Service Centers
Roles, Cost
Analysis, and
Year End
Leading Excellence in Research
Costing Practices
Conference October 13 - 15, 2015
Agenda
• Introductions
• Brief Compliance Primer
• Service Center Roles and
Responsibilities
• Elements of a Cost Analysis
• Finding the Right Cost
Analysis Model
• Year-End Issues
• Mitigating Risk
• Concluding Discussion
2
Presenters
 Ginger
Baker
Senior Director
Cost Studies and Property Services
California Institute of Technology
 Deston
Halverson
Senior Manager
Higher Education and Academic Medical Centers
Attain, LLC
3
Brief
Compliance
Primer
OMB Circular A-21 (Rev. May 2004)
J47. Specialized Service Facilities
A) The costs of services provided by highly complex or specialized facilities
operated by the institution, such as computers, wind tunnels, and reactors
are allowable, provided the charges for the services meet the conditions of
either subsection 47.b. or 47.c. and, in addition, take into account any items
of income or Federal financing that qualify as applicable credits under
subsection C.5. of this Circular.
B) The costs of such services, when material, must be charged directly to
applicable awards based on actual usage of the services on the basis of a
schedule of rates or established methodology that
(1) does not discriminate against federally supported activities of the
institution, including usage by the institution for internal purposes, and
(2) is designed to recover only the aggregate costs of the services. The costs
of each service shall consist normally of both its direct costs and its allocable
share of all F&A costs. Rates shall be adjusted at least biennially, and shall
take into consideration over/under applied costs of the previous period(s).
5
OMB Circular A-21 (Rev. May 2004)
J47. Specialized Service Facilities
(continued)
C) Where the costs incurred for a service are not material, they may be
allocated as F&A costs.
D) Under some extraordinary circumstances, where it is in the best interest of
the Federal Government and the institution to establish alternative costing
arrangements, such arrangements may be worked out with the cognizant
Federal agency.
6
OMB Circular A-122 (Rev. May 2004)
J46. Specialized Service Facilities
A) The costs of services provided by highly complex or specialized facilities
operated by the non-profit organization, such as computers, wind tunnels,
and reactors are allowable, provided the charges for the services meet the
conditions of either 46 b. or c. and, in addition, take into account any items
of income or Federal financing that qualify as applicable credits under
Attachment A, subparagraph A.5. of this Circular.
B) The costs of such services, when material, must be charged directly to
applicable awards based on actual usage of the services on the basis of a
schedule of rates or established methodology that (i) does not discriminate
against federally supported activities of the non-profit organization,
including usage by the non-profit organization for internal purposes, and (ii)
is designed to recover only the aggregate costs of the services. The costs of
each service shall consist normally of both its direct costs and its allocable
share of all indirect costs. Rates shall be adjusted at least biennially, and
shall take into consideration over/under applied costs of the previous
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period(s).
OMB Circular A-122 (Rev. May 2004)
J46. Specialized Service Facilities
(continued)
C) Where the costs incurred for a service are not material, they may be
allocated as indirect costs.
D) Under some extraordinary circumstances, where it is in the best interest of
the Federal Government and the institution to establish alternative costing
arrangements, such arrangements may be worked out with the cognizant
Federal agency.
8
Uniform Administrative Requirements, Cost
Principles, and Audit Requirements for
Federal Awards (December 26, 2013)
9
Uniform Administrative Requirements, Cost
Principles, and Audit Requirements for
Federal Awards (December 26, 2013)
§ 200.468 Specialized service facilities.
(a)The costs of services provided by highly complex or specialized facilities
operated by the non-Federal entity, such as computing facilities, wind
tunnels, and reactors are allowable, provided the charges for the services
meet the conditions of either paragraphs (b) or (c) of this section, and, in
addition, take into account any items of income or Federal financing that
qualify as applicable credits under § 200.406 Applicable credits.
10
Uniform Administrative Requirements, Cost
Principles, and Audit Requirements for
Federal Awards (December 26, 2013)
(continued)
§ 200.468 Specialized service facilities.
(b) The costs of such services, when material, must be charged directly to
applicable awards based on actual usage of the services on the basis of a
schedule of rates or established methodology that:
(1) Does not discriminate between activities under Federal awards
and other activities of the non-Federal entity, including usage by
the non-Federal entity for internal purposes, and
(2) Is designed to recover only the aggregate costs of the services.
The costs of each service must consist normally of both its direct
costs and its allocable share of all indirect (F&A) costs. Rates must
be adjusted at least biennially, and must take into consideration
over/under applied costs of the previous period(s).
11
Uniform Administrative Requirements, Cost
Principles, and Audit Requirements for
Federal Awards (December 26, 2013)
(continued)
§ 200.468 Specialized service facilities.
(c) Where the costs incurred for a service are not material, they may be
allocated as indirect (F&A) costs.
(d) Under some extraordinary circumstances, where it is in the best interest
of the Federal government and the non-Federal entity to establish
alternative costing arrangements, such arrangements may be worked out
with the Federal cognizant agency for indirect costs.
12
Compliance Requirements
and Year-End Actions
Compliance Requirements
Year-End Actions
• Charges for actual usage based on
rate schedule
• Does not discriminate between
activities under federal awards and
the institution
• Service Center is designed to recover
only the aggregate costs of the
services
• Rates shall be adjusted biennially and
• Take into consideration over/under
applied costs of the previous period
(i.e. cumulative surplus or deficit)
 Bill based on an
approved rate
schedule
 Ensure continuity of
rates between users
 Perform break-even
analysis
 Adjust rates this year
or next
 Factor in surplus or
deficit
13
Service Center
Roles and
Responsibilities
Service Center Support
Roles
Service
Center
Director
Department
Administrat
or
Institutional
Leadership
Service
Center
Budget
Office
Grant
Accounting
Internal
Audit
15
Focus of Responsibility
Day-to-day
Operations
Service Center
Administrator, Technical
Staff, Scientific Director,
Department
Administrator
Oversight,
Support, and
Guidance
Business Office, PostAward and/or Financial
Compliance Director
Institutional
Oversight
Offices
Sponsored Programs
Office / Cost Analysis
Internal Audit
Executive Leadership
16
Roles and Responsibilities
Service Center Staff
Primary responsibility is to deliver the core services
to the users of the service centers and to:
 Keep track of order entry, order fulfillment, and
to provide invoicing data to business manager
or department administrator to initiate invoicing
for services provided
 Prepare an annual cost analysis in order to set
the rate schedule, considering all items of cost
and projected volume of usage for the
upcoming fiscal year
17
Roles and Responsibilities
Service Center Staff (continued)
 Maintain
any inventory and ensure proper
supply levels on hand
 Meet any regulatory compliance requirements
for biohazards, safety, waste disposal, animal
and human subject protocols
 Keep proper documentation to support
scientific conclusions related to services
rendered, costing documentation, and any
other institutional record keeping requirements
18
Roles and Responsibilities
Principal Investigator/Scientific Director
 Oversee
the scientific integrity of the service
center
 Ensure all items of cost, particularly
compensation, is appropriate. For example,
moving research assistants salary onto a service
center when there is a gap in funding is not an
appropriate method to bridge their funding
 Contribute to the rate setting process and
encouraging the business manager to set
compliant rates
19
Roles and Responsibilities
Principal Investigator/Scientific Director
(continued)
 Ensure
all regulatory requirements are being met
in the service center lab.
 Meet all budgetary requirements, including
management responsibility for service center
deficits, equipment purchases, and cash
management process (i.e. invoicing and
collection of accounts receivable).
 Provide scientific and administrative direction
for the overall service center’s operations.
20
Roles and Responsibilities
Department Administrator



