TRACFULL ECONOMIC COSTING andMANAGING FOR SUSTAINABILITY

March 2004

Jim PortMelanie BurdettJ M Consulting Ltd

Policy background

TRAC a Treasury requirement after 1998 CSR All HEIs have been implementing from 2001 to 2004 Data showed deficits on research funding, and problems of

infrastructure investment Treasury provided additional funding for both in 2002 SR Now government-wide interest in sustainability and requirement on HEIs

to move towards managing on sustainable basis (all activities) This requires all institutions to consolidate TRAC implementation and

extend to project level Now need TRAC Full Economic Costs at project level to gain increased

funding for public research (research councils, government depts etc)

Relative growth in HE activity and funding (UK)

-60

-40

-20

0

20

40

60

80

% 1989/1990 1999/2000

Research grantsand contracts

Student numbers

Sq metres

Books/jnls per FTE

Unit of funding(teaching)

What does sustainability imply?

1. You have an integrated institutional strategy (academic-financial)

2. You are recovering full costs on mainstream operations

3. You are investing enough (and appropriately) to ensure future productive capacity (of the order of 4-5% of insured asset value annually)

4. You are managing risks and able to adapt strategy as needed

How do HEIs do this?1. Costing: Knowledge and understanding of full economic

costs (by academics, not just finance)2. Strategic management of teaching, research: Use of

this information in planning, pricing, portfolio management, project management – culture change for some

3. Better prices paid by public sponsors4. Investment strategy (assets and staff)

TRAC will deliver (1) (2005) TRAC supports (2) – section B2 of manual TRAC a condition of (3) – section B3

Similar principles for Research, Teaching & Other

Institutional Strategy

ACADEMIC FINANCIAL

Key tests of sustainability:a. integrated strategyb. portfolio of activity responsive to strategy and market c. full economic cost recovery – cash to reinvestd. investment in infrastructure for future needs.

currentoperations

future operations

using

future infrastructure

generatingsurpluses tore-invest in

currentinfrastructure

Managing risk andchange

Costing: adapting TRAC for Full Economic Costing of projects

TRAC was designed for institution-level accounting FRAC group has endorsed methods and cost adjustments Some (many) HEIs have not yet fully implemented TRAC

– issues of cost drivers, data quality, management ownership and use of data

The issues for extending TRAC are: Estimating academic staff time on projects Charging more costs as direct (especially space) More robust treatment of indirect costs Verification and data quality

Principles behind the development of TRAC

Increased public funding requires increased accountability - improvement is required and an external QA process

But there is no “right” method – methods a compromise HEIs who make progress should not be penalised because

others are slower (so encourage good practice, not impose lowest common denominator solutions) Those with better methods may receive higher prices Those who fail to meet standards will have to take action

Its about costing – should not allow pricing or funding considerations to threaten best costing practice

Need to distinguish:Costing: TRAC enables HEIs to calculate Full Economic

Costs (fEC) – long-term resource impact of projects and activities

Pricing: a policy decision which may be informed by costs: Market pricing – what the market will pay – e.g. overseas

student fees, consultancy Cost-based pricing: not a free market and usually set by

government – e.g,. Teaching price bands, research councils

Funding: what the government gives to HEFCE, Research Councils and OGDs will influence the way they price non-market activity

Note TRAC is a costing tool. It is designed to provide thebest view of costs – and methods are not dictated by whatsponsors might or might not pay.

Is it compulsory for low-R institutions?

You will need TRAC fEC for any public research contracts – or have to accept lower prices

TRAC is to be used by HEFCE for teaching funding method, and is recognised by DoH, TTA, charities etc

fEC enables institutions to negotiate better prices for consultancy and other “commercial” projects – and to manage projects and change culture to improve cost recovery.

You still have to manage on a sustainable basis You will still be subject to the TRAC QA process

Implementation is effectively mandatory, but should benon-burdensome for HEIs with little contract income

Costs and benefits: research

There is a business proposition for research universities Appoint a senior project manager (PVC level) Set up a project team Recruit some new staff (accounts/research support) Involve all academic staff who manage research projects Manage the research portfolio and projects to maximise outputs

and cost recovery as soon as possible This might cost £200k for 2-3 years. It might deliver £2-£5m

annually from research councils/OGDs from 2006, and this could increase significantly over time

Other institutions will have a different mix of costs and benefits – those with significant contract income will probably gain most

Timetable for implementation TRAC Guidance now approved and issued (Feb 2004) Regional training workshops (March) Implementation support from May Quality assurance process from May Research Councils forms etc available September 2004 HEIs must have initial methods in place by Jan 2005 And can apply to research councils on new basis from Sept 2005

