Panel: Managing Service Centers – Costing, Process, and Strategy

1. Panel: Managing Service Centers – Costing, Process, and Strategy Presenters: Bill Lawlor, Director of Financial Compliance and Cost Analysis, University of Nebraska Medical Center Josh Rosenberg, Director of Cost Studies, Emory University

2. AGENDA Overview of Service Centers Compliance requirements Rate Calculation Process Applying rates – internally and externally Best practices for center management In closing….

3. OVERVIEW What are “service centers?” They are often described as “departments or functional units which perform specific technical or administrative services for the benefit of other units within a reporting unit for a fee.” Service Center Categories Specialized service facilities (Animal Care Facility) University-wide recharge centers (Facilities Management) Core Facility (Immunology Core) Departmental recharge centers (Machine Shop)

4. OVERVIEW—Key Compliance Issues What are “service centers?” They are often described as “departments or functional units which perform specific technical or administrative services for the benefit of other units within a reporting unit for a fee.” Service Center Categories Specialized service facilities (Animal Care Facility) University-wide recharge centers (Facilities Management) Core Facility (Immunology Core) Departmental recharge centers (Machine Shop)

5. COMPLIANCE Governmental Concerns Inadequate policies, procedures and/or oversight Inappropriate billing rates Full amount of purchase of new equipment in service center expenses Using replacement cost versus depreciation expense for equipment Monitoring of fund balances & treatment of surplus (too large = Fed overpaid) Consistency of like costs in similar circumstances (CAS 501 & 502) Direct charging Department Administrative costs – 26% cap from OMB A-21 Double dipping (costs included in center rates and in F&A rate, e.g. equipment depreciation) Claiming additional costs that should have been included in indirect cost recoveries. These are frequently seen as 3-4% Departmental surcharge in addition to indirect cost recovery

6. COMPLIANCE Governmental Concerns A-133 Compliance Supplement – Internal Service Central Service Computation of retained earnings / fund balances Working Capital Reserves not greater than 60 days expenses No transfers to other funds (or Feds get to share) All users billed consistently Billing rates exclude unallowable costs Billing rates based on actual costs

7. RATE CALCULATION At a high level, what goes into the rates? Numerator Direct Operating Expenses Any subsidies Carry Forward Balances Denominator Projected number of goods/services sold

8. RATE CALCULATION Billing Rates Rate Structure Based on actual cost - cost study is required Can bill users different rates Factor non-paying users in rate (imputed revenue) Watch operating reserve (normally 60 days working capital) Consistent Costing 26% threshold applies Treatment of costs normally in IDC Unallowable costs (e.g. Marketing, equipment replacement reserves, entertainment, visas) – see Section J, A-21

9. RATE CALCULATION PROCESS 60-day Rule: Working capital reserves cannot be excessive in amount (generally not greater than 60 days for cash expenses for normal operations incurred for the period exclusive of depreciation, capital costs and debt principal costs)

10. RATE CALCULATIONS Allowable Surplus The ending cumulative balance is equal to or less than 60 days worth of operating expenditures for a fiscal year. Example: $120,000 Expenses for the year = 20,000 allowable surplus

11. RATE CALCULATION Equipment Depreciation Central administration (usually Cost Studies) must approve equipment depreciation in order to include it in your rates. If depreciation is approved, then specialized accounting procedures will apply. Cost Studies will calculate the annual depreciation for service centers to include in their rate calculations. Note: Purchase cost of capitalized equipment is not an operating cost.

12. RATE CALCULATION EXAMPLE Dr. Kirk spends 20% of her time in a lab, at a salary of $15,000 a month. Dr. Spock spends 40% of his time in the same lab, at a salary of $8,000 a month. Employee fringe benefits are 25% of salaries for this lab. Supplies cost approximately $10,000 annually. The lab receives $20,000 annual subsidy from the Vice Chancellor of Research to help cover salaries. The lab has a prior year surplus carry-forward of $8,000.

13. RATE CALCULATION Example – Yearly Budgeted Expense: Dr. Kirk (20% x $15,000 per month x 12 months) $36,000 Dr. Spock (40% x $8,000 per month x 12 months) $38,400 Salaries & Wages $74,400 TOTAL Benefits ($74,400 * 25%) $18,600 Supplies $10,000 Total Budgeted Expenses $103,000

14. RATE CALCULATION Example – Carry Forward & Subsidies Total Budgeted Expenses (from prior slide) $103,000 Less Prior Year Carry Forward (8,000) Less Subsidy from Vice Chancellor Research (20,000) Amount Used for Rate Configuration $75,000

15. RATE CALCULATION Example – Lab assumptions Assume the lab performs a service charged on an hourly basis and takes an average of 3 hours to complete. The lab expects to perform 500 tests of “Service A” based on past history and best estimate of the future year.