Support the scientific personnel of the service center
with any financial or administrative and business
management requirements.
Facilitate the monthly invoicing process and assist with
the cash collection of outstanding accounts
receivable.
Lead the financial component of the annual cost
analysis and rate setting process by setting up a cost
analysis excel template, providing financial data in
terms of detailed transaction reports, and assist with
modeling different scenarios to arrive at a revised rate
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schedule.
Roles and Responsibilities
Department Administrator (continued)
 Test
for financial compliance by reviewing costs
with the Service Center staff or Scientific
Director.
 Writing off bad debt (i.e. uncollectable A/R) and
funding balances from unrestricted (i.e. nonservice center) funds.
22
Roles and Responsibilities
Central Administration
 Grant



Accounting or Post-Award Functions
Review annual cost analysis to approve
new/updated rate schedules.
Answer questions pertaining to allowability of costs
and make final institutional ruling on the
allowability of those costs.
Maintain institutional policy and procedures
regarding service centers, annual cost analysis,
rate setting, frequency of invoicing, and
allowability of costs.
23
Roles and Responsibilities
Central Administration
 Grant


(continued)
Accounting or Post-Award Functions (contd.)
Train and educate the research community on the
nuances of service center financial administration
and costing compliance.
Year-end entries: Accrue Revenue, Record Open
A/R, and Ending Inventory Balances.
24
Roles and Responsibilities
Central Administration (continued)
 Internal