But can use new robust FEC data with other projects and sponsors (OGDs, charities etc) as soon as you have it:

And of course to inform pricing of consultancy, student fees etc

So implementation and benefits start now

Implementation and support

Decide your strategy – don’t do too much or too little without understanding why

Do appoint additional staff if you need them – they may well pay for themselves

Hence senior managers MUST get involved in planning

But it is a legitimate strategy to do the minimum (and accept some loss of potential benefits)

Culture change and communication The manual is full of materials to help with this And there will be support

Full economic costing: the methods

Principles

light-touch build on existing Guidance practical robust fair and reasonable materiality can be developed over time holistic consistency

The Guidance Manual: Volume III

Methods are in Section B1

Overview in Section A1 or A2

List all of requirements in Section A3

Most of it is advisory/supporting/descriptive

Useful definitions on page 6

The Manual

Substantial document Written for technical project manager Assumes good knowledge of TRAC (builds on

methods required for annual TR allocation) – a few changes (Section A4)

Meets three needs: Diverse circumstances of 165 institutions Robustness for sponsors Holistic agenda

Principles for readers of the Manual

Minimum indicated by should (see Section A3)

Lot of detail for those that want it Or for those that want to go further

Simple methods, can ignore much of detail if want– but possible downside in terms of cost recovery

Don’t go over the top. Practical, materiality, fair and reasonable.

Need to understand

Focuses on Research projects (including fellowships);o but methods directly applicable to Teaching and

Enterprise

Training and supervision of PGR students are a separate ‘activity’ from research projects

About costing not pricingo Building up the fEC of a project, not the price.

What is the fEC Directly incurred costs (RAs, travel and subsistence,

consumables, new equipment) Directly allocated costs (PI costs, estates, lab technicians,

equipment) Indirect costs

(Implications for Research Council funding:Directly incurred costs – record on actual, and can

vire between them.

Directly allocated costs and indirect costs – record on

estimate, and can’t vire/change.)

Directly incurred costs

Estimate and record costs exactly as currently

Exclude redundancy costs, overtime, replacement

teaching costs

Include dedicated staff: research assistants,

technicians, etc.

Directly allocated costs

PI and co-investigators time and salary

Laboratory technicians (pool)

Major research facilities (& equipment)

Estates costs

Investigators time and salary

Who principal investigator, co-investigators, new fellow, existing fellow (if has uncommitted time), visiting academics, retired academics, collaborating academics, clinical academics, PGR student on a project studentship (for this project)

Irrespective of who pays their salary/stipend.

Investigators time and salary (2)

Time and cost Can use variety of techniques to estimate time Will be overages/underages in reality – many

reasons for this

Ensure have time available

Actual hours estimated on this project * hourly rate (based on standard hours)

(not % of time/salary)

Investigators time and salary (3)

Apply hourly/daily charge-out rates to estimated time: Use standard working year (220 days, 1650 hours)

Salary bandings can be used Full salary, irrespective of what the sponsor will pay Include all allowances etc (but not agency payments on

behalf of NHS; nor overtime) If institution does not have a salary cost in their books (e.g.

visiting academic) then no cost

Investigators time and salary (4)

Overall, ensure don’t charge the RCncls/OGDs more than the salary costs incurred – para B1-24

Ensure group of academics don’t charge more than standard hours to Research Council/OGD projects (taking into account Support time)

Estimate time and costs Then record on estimates – not on actual

Laboratory technicians

Charge all costs as direct no later than Aug 07

If dedicated staff then can be treated as directly incurred

For pool staff: estimate time and associated cost for a typical project (will need institutional standards for this: need to take into account their work on all activities)

No balance of uncharged time/cost can be included within indirect costs (or estates costs)

No estates/ind costs now attached to lab technicians.

Major research facilities (& equipment)

Major research facilities must be charged as direct no later than Aug 07 – glasshouses, animal houses, big research units, dedicated IT R systems

Self-defined; likely to be groups of facilities

Estimate utilisation (days or hours used on all activities)

Estimate total annual costs (capital costs - using replacement costs - and running costs)

Calculate a charge-out rate (per hour/day)

Major research facilities (& equipment) (2)

don’t have to know original source of funding or historic cost – as simple method removes any double-counting

don’t have to have a formal measured usage good practice (but not mandatory) to extend to all big

bits of equipment simple method in place to stop double-charging (B1-

88) in context of complex funding streams will need to look closely at charge-out rates currently

calculated by individual departments

Estates costsNow directly allocated/charged. No longer part of

ind costs.

