1. Managing research with Full Economic Costing (FEC) John Green January 2006 For dissemination by Faculty Operating Officers to Faculty Administration meetings and to Divisional/departmental executives

2. Topics to be covered Equipment Pricing Allocation of new income Challenges

3. Components of a project’s FEC FEC of a project comprises Directly incurred costs: research staff, travel, consumables, dedicated technical (timesheets)/clerical staff costs, non-staff costs Directly allocated costs: - PI & CoI time - “estates” costs [= no of FTEs x “estates rate”], out of which ~10 major facilities costs have been removed - charge-out rates for ~10 major facilities and later … charges for pooled/shared lab technicians Indirect costs: general office and basic lab consumables, central services, admin/ secretarial [= no of FTEs x “indirect cost rate”]

4. “Estates” rate Term imposed by TRAC methodology – standard term used by HEFCE, Research Councils etc. Does not reflect what it includes nor fit with Imperial terminology The “estates” rate includes: –Rents, rates, repairs, refurbishments, insurance –Infrastructure adjustment –Depreciation of our estate –Pooled technicians (until 2007) and equipment At Imperial, these costs borne by various cost centres: - departments - faculties - College centre (Finance department) - … and Imperial’s Estates department

5. Equipment and facilities (1) For Research Councils New equipment and associated maintenance/service costs must be recovered as directly incurred costs Up to 2006: existing equipment costs are included in the College wide “estates” rate (within directly allocated costs) From end Jan 06, ~10 items of equipment and CBS will be charged on a usage-basis (with their costs subtracted from the “estates” rate) NB Competitors only stripping out CBS from Jan 06 so our “estates” rate will decrease comparatively – GOOD NEWS From 2007 all major items have to be extracted from the “estates” rate and charged for separately

6. Equipment and facilities (2) So how do we fund replacement equipment and facilities? Theoretically (TRAC), when facilities in “estates” rate, costs recovered into the College’s FEC Investment Fund (FIF), which should therefore fund replacement BUT from 2007 all depreciated costs will be recovered from usage based charging so money will flow to faculties Therefore faculties will have to build up ear-marked funds to replace equipment (or get from funders) Facilities will need to be more actively managed by faculties/departments (monitoring usage, recording running costs etc.)

7. Pricing RCs price = cost (80% thereof in short-term) Charities as now – some movement by some charities to pay some FEC elements (but know there is additional HEFCE money) Industry, OGDs, other non-RC, non-charity funders: InfoEd will include the expected price, i.e. the price we need to charge in order to recover at same level as hitherto (i.e. lose no more than we have been doing up until now!) BUT how do we price to industry? – first, look at the way in which resources will flow

8. Recall In 2003-04 Imperial’s price recovered only 53% of FEC across all sponsors Old concept of “overheads” not identifiable with FEC – 100% “overheads” not equal to FEC! Objective of FEC is sustainability and transparency TRAC calculates that 18% of “Estates” charges and 21% of indirect costs required to maintain and replace infrastructure How does the College ensure it builds an FEC Investment Fund (FIF) in a post SRIF era?

9. Resource Allocation Model (1) FEC will bring additional resource to College: £8M from Research Councils in 2006-07 ~ £6M p.a. from an increase in HEFCE contribution for Charities RC will increase year on year until steady state in ~ 3 years (providing research volume from RCs maintained) TRAC methodology predicts the following allocation of additional RC income (steady state of ~ £24M p.a.) and of the HEFCE income for peer-reviewed charities (~ £6M): £20M will go to faculties and £10M to FEC Investment Fund (FIF) 1/3 of new money goes to FIF and 2/3 goes to Faculties

10. Resource Allocation Model (2) New income stream for Faculties – the additional income from those funders who will pay a price higher than before Primarily from Research Councils and the HEFCE charity subsidy for FEC Objective of FEC is sustainability and transparency SO we must not overtrade with the additional income (e.g. Faculty fund to replace facilities) FEC includes the cost (as calculated by TRAC) to cover the college infrastructure in the long term FEC Investment Fund (FIF)

11. The College must build up FIF to meet the post SRIF, long- term FEC requirement of sustainability BUT … build up will be gradual will recognise that not all sources of income will obtain prices at FEC the reserve will be built up increasingly as our price begins to recover more of the FEC (in varying amounts from different funders) the contribution to FIF will change year on year in accordance with the prices achieved from different sources; corresponding amounts will be transferred to the FEC Investment Fund

12. Research Income by Source 2004/05 FEC should not dictate our funding strategy but we must do everything possible to extract maximum benefit       - 2.1% - 3.4% + 9.5% + 0.2% - 6.4% + 27.5%

13. How much NEW money will Faculties get? (1) Our research portfolio: Research councils UK charities OGD and UK industries EU, overseas etc Total Research income (£M) 45573633171 Faculty A 207 8 641 Faculty B 131 9 730 Faculty C 12491920100

14. How much NEW money will Faculties get? (1) Our research portfolio: Research councils UK charities OGD and UK industries EU, overseas etc Total Research income (£M) 45573633171 Faculty A (20) 44% (7) 12% (8) 22% (6) 18%41 Faculty B (13) 29% (1) 2% (9) 25% (7) 21%30 Faculty C (12) 27% (49) 86% (19) 53% (20) 61%100 We now apportion the new money between Faculties according to these %

15. How much NEW money will Faculties get? (2) So e.g. in Year 1, we obtain £8M from RCs, £6M from HEFCE (for charities) Faculty AFaculty BFaculty C From RCs£8M From HEFCE£6M From the rest£0M

16. How much NEW money will Faculties get? (2) So e.g. in Year 1, we obtain £8M from RCs, £6M from HEFCE (for charities) Faculty AFaculty BFaculty C From RCs£8M£3.52M (44%) £2.32M (29%) £2.16M (27%) From HEFCE£6M£0.72M (12%) £0.12M (2%) £5.16M (86%) From the rest£0M (20%) £0M (23%) £0M (57%)

17. How much NEW money will Faculties get? (2) So e.g. in Year 1, we obtain £8M from RCs, £6M from HEFCE (for charities) Faculty AFaculty BFaculty C From RCs£8M£3.52M (44%) £2.32M (29%) £2.16M (27%) From HEFCE£6M£0.72M (12%) £0.12M (2%) £5.16M (86%) From the rest£0M (20%) £0M (23%) £0M (57%) New money£14M£4.24M£2.44M£7.32M

18. How much NEW money will Faculties get? (3) Doing this for each year (assuming research volumes same) gives: Year 1Year 2Year 3 Faculty A £4.24M£7.85M£11.40M Faculty B £2.44M £4.73M £7.04M Faculty C £7.32M £9.42M £11.56M £14M£22M£30M Note: have used research volumes (£) as surrogate for apportionment; could use others, e.g staff FTEs

19. How will the FEC Investment Fund (FIF) be built up? Research Council income will contribute to the FIF allocation according to TRAC (£8M of £24M, after 3 years) Charity income attracts the new HEFCE money & will contribute to FIF (£2M of £6M) Other funders will contribute at a level commensurate with the price achieved against cost, but we shall recognise the need for a gradual move EU – no contribution, probably

20. How will the contribution to FIF be taken? (1) Previously anticipated that each grant would contribute to FIF as if the price obtained was 100% FEC –but now will only calculate the contribution to FIF based on actual new money coming in Contribution to FIF will not now be taken project by project but calculated as a block amount for each Faculty (the “Investment Charge”) Oracle Grants will automatically distribute to Faculties and can, if Faculties choose, replicate this distribution to departments/divisions

21. How will the contribution to FIF be taken? (2) Directly Incurred (DI) costs will go to project Everything else to Faculty Faculty will top up DI costs to 100% (for RCs) New HEFCE charity money will also all flow to Faculties So Faculties all gain…but they will contribute to the FIF by paying the Investment Charge so College builds up the fund to pay for refurbishment and renewal of infrastructure

22. How will the contribution to FIF be taken? (3) Taking it as an investment charge on faculty … much simpler transactions enables different levels of contribution to FIF for grants from different funders, so a Faculty’s funding profile influences its contribution to the FIF sets direction of travel for recovery from other funders – gradual increase in investment charge as prices move nearer to FEC allows College to set the size of FIF needed –obtains it from (known) RC and charity new monies & a gradual contribution from other funders (as price increases are obtained above ‘status quo’, towards FEC) To become sustainable (i.e. replace decrease in SRIF) College needs £40M p.a. to FEC Investment Fund (FIF) 8 years to achieve

23. How do we build up the FIF from the funds available? (1) Yr 1Yr 2Yr 3 New money from … RCs (£8M, £16M, £24M, £24M …) 2.67M5.33M8.00M HEFCE (charity) (£6M …) 2.00M Elsewhere ??? TRAC calculates that approx 1/3 rd of new money goes to FIF

24. How do we build up the FIF from the funds available? (1) Yr 1Yr 2Yr 3 FIF contribution 5.0M10.0M15.0M New money from … RCs (£8M, £16M, £24M, £24M …) 2.67M5.33M8.00M HEFCE (charity) (£6M …) 2.00M Elsewhere 0.33M2.67M5.00M If we decide we need £40M p.a. to FIF fund in 8 years’ time …

25. How will a Faculty’s investment charge be calculated? (1) Research councils UK charities OGD and UK industries EU and overseas etc Total Research income (£M) 45573633171 Faculty A 207 8 641 Faculty B 131 9 730 Faculty C 12491920100 Recall our overall research portfolio …

26. How will a Faculty’s investment charge be calculated? (1) Research councils UK charities OGD and UK industries EU and overseas etc Total Research income (£M) 45573633171 Faculty A (20) 44% (7) 12% (8) 22% (6) 18%41 Faculty B (13) 29% (1) 2% (9) 25% (7) 21%30 Faculty C (12) 27% (49) 86% (19) 53% (20) 61%100 We now apportion the required contribution to FIF between Faculties according to these %

27. How will a Faculty’s investment charge be calculated? (2) So e.g. in Year 1 FIF needs £5M, obtained from: Faculty AFaculty BFaculty C From RCs£2.67M From HEFCE£2.00M From elsewhere£0.33M £5.00M

28. How will a Faculty’s investment charge be calculated? (2) So e.g. in Year 1 FIF needs £5M, obtained from: Faculty AFaculty BFaculty C From RCs£2.67M£1.17M (44%) £0.77M (29%) £0.72M (27%) From HEFCE£2.00M£0.24M (12%) £0.04M (2%) £1.72M (86%) From elsewhere*£0.33M£0.07M (20%) £0.08M (23%) £0.19M (57%) £5.00M * i.e. for non-RC, non-HEFCE money

29. How will a Faculty’s investment charge be calculated? (2) So e.g. in Year 1 FIF needs £5M, obtained from: Faculty AFaculty BFaculty C From RCs£2.67M£1.17M (44%) £0.77M (29%) £0.72M (27%) From HEFCE£2.00M£0.24M (12%) £0.04M (2%) £1.72M (86%) From elsewhere£0.33M£0.07M (20%) £0.08M (23%) £0.19M (57%) TOTAL to FIF£5.00M£1.48M£0.89M£2.63M

30. How will a Faculty’s investment charge be calculated? (3) Doing this for each year (assuming research volumes same) will give: £MYear 1Year 2Year 3 Faculty A 1.48M (0.07)3.16M (0.53)4.82M (1.10) Faculty B 0.89M (0.08)2.19M (0.61)3.51M (1.25) Faculty C 2.63M (0.19) 4.65M (1.52) 6.68M (2.85) £5M (0.33)£10M (2.67)£15M (5.00) This shows how much each Faculty contributes to FIF ( ) = element for which no new funding specifically obtained

31. What is the net effect for Faculties? Faculty AFaculty BFaculty C Year 1: new investment charge Net gain £4.24M £1.48M £2.76M £2.44M £0.89M £1.55M £7.32M £2.63M £4.69M Year 2: new investment charge Net gain £7.85M £3.16M £4.69M £4.73M £2.19M £2.54M £9.42M £4.65M £4.77M Year 3: new investment charge Net gain £11.40M £4.82M £6.58M £7.04M £3.51M £3.53M £11.56M £6.68M £4.88M

32. So how does this give guides as to how to price for non-RC, non-charity sponsors? (1) Aim to recover additional money to FIF by increasing price to other funders & from alternative new sources of money (including e.g. IP) Need to generate additional income on non-RC, non- charity volume of £69M: £0.33M in year 1; £2.67M in year 2; £5M in year 3 Currently our total portfolio achieves 53% of FEC So to recover required contributions to FIF our price to industry and other sponsors will have to increase

33. So how does this give guides as to how to price for non-RC, non-charity sponsors? (2) To recover on base of £69M Price must be X% FEC Year on year % increase required on price Discount on FEC in InfoEd (currently 47%) Year 1£69.33M54%54/53 = 1%46% Year 2£71.67M57%57/54 = 5%43% Year 3£74.00M60%60/57 = 5%40% Assuming that additional money met by price increase to other funders rather than from other sources

34. Key points All Faculties will receive additional benefit from FEC The College will be building up a reserve gradually and working to ensure that –the build up does not penalise any source of income (especially industry) –the weightings for the investment charge from different sources of income will vary from year to year Departments and Divisions will need to work with their Faculties to establish an equitable distribution of the additional resource Can raise the additional money to FIF either by increasing price to other non-RC funders, year on year by 1% … 5% … 5% … or from other sources (e.g. IP revenues)

35. Challenges ahead for Faculties Price alignment of identical facilities with different costs Consistency of prices to each industry within and across faculties Responsibility of FPs & HoDs for approvals becomes ever more critical – delegation of rights is not sensible! Decide how faculties distribute resources and monitor consequences (e.g. distribute same amount as overhead of “status quo price”, allocate (e.g.) any recovery for pooled technicians from the “estates” recovery withinDA and keep rest at centre of faculty?) Manage facilities (in terms of utilisation and resourcing) and strive to reduce costs

36. Challenges ahead for the College FEC must not drive changes in our funding portfolio How does the College ensure it builds a sufficient FEC Investment Fund in a post SRIF era? We will engage with RC panellists to get feedback on RC behaviour and we will educate our peer reviewers to understand component parts of “estates” and indirect rates Partnership with industry is critical in going forwards Integration with JeS

37. This presentation & FAQs on: www.imperial.ac.uk/rs/changes Email questions to: fec@imperial.ac.uk Discussion?