16. RATE CALCULATION Example – Rate Configuration Calculation (3 hrsx 500 hours) * (Unknown Rate) = $75,000 Solve for Unknown Rate = $50 per hour Total cost per service = $50 per hour x 3 Hours =$150.00

17. RATE CALCULATION Example – Budgeted Revenue vs. Expense Total Budgeted Expenses $103,000 Less Service A @ $50/hr. * 3 hrs* 500 Services = ($75,000) Less Previous Year Carry Forward Surplus ($8,000) Less Subsidy from NRI ($20,000) Net Surplus $ 0

18. RATE CALCULATION Example – Allowable Surplus Total budgeted expenses for year $103,000 Expense per month 8,583 Times 2 months (approx. 60 days) 17,167 $17,167 is the approximate allowable surplus for the lab (per OMB A-133)

19. APPLYING RATES Internal versus External All internal users (users within the university) should be charged the same rate External users (outside of the university) may be charged rates higher than internal users

20. APPLYING RATES Discounts and Prepayments Discounts Generally not allowed Only allowable if volume discounts are equally available to all users Prepayments Prepayments from federal grants are not allowed in service centers

21. APPLYING RATES Example 1 Lab XYZ asks some of their regular customers to prepay for upcoming services and also offers them a discounted rate. They plan to use the prepaid funds to purchase a piece of equipment. What is wrong in this example?

22. APPLYING RATES Example 2 Lab PQ performs a service where extensive set-up/configuration is needed per customer and then very little time is needed per service after the initial set-up has occurred. As such, the lab director has decided to price services with a 20% discount given when multiple tests are run using the same initial set up. What is wrong in this example?

23. BEST PRACTICES Be able to identify the active service centers in 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)

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

25. BEST PRACTICES Know the workflow (and 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

26. BEST PRACTICES 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

27. BEST PRACTICES Have a solid (and 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.

28. BEST PRACTICES Have written policies and procedures in place for the management of service centers. Is everything clearly defined? Steps for set-up, 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

29. BEST PRACTICES 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 Effort Equipment Supplies Usage Estimates Advantages and disadvantages to both options

30. BEST PRACTICES 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

31. BEST PRACTICES External usage (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

32. BEST PRACTICES 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

33. BEST PRACTICES Billing Rates – should/should not Service center losses should not be recovered through the F&A Rate Excess (accumulated) reserves in service centers should be used to adjust future billing rates. Cannot be used to purchase equipment Cannot be used to fund other service units within the recharge center operating at a loss Cannot be used to fund salary increases

34. BEST PRACTICES: Action Plan If you have not been accounting for service centers, a few ideas: If Federal charges > $10,000all rates will be reviewed and approved by a Central Office. Education classes on rate setting Create/update your policies Standardized accounting for each service center Create list of capitalized equipment Create new cost center for Equipment purchases and Depreciation Establish a monitoring plan Monitoring & review if surplus > 60 days of expenses

35. BEST PRACTICES: Action Plan Remember! Expenses included in the rate must be for the benefit of the service center Prepaids are not allowed Discounts to certain PI’s are not allowed Rates must be based on costs Billing should be monthly, not semi-annually.

36. BEST PRACTICES: Roles Responsibilities of Core Facilities: Work with Office of Research and Cost Studies to set rates Post approved rates publicly i.e. webpage Maintain documentation on rates Identify a contact person for any auditors

37. BEST PRACTICES: Roles Responsibilities of central office: Review and approve rates for all core facilities that have greater than X dollar threshold in federal charges Develop and update Policy on Service Centers Assist Controller & A-133 Auditors with service center identification Consult with department administrators as needed

38. BEST PRACTICES: Billing Billing and Documentation Billing Billing should be done on a timely basis (monthly) RA Core Facility Management Billing System Documentation Documentation should be kept to support all billing charges (including the expenses and usage)

39. BEST PRACTICES: Fund Transfers Fund Transfers Out Transferring funds out of service centers is not allowed. Fund Transfers In Transferring funds into a service center is allowed. This can be done to provide additional support to the service center.

40. BEST PRACTICES: Deficits If a core lab has deficits that grow each year, what do you do? Does senior leadership have a direction or policy for core labs with deficits? Consider raising rates despite pressure from PI’s? Are expenses properly recorded and allocated in correct funds? Could services be performed at a lower cost by outside provider? What is the Communication or do deficits simply grow at your campus?

41. In Closing….

42. Questions/ContactsBill Lawlorwlawlor@unmc.eduJosh Rosenbergjosh.rosenberg@emory.edu