Research University Service Centers |
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A
compliance opportunity
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Background.
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| Regulations. The cost principles for Universities are set forth in Office of Management and Budget Circular A-21. The regulations address .questions of service-center pricing, both specifically and in general. In general, the principles are designed to provide recognition of the full allocated costs of such research work under. generally accepted accounting principles. No provision for profit or other increment above cost is provided for in A-21. Section D of A-21 also stresses the need for consistency in treatment of costs as either direct or indirect. IMAGE Section J.44 of OMB
Circular A-21 deals specifically with service centers. Its specific provisions
are somewhat vague; in fact, only the principles for "specialized service
facilities," of which most universities have one or only a few, are discussed
there. The section is explicit in two concepts, however:
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Policy Issues. IMAGE
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Service
Center Policy
Issues
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1. Rates based on costs. |
12. Unallowable
costs.
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A typical policy statement
might specify that service centers will use a single account or a series
of accounts.
Each service center might contain three accounts: operating, capital equipment,
and an account
to segregate unallowable costs. These accounts will provide sufficient
information of cost types and amounts for rate calculations.The policy
statement would also provide a list of the cost types that may be included
in The policy statement might also specify the types of costs that would not be included |
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2. Discriminatory pricing. This is a potential issue for all university service centers, but particularly for those in urban institutions that serve both internal and external users. There is an understandable tendency for a service-center manager to stabilize volume in a service center by taking on external business at a discount. While it is apparent that under J.44, the subsidy of a service sold to outsiders (or to students) by higher charges to federal awards would be prohibited (this is also precluded by paragraph G.1), it is not clear from the regulations whether a university can charge the federal accounts a price that is equal to cost but more than that charged to instructional activities, which are subsidized from another source.
These
appear to be two distinct concepts. It is possible to charge government
accounts more than others, but no more than cost, but this may be viewed
as discriminatory under J.44. In other industries, the government has claimed the second type of advantage (the "most favored nation" concept) and has attempted to enforce draconian remedies for perceived discriminatory pricing. For example, if a service center in such an industry had a volume of a million dollars of direct and indirect charges to grants and contracts at a standard internal price of a dollar, but sold one service unit to an outside party at 50 cents, the center would owe the government the lower price on all the sales. In other words, if the government's claim were upheld, they could conceivably stand to lose half a million dollars because of one fifty-cent sale. In addition, a service center that sets its external prices too low will run the risk of bad publicity from taxpaying competitors, while the one that charges a higher fee may need to report unrelated business taxable income CUBIT). Some ways other institutions have dealt with this exposure are: To distinguish between
services provided to internal scientists (high-resolution cellular photography,
for
example) from those more routine services provided outside (normal photo
developing), so as to justify a
differential pricing structure. To base other differential prices on differences in circumstances, such as volume purchases (though one must compare volume with an outside customer to both the direct and indirect costs of federal projects, as a whole, for this purpose). A typical policy draft would incorporate some or all of these suggestions. To limit a University's exposure, management might take the position that service centers should charge the same price to all users for the same service in the same circumstances. The policy might provide for "pricing agreements" for peak periods and special volumes. |
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3. Student use. Frequently a university will provide a service (computer time, for example), to students "as part of their tuition," or as a service to various users (e.g., religious scholars) within the "university community" while sponsored projects and administrative departments must pay for the same service. "There is an understandable tendency for a service-center manager to stabilize volume in a service center by taking on external business at a discount."Federal auditors would have a problem with such a policy if the sponsored projects paid for the entire cost of the service, including the part that would be billed to students. This practice would be acceptable, however, if the University absorbed all the costs associated with the student or other free use, and charged the other users at a price that covered only their costs. In order to protect against risk of discriminatory pricing in this situation, one could: Account
for student and other free use in a way that it can be segregated from
the other uses of the service, and
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4. Service centers vs. recharge accounts. At a typical research university, there may be hundreds of departments and other units that charge University accounts through interdepartmental invoices. In addition to the larger campus-wide service centers like printing, telecommunications, and audio-visual services, many departments have established accounts to which costs are charged initially, before they are allocated to users. Examples of these might be the monthly allocation of the copier or postage bill. All service and recharge centers, no matter how small, are subject to the basic cost principles set forth in A-21 (break-even on allowable costs and non-discriminatory pricing), and a typical policy draft should propose to apply the principles to both service and recharge centers.