Now to include infrastructure adjustment, research facilities and technicians not yet being directly allocated, equipment not being directly allocated. Excludes COCE, and central services estates.

Costs are included irrespective of source of funding

Use historic costs e.g. 03/04 data for charges applicable from Feb 05 (indexed)

Estates charge-out rates (2)Minimum: from 2005 must be allocated to Academic departments on basis of usage T, R, O on basis of usage (= original requirements!) Research projects on £/FTE basis

Identify estates costs for Research

Separately for generic (classroom) and laboratory departments

Divide Research cost total for each group of depts, by number of FTEs in those depts

To give £/FTE generic charge and £/FTE laboratory charge

Optional : clinical rate; PGR student rate; dept rates

Estates charge-out rates (3)

Rules for off-campus work, visiting academics, collab projects, interdisciplinary work.

By at least Aug 07 must use at least four differential space charges to allocate costs to departments and to T, R, O

Could also introduce laboratory cost per project (based on use of a particular lab - £/day or £/sq m/day) – but not mandatory

Case studies will be published in April update

FTEs

Rationale: student and staff require space and

central services – a key driver of both types of cost

So express both estates charges and indirect cost

rates for Research in terms of £/FTE

(and similarly for Teaching and Other)

Need robust FTE count (at least by 2007).

FTEs (2)

Calculate FTEs on Researchfor laboratory and for classroom departments: total FTEs of PIs (average for year),

allocated to T, R, O (thru TRAC) plus RAs plus PGR students

(For Teaching: probably just use student numbers.)

Should consider weighting FTEs : PGR students unlikely to need as much space or support services as a RA, or PI

Indirect costs

Now smaller residue: Support time of academics, COCE, central services including estates, departmental support (e.g. administrative staff)

Express in terms of £/FTE – no later than August 2007 (no longer % direct salaries)

One generic £/FTE rate

Use historic costs e.g. 03/04 data for charges applicable from Feb 05 (indexed)

Indirect costs (2)

For Research, FTEs must include PGRs as well as academic staff.

Again, consider weighting PGR students; materiality of separate clinical department rate

Rules on collab projects, visiting academics

No rate abatements now necessary.

Other areas

Systems implications: need to record all costs (actual or estimated) each year by project. Not just the price.

Extraordinary items no longer included in the fECs (but continue to report them in the annual return)

Fully applicable to Teaching & institution-own-funded Research & Enterprise work & PGRs.

Other areas (2)

No recalculation of directly allocated or indirect costs that are being charged to the project (and form the basis for the price) unless significantchange to program or e.g. as consequence of mid-term review. Not when RA leaves early, or even on transfer to another institution.

Increments and indexing – issue about indices to use (be pragmatic?)

Collaborative projects with industry.

Other areas (3)

TRAC time allocation: now 3-yearlyAnd: identify time trg/supervising PGR students separately; all RA time to R

PI broadly to confirm time has been spent each year (but no records required)

Annual institutional comparison of actual costs of Res Cncl work (annual TR) with time charged to projects (fEC) – from 2009.

Pricing

Research Councils: fEC forms cost based price Standard X% to be funded No discounting or negotiation on costs No in-project changes to budget (unless exceptional) Don’t calculate fEC on projects live at Sept 05 Detailed rules in September 2004 (e.g. dipstick visits)

OGDs: see Treasury letter. Applicable now.

Charities: discussions continuing.

Areas of complexity

Can be ignored (but fEC may then be too low): using % of time to determine hours (not actual

hours) clinical indirect cost rates and estates charges weighting PGR students time of research fellows who work on other projects charging for equipment

Think about materiality (and impact on price).Can be done through simple approaches.

Areas of complexity (2)

Perhaps leave (not a requirement): different estates charges by building laboratory time by project different indirect cost rates for each department different indirect cost rates for each type of staff workload planning system to ensure academics

have time available time-recording system to ensure academics have

broadly spent the time each year on the project

Areas of complexity (3)Perhaps leave…. cont’d method to check that a single academic has not

charged more than 100% of their salary on RCncl/OGD projects in any one year

identifying the source of the institutional contribution to the fEC for each individual RCncl project

recording fECs for Teaching during the year

Not resolved: will not meet EU requirements HESA reporting – do least burdensome, e.g. record in

same categories as currently

QA and implementation

Ensuring robustness (quality assurance) Proper project implementation plan Getting the academics on board (training and

communication) Helping think through the wider institutional

implications

Quality assurance: integral part of methods

Verification that costs are not being double-charged: Equipment (method, para B1-88) Academic staff salaries (methods, para B1-24)

Annual comparison between salaries allocated to Research Councils derived from annual TRAC time allocation (based on % of total time), and those charged to Research Councils (based on estimated actual hours, but £/hour based on standard working week)

Quality Assurance review

To provide reassurance that TRAC is being implemented robustly.

