

• Specific cost structure research institute (laboratories, equipment etc.)

4) Finally allocate full costs by time recording

• Hours recorded multiplied with hourly rates (in different components)

• To individual research projects (+ teaching programs / evt. other activities)

• Final step: exclusively education or research related overhead costs on the basis of

time spent (FP7 requirement: not mixing costs by nature)

N.B. Applied to all activities: either governmentally or externally funded, i.a. FP7- research

V.Ways to implement Full Cost

Necessary preconditions Apply cost allocation model to figures from Annual Report

or from annual budget, provided regularly adjusted from post calculation

Decide: Implementing cost settlement procedures in Financial Information System

(making full cost base of management accounting throughout organisation)

Keep model compatible (Excel)

(making full cost a tool of controllers especially for reporting FP7-projects)

Communicate tariffs / rates / procedures in organization

Offer a reliable time-recording system Preferably computerised (and integrated with Financial Information System)

Zooming in: Time recording

Active day-to-day time recording (Employee Self Service): only by those who are employed in contract activities (if required)

Instructions for active time-recording: In principle: record all real hours spent

(avoid mystification / simplification / copying plan) Take into account off-time due to illness and holidays Way of recording overtime (at FC-rate or zero-rate) depending on contract conditions:

if overtime will be paid for (in NL not) if time spent will be compensated (saving for taking sabbatical) if external contract party is willing to pay for it (E.U.-FP7: not)

Passive “background” recording (periodically updated timetables) for all other personnel: “detailed” distribution of available time to various activities /

project (as planned – taking into account illness and holidays) timesheets are “automatically” generated

Other aspects of time recording Emphasize:

Academic activity is highly “personnel consuming” Appointments / salaries of academic personnel are expressed in

hours per week,- due to this: Measuring academic effort in time spent is the best cost indicator In any case as long as external funding is not output-related “No cure no pay” is conflicting with academic

“code of conduct” Sometimes “misunderstanding”:

Nor brain activity (probably continuous), nor presence is measured

Accept the necessity as an economic fact of life Management reporting

Knowledge about time available and time spent can refine and deepen the conception of academic activity

VI.Provisional conclusions

Added value of Full Cost Full Cost: the only clear base for management decisions

Relating costs to cost driver and in the meanwhile budgets to performance

indicators can replace the cheese slicer

In the long run: FC necessary precondition for sustainability

Explicitly co-funding, matching and cross-subsidizing is better than hollowing out government budgets implicitly

Matching expresses bi-lateral interest in research outcome

Showing poverty: the beginning of political awareness

VII.Questions

FP7 and different national settings: One size fits all?

Is the price of Full Cost acceptable?

FP7 Consortia: Market principle or Quality Selection?

Academic manager: contradictio in terminis?

FP7-regulations: Crowbar to increase transparency?