Most institutions,
however, wish to achieve reasonable assurance that regulations are met,but
cannot afford absolute assurance of compliance. University departments,
for example, do not have the staff to set up and monitor separate accounts,
for example, for each copier; and the central administrations do not have
the resources to review rates for all these centers every year. The typical
university, therefore, may want to limit the number
of centers reviewed annually. In the academic units, we recognize that recharge practices provide a department, which has a single type of expense in a relatively simple costing environment, with an efficient method of recovering costs. A recharge-center policy, therefore, would eliminate certain requirements for smaller centers. The policy might state that the recharge centers, with a volume below a certain level:
· do not need to set up separate accounts; · may charge annual excesses or surpluses to departmental accounts, rather than to established "guarantee accounts" (see below); and · will be required to affirm they have followed the Policies Manual every year. |
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5. Approval of Rates by the cognizant agency. A-21 suggests that the cognizant agency be involved in any pricing arrangements that are out of the ordinary. At one private university , the administration negotiates rates for the major centers with its cognizant agency annually. An alternative is to submit the university's Policy and Procedure Manual to the agency for approval; but not to seek approval for individual rate structures. |
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6. Effective date of the policy. Our work suggests that centers may have built upsurpluses or deficits in the past or otherwise charged rates that would be inappropriate under the new policy. It is not clear what the effect of these practices has been on charges tofederal and other sponsored projects. In thecircumstances, some. sort of "stake in theground" approach would probably be appropriate to avoid a lengthy analysis of past activity and to limit retroactive adjustments. IMAGE |
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7. Specialized service facilities. The cost principles do not deal in detail with all types of service centers, but only with "specialized service facilities," the rates of which, if the center is material, are to include not only the direct costs of the center but also its allocated indirect costs, like space. As noted above, the reason for this requirement is set forth in the U.S. Department of Health and Human Services Long form Review Guide:
To limit the effect of this cross-subsidy, major service centers should absorb indirect costs. Currently, at most universities, none or a limited number of the service centers might absorb such costs in their budgets. A service-center policy should make a careful distinction between major specialized service facilities, for which the allocation might be necessary under the regulations, and less significant centers, for which it is not. Criteria for a "specialized service facility" include: Large annual volume, Treatment of its indirect costs within the service-center rate, rather than as part of the overhead pool, would "materially" affect the university-wide g, Break-even. The cost principles suggest overhead rate (HHS sets this at a low teat service centers are to break even over rate of 0.1%); and time. Its services must not be easily available from an outside vendor. Adding allocated indirect costs to the rates of a specialized service facility, such as an animal-care operation, is likely to present a problem, however, to investigators and others around the university who have balanced their direct-cost budgets before such charges. Representatives of sponsoring agencies have also told us that they do not favor the treatment as direct expenses of amounts previously considered as indirect costs. Further, if an institution includes in its rates for certain major specialized service facilities costs that previously were charged indirect, it violates the terms of the October, 1991, revisions to Circular A-21, which preclude movements of costs between such categories without the approval of the cognizant agency. One way a major institution has chosen to overcome these obstacles is to charge a separate group of service-center users for all their costs, yet comply with the provisions of A-21, is by developing and negotiating a separate indirect-cost rate for each major specialized service facility. Such rates are common among government contractors. IMAGE |
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8. Break-even. The cost principles suggest that service centers are to break even over time. That could be accomplished by: Balancing the accounts each year; In practice, it makes sense not to require an absolute annual break-even, but to set some limit on the amount of a profit or loss that is carried forward, so that service-center rates do not fluctuate wildly from year to year. One major private university has for years successfully used + or - 5% of revenues as a level above which profits must be returned to users or absorbed by the department through a "guarantee account." HHS suggests this 5% "band" in its Long Form Review Guide. The breakeven band would work like this:
if a service center's
rate produces a profit or loss within the 5% range of break-even, this
amount will be added or subtracted from the rate the following year; and
any variances
above this amount must be resolved before the end of the year, either
In dealing with break-evens, universities should note that A-21 also provides for long-term breakeven agreements, when they have been agreed to by the cognizant agency. Such arrangements would be welcomed by centers that planned to raise their rates gradually in order to cover the purchase of equipment, or other startup costs. |
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| 9. Distribution of organized-research indirect costs to service-center charges. Like other direct costs, billings from service centers to sponsored projects bear their allocable share of general overhead. Over time, some universities have successfully calculated a broad base that includes loaded service-center costs. The cost principles provide for their exclusion from such allocation only if it causes a "significant distortion." At most universities, the only case where this might be true is with regard to charges from activities designated as major specialized service facilities, because they have been loaded at a separate rate for that service facility. In a typical policy draft, therefore, one might propose to exclude such charges from the distribution base. | |