Funding Council/Research Council QA team Not an audit. Developmental. Helpful to you. Will focus on annual TRAC cost allocation, but also on

fEC, so everyone will have action points.

QA process

Benchmarking proforma and self-assessment form issued mid-MarchCompletion by end May 2004

One-day visit by QA team member July – December 2004Action points agreed at the visit

Internal audit gives confirmation that material action points are met If not possible by May 05 then must use default indirect cost rates; or cannot directly charge estates costs or PI time

Dec 04 resubmit 02/03 indirect cost rates if necessaryMar 05 submit 03/04 indirect cost rates

QA process: typical questions

Are good cost drivers being used? (e.g. not too much use of income or academic staff time)

Are estates costs being allocated to departments and to T/R/O on basis of usage?

Are equipment charge-out rates being calculated robustly? Are appropriate costs being allocated to PGR students? Are the response rates on the annual TRAC time allocation

exercise adequate? Is management doing reasonableness checks? Is a senior committee involved? Internal audit? Will your plans enable you to implement the fEC requirements in

time for Sept 05?

Some common failings

Response rates on the in-year returns means that a sample have provided information, not ‘all academics’

Build up statistically robust sample Jan 04 to Dec 04

In low-R institutions, time on research appears very high (should be scholarship?) Identify the research active staff (internally and externally funded) and ensure

100% completion of time allocation returns Jan to Dec 04 – and compare against income to help assess reasonableness

Ensure statistically robust sample of rest of staff

There is no information on estates use by department, or by activity (T, R, O) Sit down with a master plan of the estates and go through each building with

informed estates manager; and if necessary get HoD to agree results/fill in gaps. Lack of detailed records or a master database cannot stop you from moving forward

Some common failings (2)

Cost drivers for attributing indirect costs to T, R, O have focused heavily on the use of academic staff time

Consider whether the cost driver should be staff and student numbers, with only the staff allocation attributed on AST

Methods to identify the cost of training and supervising PGR students are not well developed

Collect time separately in soc sciences departments

Review proxies (and weightings) in lab departments

Methods to attribute externally funded Research costs between sponsor type are not well developed

as above

How to approach implementation

Why are you doing it:

minimum to comply (‘imposed on us’); or

will give useful information for pricing NPF students, OGD contracts, commercial contracts etc

How much extra are you likely to get – business

proposition

Implementation plan

Team/Institutional ownership critical. Finance alone is not enough. now will directly affect Research Services implications for Planning (RAM) profound will directly impact on any PI as they bid for work

Resources

Tasks/timescale (see Section C3)

Implementation: key deadlines

Sept 05 make bids to Research Councils on new basis

March 06 start recording costs on new basis

Now: start estimating OGD projects on new basis and

charge 100% of fEC

[Jan 05 is useful proxy for the above]

Implementation: useful milestones

May 04: benchmarking & self-assessment questionnaireJuly – Dec 04: QA visitMay 05: last date to have systems robust if all costs can

be charged (if not: default indirect cost rate, or possibly no PI costs or no estates costs)

August 07 – improved robustness. (06/07 data, used to calculate indirect cost rates and estates etc charges applied from Feb 08)

CommunicationsWhat’s in it for academics? SRIF More income to the institution (and to them?) Sustainable level of activity in long term – with infrastructure they

need

Big messages: Its not about increasing volume of work, or about getting

increased cash to spend on PGR studentships or RAs or travel and consumables

Game-playing is difficult: the higher the cost charged, the more the contribution they need to find (and there will be peer review)

Some of it is about their own proactive action in ensuring all costs are charged as direct, and in ensuring prices are appropriate

AND IN CLAIMING fEC FROM OGDS, NOW

Training and communications

To minimise academic effort:

Efficient systems (charge-out rates, automatic calculations of price etc) forms and instructions

Access to costing support Training materials

(they are doing much of it at the moment, it needs to be formalised

and extended)

Wider implications

Resource allocation model – no longer 46% going to departments, all QR going on studentships

Management information systems – how are all the elements of the fEC to be shown in the monthly management accounts?

Volume of (different types of research) that institution can support in sustainable manner (i.e. how much contribution can it make?)

Need to spend more on infrastructure (and be seen to be)

Support for implementation

JCPSG Implementation pack (training materials for academics, case

studies on estates cost allocations, methods of estimating time, example forms)

Seminars Helpdesk

Research Councils New forms and procedures September 2004 Training of Peer Review Panel members