TRAC FULL ECONOMIC COSTING and MANAGING FOR SUSTAINABILITY March 2004

1. TRACFULL ECONOMIC COSTING andMANAGING FOR SUSTAINABILITYMarch 2004 Jim Port Melanie Burdett J M Consulting Ltd

2. 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)

3. Relative growth in HE activity and funding (UK)

4. What does sustainability imply? • You have an integrated institutional strategy (academic-financial) • You are recovering full costs on mainstream operations • You are investing enough (and appropriately) to ensure future productive capacity (of the order of 4-5% of insured asset value annually) • You are managing risks and able to adapt strategy as needed

5. 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 sponsors 4. 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

6. Institutional Strategy ACADEMIC FINANCIAL current operations future operations using current infrastructure future infrastructure generating surpluses to re-invest in Managing risk and change • Key tests of sustainability: • . integrated strategy • . portfolio of activity responsive to strategy and market • . full economic cost recovery – cash to reinvest • . investment in infrastructure for future needs.

7. 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

8. 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

9. 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 the best view of costs – and methods are not dictated by what sponsors might or might not pay.

10. 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 be non-burdensome for HEIs with little contract income

11. 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

12. 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

13. 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

14. Full economic costing: the methods

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

16. 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

17. 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

18. 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.

19. Need to understand • Focuses on Research projects (including fellowships); • but methods directly applicable to Teaching and Enterprise • Training and supervision of PGR students are a separate ‘activity’ from research projects • About costing not pricing • Building up the fEC of a project, not the price.

20. 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.)

21. Directly incurred costs Estimate and record costs exactly as currently Exclude redundancy costs, overtime, replacement teaching costs Include dedicated staff: research assistants, technicians, etc.

22. Directly allocated costs PI and co-investigators time and salary Laboratory technicians (pool) Major research facilities (& equipment) Estates costs

23. 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.

24. 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)

25. 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

26. 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

27. 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.

28. 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)

29. 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

30. Estates costs Now 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)

31. 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

32. 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

33. 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).

34. FTEs (2) Calculate FTEs on Research for 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

35. 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)

36. 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.

37. 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.

38. 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 significant change 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.

39. Other areas (3) TRAC time allocation: now 3-yearly And: 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.

40. 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.

41. 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.

42. 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

43. 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

44. 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

45. 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)

46. 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.

47. QA process Benchmarking proforma and self-assessment form issued mid-March Completion by end May 2004 One-day visit by QA team member July – December 2004 Action 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 necessary Mar 05 submit 03/04 indirect cost rates

48. 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?

49. 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

50. 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