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10. Capital equipment. Many centers fund equipment replacement out of their annual surpluses. This accounting is inconsistent with A21, which considers equipment as a capital cost, and permits only that its depreciation be allowed in costs charged to sponsored projects or administrative accounts. Including either equipment or depreciation in the service-center rate, however, could create a duplication of cost with the equipment depreciation that is part of a university's indirect-cost submission. Some ways other institutions have dealt with the issue are: IMAGE To set up designated-fund accounts outside the service center, from which equipment would be funded. The depreciation would be charged every year to the service center account, while the credit would go to the designated fund and be used as a funding source to acquire equipment. This process should be part of a capital budgeting procedure which needs to be established for such service centers. Under this scheme, all equipment must therefore be either service center or department designated but may not be allocated to both functions. In addition, consistency between coding of space and the treatment of the costs associated with the space (i.e. equipment depreciation) is necessary. Service centers declaring equipment as
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11. Interest. Frequently service centers will fund equipment purchases with internal loans. Instead of expensing the purchase of the equipment, or its depreciation, the service center account will include as an expense the principal and interest repayment on the debt. This practice causes at least two problems: first, principal repayments are not an expense; second, A-21 provides only for the recovery of interest on external debt, and only on equipment purchases over $10,000 which have been agreed to by the cognizant agency. Alternative treatments are: To keep the internal loan, like the designated fund described above, off the books of the service center altogether, perhaps in the designated fund. The service center accounts (and therefore its rates) would include only depreciation. This would create a problem for the service centers, which could not recover enough to meet the service on the debt. To set up a pool of external debt from which service centers would purchase equipment. They could then include depreciation and interest in their rates. At the start of a loan, the aggregate of these amounts exceeds debt service, so the service center budget would be workable. |
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| 12. Unallowable costs. Equipment purchases and internal interest are two examples of costs that should not be charged out in service center rates, because they are not allowable under the cost principles set forth in OMB Circular A-21. Other costs, such as liquor, advertising, etc., are specifically not allowed by the Circular and should not be charged to service-center accounts. A service-center policy should require that unallowable costs particular to service centers be segregated in a separate account. Hence each service center would have three accounts-operating, capital, and unallowables. | |
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13. Duplication of costs. There is a risk that costs reimbursed through service-center charges are also recovered by other means. One example is the equipment mentioned above. Another would occur if the service center charged to one of its users the time of an individual whose salary was also included in an indirect-cost pool. A third is a service center's applying an "administrative surcharge" to its costs, when the administrative costs included therein are already recovered through one of the indirect cost pools.
The best way to deal with this issue, we believe, is a well-informed review of the revenue and expense accounts of the service centers. Assigning account numbers and clearly identifying cost types by subcode will allow service centers to separately identify their allocable share of overhead and analyze its appropriateness each year. This is also good mechanism for assuring these costs are not included in the overall indirect cost pool. IMAGE |
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14. Administrative surcharges. As noted above, a service center will often add a surcharge to its rates to pay for administrative costs. The most common case would be items from a stockroom that were issued at cost plus a handling fee. Problems with such a practice are that:
The practice may be
inconsistent with that of other centers that do not have such a surcharge;
that
The best defenses against
inappropriate surcharges are: Under a typical ' service-center policy, personnel whose salaries are included in the administrative surcharge would be required to maintain time and effort reporting unless their sole function is for the administration of that service center. Salaries of these individuals would be split between service center and other accounts. By allocating salaries among functions based on time and effort, user rates will more accurately reflect incurred costs of providing the service and more accurate budgeting will be achieved. |
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15. Inventories. Commonly, a service center will base its operations on an inventory (e.g., a chemical stockroom), or will maintain an inventory of parts and supplies used in providing the service (e.g., a machine shop). In many cases, supply purchases will not be significant; but if they are, a recovery problem could occur. If the service-center account breaks even, but the service. center does not record such items in an inventory account, then the users will be charged for the growth in the inventory as well for as their own purchases. In order to prevent this from happening, either: IMAGEThe
university must establish an inventory account, or |