Audit
Incorporate reviewing year-end service center
costs analysis and rate setting documentation in
their annual audit work plan
Testing on allowability of costs, proving the rates
and management of cash vs. accrual basis items
(e.g. revenue, accounts receivable, bad debt,
and inventory)
Determine whether subsidies are properly
accounted for and applied to different user
groups where
 Sum
of the (Rate + Subsidy) = Total Cost
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Roles and Responsibilities
Central Administration (continued)
 Budget


Office
Simply concerned with solvency of operations (i.e.
whether the service center will run deficits)
May be involved in start-up of service center and
analyzing financial performance at year-end to
determine ongoing support
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Roles and Responsibilities
Institutional Leadership
Executive Leadership




Provide funding for equipment purchases
Support the scientific endeavors of the service
center and question operations when the services
become obsolete
Hold service centers accountable for budgetary,
financial and regulatory compliance requirements
Give each role the tools and support they need to
carry out a compliant year-end cost-analysis and
rate-setting process
27
Elements of a
Cost Analysis
Elements of a Cost Analysis
A cost analysis is not limited to costs alone—corresponding volume of
usage, revenue streams for users, and a dynamic market influence a
cost analysis. Underlying assumptions should be documented along
with constraints properly identified to make the analysis realistic.
Costs
Volume
Rates
and
Revenue
Market
Assumptions
Constraints
29
Total Costs Illustrated
$
Variable Costs
Fixed Costs
Volume
30
Typical Fixed Costs
 Salaries
(exempt staff)
 Fringe benefits
 Equipment maintenance contracts
 Equipment lease payments
 Equipment depreciation
 Telecommunications/ISP charges
31
Typical Variable Costs
 Hourly
wages (non-exempt staff)
 Fringe benefits
 Outside services (e.g. sub-contractors,
outside personnel, and one-time service
contracts)
 Supplies (e.g. raw materials, inventory,
and consumable supplies)
32
Estimating Costs Year to Year
 Fixed

costs
Estimated by knowledge of what resources (staff,
equipment, etc.) will be needed to run the service
center.
 Variable

costs
Estimated based on volume/usage estimates.
33
Estimating Costs Year to Year
(continued)
 Use
historical information only as starting point for
cost analysis



Variance analysis between Last Fiscal Year Budget
vs. Last Fiscal Year Actual financial performance
Re-visit assumptions made last year and compare
them to the actual outcomes
Look for trends in financial data
 (e.g.
calculate supply cost as a percentage of
revenue, or utilization of staff if using a billable hours
model)
34
Volume Analysis
 Project


List by PI, funding source, and likely volume in units
and/or dollars (if available)
Review users by grant activity
 Project


Internal Users:
External Users:
Types of users (universities, hospitals, independent
research organizations, pharmaceutical
companies, non-profit, biotechnology firms, and
so on)
Sources of funding (if available) and likely volume
in units and/or dollars (if available)
35
Volume Analysis
(continued)
 Volume

For existing service centers, has volume increased
or decreased significantly? If so, why?
 Examples:
center

PI transfer, new PI, competing service
For new service centers, what types of information
can you rely on to make volume estimates?
 Examples:
existing PIs who already collaborate with
the scientific director, potential users in your
department, new collaborations with external users
36
Rates and Revenue
 Forecast




Revenue
Multiply (anticipated volume) times (rate)
Compare to historical revenue figures
Look for trends (upward, downward, or flat)
to decipher solvency of the service center
Determine volume of external users and
indirect cost recovery from external users
37
Rates and Revenue
 Perform


(continued)
break-even cost analysis
Sum of Rates times Volume for each service
should equal the total cost of operating the
service center.
For example, $200,000 in total service center
costs divided by 5,000 units will yield a rate of $40
per measurable unit (hour, job, item, etc.)
 Multiple
services or items require more complex
calculations to allocate costs.
38
Rates and Revenue
 Rate





(continued)
Considerations
Remember the goal is to break-even at the end of
the fiscal year.
Review rates in terms of costs, volume, and market
considerations.
Determine whether rates should be adjusted (i.e.
increased or decreased).
Incorporate any deficit or a surplus from the prior
fiscal year.
Provide updated rate schedule based on your
39
final cost analysis.
Market
 Information




to consider:
Is this a unique service with no basis for cost?
Is this a homogeneous service offered by competing
firms?
Do internal users have funding sources to pay for the
services?
What is the quality of the service provided by your
service center? Is it considered cutting-edge
technology or could it possibly be obsolete fairly soon?
40
Assumptions
 Keep
in mind the assumptions used to create
the initial costing model and rate schedule.
 Analyze variance between the original model
and the actual performance.
41
Assumptions
 Analyze





