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Service Center Workshop How to Open and Operate – Legally! 111 Sarah Elwell Associate Director of Operations, Harvard University Nuala McGowan Senior Manager.

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Presentation on theme: "Service Center Workshop How to Open and Operate – Legally! 111 Sarah Elwell Associate Director of Operations, Harvard University Nuala McGowan Senior Manager."— Presentation transcript:

1 Service Center Workshop How to Open and Operate – Legally! 111 Sarah Elwell Associate Director of Operations, Harvard University Nuala McGowan Senior Manager for Compliance, Harvard University

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. 3

4 Federal Definition of a “Recharge” Ctr.? Definition of “Recharge Centers” * 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.” 4 * Summary Report on Audits of Recharge Centers at 12 Universities ~ HHS Office of Inspector General, January 1994

5 Which of the following best describes your role? 1.Central Sponsored Research Administration Office 2.Department Grants Management 3.Service Center Facility Manager 4.Compliance Office 5.At wrong training session, I think… 5 Introductions…

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

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) 7

8 Regulations Governing Service and Recharge Centers 8

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) 9

10 OMB Circular A-21 Specialized Service Facilities (section J.47) 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 No mention of “service centers” in A-21 Change to OMB Circular A-21: 5/10/04 Change to OMB Circular A-21: 5/10/04 – Specialized Service Facilities (section J.47) Rates to be adjusted “no less frequently than biennially.” Rates to be adjusted “no less frequently than biennially.” 10

11 Specialized Service Center (A-21) Cost of service includes direct and F&A Cost of service includes direct and F&A Cost will be charged directly to users 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 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) Rates shall take into consideration over/under applied costs of the previous period(s) 11

12 Other Sources of Federal Guidance OMB Circular A-122: Cost Principles for Non- Profit Organizations 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 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…” 12

13 Service Center Accounting 13

14 Service Center Accounting… Revenues should equal costs, over time Revenues should equal costs, over time Accurate accounting for service center costs and revenues is critical 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 14

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

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

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

18 Step 7 - Develop a reasonable method to assign service center operating costs to each service 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 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 9 - Calculate cost-based rate for each service Step 10 - Determine the rate that will actually be charged Step 10 - Determine the rate that will actually be charged 18 Guidance for Calculating Serv. Ctr. Rates

19 19 Exercise : Rate Calculation

20 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 *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 the F&A Rate Calculation - Addit’l costs not included in Service Center Rate: $630,000. Add to F&A numerator => higher F&A rate 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

21 Service Center Compliance Issues 21

22 Summary of Key Compliance Issues 1.Rates should recover no more than the cost of the good or service 2.Rates must breakeven over time, not each year 3.Rates don’t discriminate between users, especially those paying with federal funds 4.Surplus from service center shouldn’t be used to fund unrelated activities 22

23 5.Must maintain published price list 6.Rates may include depreciation expense only, not the full cost of equipment 7.Depreciation included in SC rates can’t also be in the F&A rate 8.Service center subsidies should NOT be included in the F&A rate 23 Summary of Key Compliance Issues

24 1.Must all users be charged the same rates? 2.Can we charge F&A costs on service center charges made to grants? 3.Can we include a “reserve” amount in the rate to purchase new equipment? 4.Do we add F&A costs to service center charges made to external parties? 24 Discussion Questions

25 5.Can we charge users based on “market” rates, or what other institutions charge? 6.Can we charge external users more than the cost of the good or service provided? 7.If we earn a surplus, do we have to give a refund to users in the same year? 25 Discussion Questions ( cont’d)

26 26 Top 10 Elements for Effectively Managing Service Centers 1. Be able to identify the active service centers at your university. 2. Understand the mechanics behind service center accounting. 3. Know the workflow (and the parties involved) in setting up a center. 4. Recognize operations that may become service centers in the future. 5. Have a solid (and realistic) business plan for operating the center.

27 27 Top 10 Elements for Effectively Managing Service Centers (cont.) 6. Have written policies and procedures in place for the management of service centers. 7. Templates should be made available to assist with rate calculations. 8. Rates should be reviewed and approved at least every two years. 9. External usage (sales to non-university customers) should be monitored and tracked. 10. Use software or some other means to invoice and collect regularly.

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

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

30 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 in each step of the set-up process? Who is involved once the center is up and running? Who is involved once the center is up and running? What approvals are required during set-up and beyond? What approvals are required during set-up and beyond? School/Department School/Department Budget Office Budget Office Accounting Accounting Cost Studies Cost Studies

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

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

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

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

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

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

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

38 Break - 15 minutes 38

39 Audit Findings: Past and Present 39

40 Summary of HHS OIG Audit Findings (1994) Audits at 12 universities to determine whether recharge centers complied with “OMB A-21” Audits at 12 universities to determine whether recharge centers complied with “OMB A-21” OIG Identified $3.2m in overcharges for: 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) 40

41 Examples of significant issues 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 41 Summary of HHS OIG Audit Findings (1994)

42 Examples of significant issues (continued) 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 42 Summary of HHS OIG Audit Findings (1994)

43 HHS OIG Findings: Reasons for Overcharges Universities did not: 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 OMB Circular A-21 does not provide specific instructions for when and how to adjust for surpluses and deficits in fund balances 43

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,

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 45

46 10 Most Common Mistakes 1.Inadequate policy and/or oversight 2.Billing rates based on “market” rates, not actual costs 3.Surpluses not carried forward 4.Invoicing not done on a timely basis 5.Depreciation included in s.c.rates and F&A 6.Unallowable costs included in billing rate 7.Surpluses used for unrelated activities 8.Mismatch of s.c. expenses and revenues, especially depreciation 9.Charging lower costs to external customers (e.g. No O/H) 10.Improperly accounting for costs of subsidies 46

47 Mitigating risk at your Institution 1.Do you have an office responsible for oversight of service centers? 2.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 47

48 Questions… 48


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