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16. Treatment of losses. The Long form Review Guide of the U.S. Department of Health and Human Services warns institutions against including the losses of various service centers in the indirect-cost rate. The problem with such a practice is that it charges a portion of the cost to those who did not use the center. In the view of the government, it inflates the indirect-cost rate in two ways: first, the loss itself, second, the failure to treat the loss as what it was--a direct cost that was not charged, and belongs in the distribution base. On the whole, sponsored projects pick up the proper amount of cost; but one user group may be subsidizing another through the rate. (The government has the same concern about an institution's failure to allocate general overhead, such as space costs, to major specialized service centers.) Solutions to this problem include: Assigning single accounts, or discrete groups of accounts, to service centers, so that the individual who prepares the indirect-cost submission can removetheir profit or loss from the annual calculation. Identifying the amount of any loss that might be attributed to the general operation of the center, and not to specific users, and including that amount in the appropriate indirect-cost pool. One example might be treating the costs of a university-wide animal-care committee, including the advising veterinarian, as general administration, while accounting for the cost of the rest of animal care through a perdiem rate. |
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17. Market prices. Some service centers, for example, stores and copy centers, may be in direct competition with external service providers, so they may be able to charge only what the market will bear. Such pricing is acceptable so long as:
· Any losses are not charged to other activities through the general overhead rate (see above). IMAGE
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| 18. Credits to expenditure accounts. Credits for expenses are normally used to record amounts received for returned goods and other expense-related adjustments. The use of such entries in place of normal revenues will misstate the revenue and will understate the service center's expenses in the break-even calculation. As a result, the rates may be understated in following periods. A well-prepared policy draft would specify that receipts are to be credited to revenue, not expenditure accounts. | |
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19. Multiple services. Frequently a center provides more than one service, and makes a surplus on some services, and a loss on others. Combining the results of various services should be acceptable, so long as the users of each service are not greatly different, so that higher prices charged to one set of users is subsidizing losses that should be charged to another group. Image
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| 20. Functional responsibilities. Because most research universities operate in a decentralized manner, interdepartmental service centers are so common, and the risk of improper accounting is so present, it is important to establish .clearly the responsibility of all parties in the administration of service centers. In a policy document, management might suggest responsibilities for the departmental administrator or service center manager, for the controller's office, and for the budget office. There may also be a need to assign responsibilities to the office of academic affairs: these might include the review of establishing a center or permitting it to sell to external parties. | |
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21. Record retention. Certain documentation is necessary. if direct and indirect charges to sponsored projects are to be allowed in an audit. A service center must adequately document its activities and maintain records to support expenditures, billings, and cost transfers. Documentation of service-center charges should include the level of activity, the rate used to calculate the charge, and the time of the charge. Examples of documents that must be maintained are: · Workpapers showing how the chargeout rate (s) were calculated; · Central approval of the rates; · Records supporting utilization or level of activity; · Billing records that identify the service provided to each user; and · Effort reports of service-center personnel Once a university has defined its policies, then they will need to implement and monitor compliance with them. Each party-the department, the servicecenter manager, the academic administration, and the budget and finance offices, will need to participate. |
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| 22. Contracts and warranties. Universities that provide services to external parties must be concerned about the form of the agreement between the service provider and the user. The Office of the General Counsel should be involved in reviewing the purchase orders and contracts with external users. | |
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Summary. Service centers at research universities represent both a compliance risk and an opportunity to improve operations. With the focus on such centers at the federal level, institutions should be considering a review of their service-center policies and practices in the decentralized centers throughout the campus. The first step in such a plan would be to meet with representatives from each center to confirm : · the method used for determining service center rates and the frequency of recalculation; · the established controls by the center to make sure that all usage is identified and accounted for; · that federal and nonfederal users are charged equally for services or, if federal users are charged only, determine that amounts charged to these users did not subsidize expenses which should have been charged to others; · that charges are made only as direct costs, or only as indirect costs but when charged as both, that federal users do not subsidize others; · whether the service center is "breaking even" on a reasonable basis over the long run, or if there is surplus or deficit, identify its nature and ensure that it is considered in determining future rates; and IMAGE · whether service
center rates include only costs that are allowable and allocable to federally
sponsored agreements.
The next step would
be to analyze the data collected in order to isolate the policy issues
that affect particular centers at the university. Once these have been
discussed, the working group should draft policies and procedures for
service centers/recharge accounts. After approval of a completed draft
of the policy and procedures manual, the task force would meet to finalize
the document. This task force might be comprised of the following: Once the policy and procedures manual is agreed upon by all respective parties the "final" document will be distributed to the university community (departmental administrators, deans, etc.).
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