(continued)
the results to learn what happened.
Were all items of cost considered?
Were the rates appropriate with the cost of
performing the service?
Was the volume of expected users higher or lower
than projected and why?
Was the market not receptive to your service or
over-receptive, possibly meaning the rates could
be too low?
Were there any other significant events affecting
42
the operation of the service center?
Finding the
Right cost
Analysis
Model
Items to Consider When Creating or
Deciding on a Cost Analysis Model
Number
of Services
Mostly
Fixed
Costs
Subsidies
Internal
and
External
Users
Ability to
Estimate
Variable
Costs
Passthrough
Costs
Variation
between
Services
44
One Approach to a Cost
Analysis Model
1. Variable costs are identified to actual services.
2. Fixed costs are allocated across all services by:
a)
Projected volume/expected usage.
b)
A complexity coefficient.
3. Volume is projected by:
a)
Using 80/20 rule.
b)
Trend analysis to project the remaining usage.
45
One Approach to a Cost
Analysis Model
(continued)
4. Calculated rates are compared to market prices.
5. Statement of activity is prepared to analyze projected
surplus or deficit.
6. Subsidies and prior-year surplus/deficit is incorporated.
7. Assumptions and constraints are documented.
46
Year-End
Issues
Important Year-End Items
to Consider
1. Getting all revenue billed in the fiscal year
2. Collecting outstanding A/R
3. Making decisions about aged A/R and
converting uncollectible A/R to bad debt
4. Funding bad debt
5. When to carry deficits forward and when to
absorb them
48
Important Year-End Items
to Consider
6. Dealing with surpluses
7. Subsidies—aggregate center subsidies vs.
targeted users, and then funding those
subsidies
8. Disposal of equipment and its impact on
including accelerated depreciation
9. Preparing the final cost analysis
10. Analyzing FYE usage numbers to project NFY
usage
49
Important Year-End Items
to Consider
(continued)
11. Adjusting rates
12. “Competing with the Joneses”—not changing
rates because you don’t want to price yourself
out of the market
13. Central oversight and review of the cost
analysis
14. Approving the cost analysis’ “math” and
validating the assumptions for feasibility
50
Important Year-End Items
to Consider
(continued)
15. Proving revenue (i.e. rates times volume) rather
than preparing a budget and just calculating
costs
16. Auditing the cost analysis
17. Select items of cost and unlike circumstances
18. What to do if your institution has no policy
19. What to do if your institution has a poorly
written policy and misinterprets key issues
51
Important Year-End Items
to Consider
(continued)
20. Learning from mistakes related to information
needed at year-end not being readily
available
21. Ask for help when needed!
52
Risk Areas
Audits
http://www.costaccounting.org/
• Last updated in April
2015.
• 147 pages of various
audit findings from April
1993 to February 2015
• Service centers or
recharge centers are
listed in 9 different
audits – one of which
was for an audit of
service centers at 12
universities
• Most recent audit which
mentions service
centers or recharge
centers occurred in April
2014.
54
High Risk Practices
 Billing







Rates
Lack of documentation to support and justify billing rates
No review of rates external to the service center
Rates not based on projected costs and usage i.e. Rates
based on actual cost of materials plus a percentage
markup not based on cost.
Including funds for contingencies in the billing rates.
Not regularly reviewing and, if needed, adjusting rates
Not adjusting rates for accumulated surplus and deficit
fund balances
Including duplicate or unallowable costs in the calculation
of billing rates
55
High Risk Practices
(continued)
 Billings



Inadequate support or documentation for billings
i.e. no log tracking usage and service utilized
Billing non-federal users at a reduced rate and
not imputing the revenue when calculating
future year billings rates
Billings not based on usage and rate i.e.
membership fees
56
High Risk Practices
 Service



(continued)
Center Accounting Practices
Transferring surplus service center funds to other
accounts
Using funds of service center account for
unrelated purposes
Equipment costs were expended instead of
capitalized
57
High Risk Practices
 Principal

(continued)
Investigator
Including actual direct recharge costs in
proposal budget and charging those costs
directly to the sponsored award instead of
charging the award based on usage and the
billing rate
58
High Risk Practices
(continued)
 Institutional


No written policies and procedures for recharge
centers
Including recharge costs in indirect pools in the
calculation of indirect costs rates
59
Concluding
Discussion
Contact Information
Virginia (Ginger) Baker
Senior Director
Cost Studies and Property
Services
California Institute of
Technology
Phone: 626.395.2540
virginia.baker@caltech.edu
Deston Halverson
Senior Manager, Attain, LLC
Phone: 312.912.5406
dahalverson@attain.com
Attain, LLC
Higher Education and Academic
Medical Centers
8000 Towers Crescent Drive, Suite 1500
Vienna, VA 22182
703.857.2200
education@attain.com
www.attain.com
61