FEC at Essex

1
FEC at Essex

• What is it?
• Some history
• What TRAC told us that we didnt already know
• Principles of FEC
• How will you be affected?
• Where will it end?

2
What is it?

• Easy to analyse costs by type of expense
  (staffing, running costs etc) or by cost centre
  (departments and sections) as we have seen, the
  Finance Sections reports sort information in
  this way for budget holders
• More difficult to analyse costs by activity, and
  ascertain the total cost and profitability of
  teaching, research and other activities
• A methodology called Activity Based Costing was
  developed as recently as the late 1980s, and Full
  Economic Costing in the HE Sector was built
  around these principles

3
What is it?

• FULL Direct costs plus a share of estates and
  other indirect costs
• ECONOMIC Accounting figures are adjusted to
  arrive at a cost that better reflects reality
  the current cost of replacing assets (the
  infrastructure adjustment) and the best
  alternative use of funds (the Cost of Capital
  Employed adjustment). These costs need to be
  covered if economic sustainability is to be
  achieved
• COSTING Costing is separate from the pricing
  decision, though it informs it. Decisions to
  subsidise loss-making activities should at least
  be conscious rather than occurring by default,
  and activities should be sustainable in the long
  term

4
Some history

• In late 1990s, Treasury demanded more
  accountability on use of public funds
• Transparency Review (TRAC) was born requires an
  annual return reporting total expenditure for
  publicly- and non-publicly funded activities
  (Teaching, Research and Other)
• TRAC provides data at the institutional level,
  which can be disaggregated to provide costs at
  project level, using FEC methodology
• FEC introduced for bids to Research Councils from
  September 2005

5
What TRAC told us that we didnt already know

• There has been under-investment in infrastructure
  and under-funding of research activity
• A low price culture permeates HE sector
  over-delivers and under-prices

6

• TRAC Outcomes 2004-05

7
Principles of FEC

• At the institutional level
• TRAC requires that we survey academics to
  ascertain how staff time (and cost) is split
  between activities
• We also survey HoDs to find out how departmental
  space is used, and how the time of non-academic
  staff is split between activities
• Indirect costs (central administration) are
  allocated using suitable cost drivers e.g.
  Personnel costs are allocated to departments
  proportionately to staff numbers
• Trading areas should bear their share of indirect
  costs (NB Trading areas are treated as an Other
  activity)
• Calculation of institutional rates for allocating
  Estates and Indirect Costs to projects

8
Principles of FEC

• At the project level
• