Service Centers: Financial Compliance

Transcription

1 Service Centers: Financial Compliance What You Need to Know Jennifer (Wei) Mitchell Director of Cost Studies Northwestern University Wendy Meister Director, Education & Life Sciences Huron Consulting Group

2 Agenda Core Facility vs. Service Center What goes into the rate setting & rationale? Overview of cost allocation Examples of Rate setting External revenue and considerations Appendix Regulations & references References to templates & rates calculation tools

3 Core Facility vs Service Center Defining Terms

4 A Broader Category: Service Center Before we dive into Core Facility Rate Setting, let s discuss a broader category that includes core facilities: Service Center Service centers are departments or functional units which perform specific technical or administrative services primarily for the benefit of other units within a reporting unit. Service Centers include recharge centers and the specialized service facilities. * Cost Accounting Standards (CAS), Disclosure Statement, DS-2

5 Service Centers Service centers are not specifically addressed in Uniform Guidance. The specialized service facility (SSF) is addressed. Service centers can be put into two categories Specialized service facilities Recharge centers Some institutions put recharge centers into two additional categories University wide Departmental 5

6 Service Centers (continued) Institution should have written policies and procedures for establishing service centers Some institutions use a dollar threshold to determine if a service center will be a recharge center or a specialized service facility. Uniform Guidance suggests using the type of service or material charges to the feds. An SSF is defined in Uniform Guidance, subpart E, The costs of services provided by highly complex or specialized facilities operated by the institution, such as computers (now computing facilities), wind-tunnels, and reactors are allowable, provided the charges meet the conditions of subsections b. or c. (now paragraphs (2) or (3)) and include applicable credits. 6

7 Example Service Center Specialized Service Facility (Direct + Indirect = Fully loaded costs) e.g., Solar farm, wind tunnel Example Core Facilities (Shared resources with a research aim) e.g., Genomics University-wide Service/Recharge Center (Managed by Central e.g., Facility Management) Department Recharge Center (Operated by a department) e.g., Machine shop

8 Why Different Categories? Most core facilities: Not classified as Specialized Service Facility (SSF) Indirect costs* are included in F&A Rates calculation & not in Core s Recharge Rates Helps to increase the institution s F&A Rate If included in F&A rate s calculation, the same costs CANNOT be included in recharge rates (and vice versa) * Indirect Cost = F&A Cost = Facilities & Administrative cost

9 Rate Setting What goes into the rate setting & rationale?

10 Government Concerns Inadequate policies, procedures and/or oversight Billing rates do not represent actual cost Unallowable costs are included in the billing rate (equipment replacement fee) Fund balances are not properly monitored Surpluses are not always used to reduce future rates 10

11 Government Concerns (continued) Some users are billed at reduced rates and the federal programs are subsidizing the difference It is okay if the feds are subsidized Duplicate costs included in rate development and F&A calculation (equipment) 11

12 Rate Setting - General Comments Service center rates developed for federal programs must be developed in compliance with the Uniform Guidance cost principles and the costs must be allowable The schedule of rates should be established using a documented method; records must be retained and made available to federal officials as required (NIH cores FAQs) Service centers should not be established to make a profit 12

13 Rate Setting - General Comments The same rate does not have to be charged to every user However, if some users are billed using a lower rate than the federal rate, or not being billed at all, other source of funding will be provided to make up the difference so the government does not share in the service center subsidy A working capital reserve as part of retained earnings of up to 60 days cash expenses for normal operating purposes is considered reasonable (A-110) 13

14 Rate Setting - Equipment The actual cost of equipment used in the service centers is not an allowable cost. However, equipment depreciation using estimated useful life is allowable. Equipment used in service centers can have different useful lives than those in general university operations Must defend shorter life In addition, service center equipment should be flagged in the asset management system to assure depreciation is not also claimed in the Facilities & Administration (F&A) rate calculation 14

15 Rate Setting - Equipment An equipment replacement reserve is not an allowable cost for a federal billing rate. However, the allowable equipment depreciation returned to the center via the billing rates can be set aside into a reserve for future equipment purchases. External billing rates can include a cost for an equipment replacement reserve 15

16 Rate Setting Unallowable Costs Entertainment Alcoholic beverages Bad debts Contributions and donations Fund raising Public relations

17 Direct vs. Indirect Most Indirect Costs are not included in the Recharge Rates calculation Direct Cost Examples Faculty/Technician salaries & associated fringe benefits Reagents Lab supplies Indirect Cost Examples Utility Building depreciation Equipment Not Funded by sponsor/agency HR, Payroll (central admin) * Treatment of Equipment Depreciation may vary

18 F&A Reimbursement Difference Example: Negotiated F&A rate is 50% Core including Direct Costs only Charges a service fee of $1,000 to a sponsored project SSF with fully burdened costs in the recharge rates Charges a service fee of $1,000 to a sponsored project Total Reimbursement: $ $500 Indirect = $1,500 Total Reimbursement: $1,000

19 Setting the Recharge Rate per service At a Glance Aggregate Costs Direct operating costs Subsidies Prior-year surplus/deficit Annualized Equipment depreciation (if utilized) 1 Aggregate Costs Projected # of Units = Calculated Rate Projected # of Units Projected # of goods/units sold per service 2

20 Setting the Recharge Rate cost based approach The Basic Equation: 1 Direct Operating Costs: Labor (Salary + Fringe) Direct Operating Costs: Annual + Non-Labor Costs + Equipment + (supplies, Depreciation maintenance (if utilized*) contracts, etc. ) Subsidies & Prior-year balance Projected # of Goods or Services Sold = Calculated Rate per Unit (may not be the same as the Actual Recharge Rate) * Special attention to utilizing equipment depreciation (see later slides) 2 3

21 An Over Simplified Example Dr. Grant spends 20% of his time at an annual salary $180,000 A lab technician spends 40% of his time at an annual salary of $96,000 Fringe benefit rates are 25% for this lab Lab supplies costs are $10,000 annually Receives subsidy $28,000 from the Office of Research A federal-funded instrument will be used Estimates that the lab will perform 500 tests for its users and each test takes 3 hours

22 An Over Simplified Example Calculating the Rate Dr. Grant 36,000 (180,000 * 20%) Technician 38,400 (96,000 * 40%) Fringe 18,600 (Above * 25%) Lab Supplies 10,000 Subsidy (28,000) Equipment Depreciation 0 (Federally funded) Total Expenses 75,000 Projected # of Tests: 500 ( 3 hours per test) Calculated Rate for Internal Customers: Per Test 150 (75,000 / 500) Per Hour 50 (150/3 hours)

23 Pricing units must be measurable & rate setting is cost based Labor Hour Machine Hour CPU Unit Per Rack Unit Daily Rate Test Slide Page Cup Q: is membership a measurable unit? A: No, Not Cost Based

24 Calculated Rate vs. Actual Rate Calculated Rate - to achieve Breakeven Can not overcharge internal users (no profit) Actual Rate (the Reality) Can be set lower than the Calculated Rate So it will not recover more than the Total Costs Consistent Rate for internal users No federal sponsored projects are discriminated Special attention to subsidy for specific group(s) of users

25 Now you have set the Internal Rate, how about External Rate?

26 Charging External Customers - Considerations Adding indirect costs to External Rates: Indirect costs are real: space, electricity, water, gas, invoicing/billing, etc. are needed to run a core Reference: uncapped Research F&A Rate IRS Unrelated Business Income Tax (UBIT) due to the institution s tax status Market competitive rates if available NIH reference: (revision in progress) see #5

27 Can surplus from internal sales be used to pay for capital equipment? Considerations: No, capital equipment (defined by the institution) cannot be paid using the surplus from Internal sales Equipment may be funded via: Non-sponsored funds (institutional funds) A capital reserve account that receives annual depreciation for existing equipment External net revenue (external customers only) Equipment grants Donations/gifts

28 Program Income Do you have cores supported by active federal grants? If yes, the net surplus earned by the recipient is considered Program Income & must be reported in financial reporting Examples: service fees, charging external customers for the use of federally funded equipment, etc. References: (revision in progress)

29 Appendix Regulations related to core facility financials Managing the Operations

30 Regulations & References Previous: A-21(colleges and universities), J.47 A-122 (non-profit) A day working capital reference A-110 Equipment depreciation Program income Current: Cost Accounting Standards (CAS) DS-2 OASC-3 Hospital Cost principles (or CFR 45, Part 74, Appendix E, Sec. IX 38)

31 Regulations & References Current continued 2 CFR Part 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards Effective December 2014 Supersedes 8 circulars, including OMB A-21, A-110, A-122, A-133, A-87 Sections: Specialized Service Facilities & general principles: Program Income: and Download: IRS UBIT, Publication 598, Chapter 4 NIH FAQs (revision in progress) Federal Audits of Recharge Centers (HHS OIG)

32 Top 10 List How to Manage the Operations Where do I Start? Service Center identification Policies and procedures Understand the accounting Templates for calculations mechanics Rate review/approval process Workflow of operations Tracking external usage Potential new centers Software Business plan 32

33 How to Manage the Operations Service Centers Identification Defining cores, service centers, recharge centers Inventory of all active centers in your university Name (and account number) of center Contact information Rate submissions received Approval Rates approved versus published rates Identifiers in the accounting system 33

34 How to Manage the Operations Policies and Procedures Is everything clearly defined? Steps for set-up Steps for maintenance Roles and responsibilities Does everyone know what their role is and what they are responsible for? Thresholds for establishment of centers Frequency of activity Number of grants charged Dollar volume Carryover of surplus and deficit 34

35 How to Manage the Operations Templates for Calculations Standard templates in place versus freedom of centers to use their own Advantages and disadvantages to both options 35

36 How to Manage the Operations Proper account codes Expenses Revenues Accounting Mechanics HR set up to get people paid out of the right place Expenses and revenues accounted for in the center Payroll expenses Fringe Depreciation Collections 36

37 How to Manage the Operations Centers need to track: Usage Invoices Collections Software University accounting system or specific service center software 37

38 Comprehensive reference Rates calculation templates & instructions (MS Office 2010)