1. Service Centers Roles, Cost Analysis, and Year End Leading Excellence in Research Costing Practices Conference October 13 - 15, 2015

2. 2 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

3. 3 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

4. Brief Compliance Primer

5. 5 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).

6. 6 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.

7. 7 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 period(s).

8. 8 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.

9. 9 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (December 26, 2013)

10. 10 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.

11. 11 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).

12. 12 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.

13. 13 Compliance Requirements and Year-End Actions Compliance Requirements 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) Year-End Actions 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

14. Service Center Roles and Responsibilities

15. 15 Service Center Support Roles Service Center Service Center Director Department Administrat or Grant Accounting Internal Audit Budget Office Institutional Leadership

16. 16 Focus of Responsibility Day-to-day Operations Service Center Administrator, Technical Staff, Scientific Director, Department Administrator Oversight, Support, and Guidance Business Office, Post-Award and/or Financial Compliance Director Institutional Oversight Offices Sponsored Programs Office / Cost Analysis Internal Audit Executive Leadership

17. 17 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

18. 18 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

19. 19 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

20. 20 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.

21. 21 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 schedule.

22. 22 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. non- service center) funds.

23. 23 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.

24. 24 Roles and Responsibilities Central Administration (continued)  Grant 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.

25. 25 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

26. 26 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

27. 27 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

28. Elements of a Cost Analysis

29. 29 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 Volum e Rates and Revenu e Market Assumptions Constraints

30. 30 Total Costs Illustrated Fixed Costs Variable Costs $ Volume

31. 31 Typical Fixed Costs  Salaries (exempt staff)  Fringe benefits  Equipment maintenance contracts  Equipment lease payments  Equipment depreciation  Telecommunications/ISP charges

32. 32 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)

33. 33 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.

34. 34 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)

35. 35 Volume Analysis  Project Internal Users:  List by PI, funding source, and likely volume in units and/or dollars (if available)  Review users by grant activity  Project 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)

36. 36 Volume Analysis (continued)  Volume  For existing service centers, has volume increased or decreased significantly? If so, why?  Examples: PI transfer, new PI, competing service center  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

37. 37 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

38. 38 Rates and Revenue (continued)  Perform 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.

39. 39 Rates and Revenue (continued)  Rate 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 final cost analysis.

40. 40 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?

41. 41 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.

42. 42 Assumptions (continued)  Analyze 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 the operation of the service center?

43. Finding the Right cost Analysis Model

44. 44 Items to Consider When Creating or Deciding on a Cost Analysis Model Number of Services Mostly Fixed Costs Ability to Estimate Variable Costs Variation between Services Pass- through Costs Internal and External Users Subsidies

45. 45 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.

46. 46 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.

47. Year-End Issues

48. 48 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

49. 49 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

50. 50 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

51. 51 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

52. 52 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!

53. Risk Areas

54. 54 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.

55. 55 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

56. 56 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

57. 57 High Risk Practices (continued)  Service 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

58. 58 High Risk Practices (continued)  Principal 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

59. 59 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

60. Concluding Discussion

61. 61 Contact Information Virginia (Ginger) Baker Senior Director Cost Studies and Property Services California Institute of Technology Phone: 626.395.2540 virginia.baker@caltech.ed u 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