Service Center Workshop How to Open and Operate – Legally!

1. Service Center WorkshopHow to Open and Operate – Legally! • Sarah Elwell Associate Director of Operations, Harvard University • Nuala McGowan Senior Manager for Compliance, Harvard University 1 1

2. Goals for Today's Session • Define a Service Center and its characteristics • Discuss OMB A-21 and other federal requirements • Identify what to budget in the billing rate • Learn the different rate bases that can be used to calculate the rate • Identify key compliance issues • Learn about the recent audit findings on service centers

3. Service Center Definition : An operating unit within the Institution that provides a service, or group of services, or product, or group of products, to users – principally within the institution for a fee.

4. Federal Definition of a “Recharge” Ctr.? • Definition of “Recharge Centers” * • “Recharge centers at universities, also known as specialized service centers, operate as in-house enterprises that provide goods or services to individual users or other operating units. These centers function as nonprofit businesses, funding operations through fees from users.” * Summary Report on Audits of Recharge Centers at 12 Universities ~ HHS Office of Inspector General, January 1994

5. Introductions… Which of the following best describes your role? • Central Sponsored Research Administration Office • Department Grants Management • Service Center Facility Manager • Compliance Office • At wrong training session, I think…

6. How many years of Service Center related experience do you have? • Less than 1 year • 1-3 years • 3-5 years • 5-10 years • 10-15 years • Too many to count / >15

7. Important Considerations • Determine the need to establish a service center: • Is this service available elsewhere on campus? • Is our need short-term or long-term? • Is this service provided for or subsidized by a federal award? - Program income vs. service center • What portion of our users will be internal vs. external? - High external user volume may result in tax implications - UBIT (unrelated business income tax)

8. Regulations Governing Service and Recharge Centers

9. Federal Service Center Guidance • OMB Circular A-21 • Other OMB Circulars (A-87; A-122; A-133) • HHS Review Guide for Long-Form University Indirect Cost Proposals • Cost Accounting Standards (CAS) DS-2 • Audit Guide: Adequacy and Compliance Audits of Disclosure Statements Submitted by Educational Institutions (HHS OIG) • Federal Audits of Recharge Centers (HHS OIG)

10. OMB Circular A-21 • Specialized Service Facilities (section J.47) • “the costs of services provided by highly complex or specialized facilities operated by the institution, such as computers, wind tunnels and reactors” • No mention of “service centers” in A-21 • Change to OMB Circular A-21: 5/10/04 • Specialized Service Facilities (section J.47) • Rates to be adjusted “no less frequently than biennially.”

11. Specialized Service Center (A-21) • Cost of service includes direct and F&A • Cost will be charged directly to users • based on actual use • using rates that don’t discriminate between federal and non-federal users • Rates don’t have to equal cost during one fiscal year - reviewed and adjusted at least biennially • Rates shall take into consideration over/under applied costs of the previous period(s)

12. Other Sources of Federal Guidance • OMB Circular A-122: Cost Principles for Non-Profit Organizations • “Specialized Service Facilities” • OMB Circular A-87: Cost Principles for State, Local and Indian Tribe Governments • “Billed Central Services” • “a working capital reserve of up to 60 days cash expenses is considered reasonable…”

13. Service Center Accounting

14. Service Center Accounting… • Revenues should equal costs, over time • Accurate accounting for service center costs and revenues is critical • Service Center operating account must “match” revenues with expenses • Inaccurate accounting will distort the financial picture and create a deficit or surplus in the service center account

15. Typical Service Center Operating Costs • Salaries and Wages • Fringe Benefits • Depreciation expense • Materials and Supplies • Outside services • Repairs and Maintenance • Carry-forward surplus/deficit

16. Guidance for Calculating Serv. Ctr. Rates • Step 1 - Identify all services provided • Step 2 - Determine direct costs associated with each service, regardless of how it is funded • Step 3 - Identify other costs associated with service center operations • Salary of service center administrator / billing personnel • General supplies

17. Guidance for Calculating Serv. Ctr. Rates • Step 4 - For specialized service facility, identify University-wide indirect costs to be included in billing rates in accordance with University policy • Step 5 - Identify and segregate unallowable costs in accordance with the cost principles • Step 6 - Add prior period variances (surplus /deficit) in accordance with University policy

18. Guidance for Calculating Serv. Ctr. Rates • Step 7 - Develop a reasonable method to assign service center operating costs to each service • Step 8 - Accumulate/estimate future usage for each service to establish the rate base(s) i.e., billable units • Step 9 - Calculate cost-based rate for each service • Step 10 - Determine the rate that will actually be charged

19. Exercise :Rate Calculation

20. Comparison of Service Center Rate Calculations (Specialized vs. Regular) Specialized Service Facility Estimated expenses: Technicians (10) 1,000,000 Supplies 250,000 Maintenance contracts 250,000 Equipment depreciation 750,000 Addt’l expenses in "fully loaded" rate: Building depreciation 30,000 Building loan interest 400,000 Operations & Maintenance 200,000 Total expense budget: 2,880,000 Estimated units of service: 10,000 Rate per unit of service = *288 Service Center Estimated expenses: Technicians (2) 200,000 Supplies 50,000 Maintenance contracts 50,000 Equipment depreciation 150,000 Total expense budget: 450,000 Estimated units of service: 2,000 Rate per unit of service = 225 *Note: That $288 may be a rate that the users of the facility will be unwilling to pay, in which case the SSC may have to charge a lower rate and the unit "owning" SSC will underrecover. For theF&A Rate Calculation - Addit’l costs not included in Service Center Rate: $630,000. Add to F&A numerator => higher F&A rate

21. Service Center Compliance Issues

22. Summary of Key Compliance Issues • Rates should recover no more than the cost of the good or service • Rates must breakeven over time, not each year • Rates don’t discriminate between users, especially those paying with federal funds • Surplus from service center shouldn’t be used to fund unrelated activities

23. Summary of Key Compliance Issues • Must maintain published price list • Rates may include depreciation expense only, not the full cost of equipment • Depreciation included in SC rates can’t also be in the F&A rate • Service center subsidies should NOT be included in the F&A rate

24. Discussion Questions • Must all users be charged the same rates? • Can we charge F&A costs on service center charges made to grants? • Can we include a “reserve” amount in the rate to purchase new equipment? • Do we add F&A costs to service center charges made to external parties?

25. Discussion Questions ( cont’d) • Can we charge users based on “market” rates, or what other institutions charge? • Can we charge external users more than the cost of the good or service provided? • If we earn a surplus, do we have to give a refund to users in the same year?

26. Top 10 Elements for Effectively Managing Service Centers • Be able to identify the active service centers at your university. • Understand the mechanics behind service center accounting. • Know the workflow (and the parties involved) in setting up a center. • Recognize operations that may become service centers in the future. • Have a solid (and realistic) business plan for operating the center.

27. Top 10 Elements for Effectively Managing Service Centers (cont.) • Have written policies and procedures in place for the management of service centers. • Templates should be made available to assist with rate calculations. • Rates should be reviewed and approved at least every two years. • External usage (sales to non-university customers) should be monitored and tracked. • Use software or some other means to invoice and collect regularly.

28. # 1 : Be able to identify the active service centers at your University • Create/Maintain an inventory that includes all of the following: • Name (and account number) of the center • Related accounts (capital accounts) • Contact information • Date when rate submissions were received • Date when rate submissions were approved • Actual rate submission documents • Identifiers in the accounting system (Fund Type, Class, Internal Revenue codes)

29. # 2 : Understand the mechanics behind service center accounting. • Proper account codes • Expenses • Revenues • HR set up to get people paid out of the right place • Expenses and revenues accounted for in the center • Payroll expenses • Fringe • Depreciation • Supplies • Collections • Carry-Over? Deficit funding?

30. # 3 : Know the workflow (&parties involved) in setting up the center. • Who is involved in each step of the set-up process? • Who is involved once the center is up and running? • What approvals are required during set-up and beyond? • School/Department • Budget Office • Accounting • Cost Studies

31. # 4: Recognize operations that may become service centers in the future. • Internal activity identified • Internal revenue account codes used • “Word of Mouth” • Not on active inventory yet, but should be • Discussions on potential centers

32. # 5 : Have a solid (&realistic) business plan for operating the center. • Market for goods/services • Is there a demand for the products and services offered? • Are you able to charge rates that will allow you to cover costs • Centers are not just a source of “revenue” • School level understanding of potential deficits • If the center loses money, will school cover it? • Expectations versus Reality • Administrative Requirements: Managing budgets, billing, etc.

33. # 6 : Have written policies and procedures in place for the management of service centers. • Is everything clearly defined? • Steps for set-up • Steps for maintenance • Roles and responsibilities • Does everyone know their role and what they are responsible for? • Thresholds for establishment of centers • Frequency of activity • Number of grants charged • Dollar volume • Carryover of surplus and deficit

34. # 7 : Templates should be made available to assist with rate calculations. • Standard templates in place versus freedom of centers to use their own. • Capture: • Salaries • Fringe • Equipment • Supplies • Usage Estimates • Advantages and disadvantages to both options

35. # 8 : Rates should be reviewed and approved at least every two years. • How often are rate calculations approved at your university? • Things to look for • Salaries and effort (individual) • Correct fringe rates used • Depreciation on equipment • Surplus/Deficit carryover • Rates at or below cost

36. # 9 : External usage (services / sales to non-university customers) should be monitored and tracked • UBIT risks • Sales to other not-for-profits/hospitals/educational institutions • Sales to corporations. • Thresholds for external usage • De minimus vs. • Significant • Rates charged to external versus internal users

37. # 10 : Use software or some other means to invoice and collect regularly • Centers need to track: • Usage • Invoices • Collections • University accounting system or specific service center software

38. Break - 15 minutes

39. Audit Findings: Past and Present

40. Summary of HHS OIG Audit Findings (1994) • Audits at 12 universities to determine whether recharge centers complied with “OMB A-21” • OIG Identified $3.2m in overcharges for: • Surplus Balances ($1.3m) • Duplicate and unallowable costs ($1.2m) • Recharge costs and Indirect costs ($0.4m) • Funds used for unrelated purposes ($0.2m) • Inequitable billing ($0.1m)

41. Summary of HHS OIG Audit Findings (1994) • Examples of significant issues • Six universities accumulated $6.6m in surplus funds • Five universities did not analyze and adjust billing rates resulting in overcharges ($1.2m) • Two universities didn’t credit recharge accounts for interest earned on excess fund balances • One university improperly classified $0.7m inventory as expense; inventory not consumed in year of purchase is unallowable

42. Summary of HHS OIG Audit Findings (1994) • Examples of significant issues (continued) • One university improperly included surpluses/deficits of recharges in the calculation of IDC rates, overcharging Federal projects by $0.4m • Four universities used $3.5m of surplus funds for unrelated purposes; supplementing an athletic department, developing an accounting system, and renovating academic offices • One university charged inconsistent rates to users of computer services, subsidizing students and staff, overcharging federally sponsored research

43. HHS OIG Findings: Reasons for Overcharges • Universities did not: • Establish or adhere to policies and procedures • Maintain adequate accounting records • Analyze and adjust billing rates, or monitor recharge centers on a regular basis • OMB Circular A-21 does not provide specific instructions for when and how to adjust for surpluses and deficits in fund balances

44. Recent Audit findings… University of Connecticut: • $2.5 Million Whistleblower; False Claims Investigation Settlement. • Specialized Service Centers: Overstated anticipated expenses, overcharged the government and billed for items not covered by the grants. • Billing Rates – Failure to revise and appropriately set its rate structure resulted in submission of numerous false claims. Newsday, January 9, 2006 (Associated Press); Hartford Current, January 10, 2006

45. Recent Audit findings… U Mass Medical: • Recharge & Laboratory Supply Center Charges • OIG could not determine who requested the recharge center services or laboratory supply charges and whether these costs were allocable to the NIH Grant. Records were not retained (Records should be retained for 3 years after the dated of the final financial status report). 08/23/05

46. 10 Most Common Mistakes • Inadequate policy and/or oversight • Billing rates based on “market” rates, not actual costs • Surpluses not carried forward • Invoicing not done on a timely basis • Depreciation included in s.c.rates and F&A • Unallowable costs included in billing rate • Surpluses used for unrelated activities • Mismatch of s.c. expenses and revenues, especially depreciation • Charging lower costs to external customers (e.g. No O/H) • Improperly accounting for costs of subsidies

47. Mitigating risk at your Institution • Do you have an office responsible for oversight of service centers? • Who is monitoring your service center activity? • Set-up of new service centers • Review and approval of rates • Identify and resolve large surplus / deficits • Establish a clear differentiation between service, recharge and specialized service centers in your policy • Dissolve inactive service centers • Review / revise policy as needed

48. Questions…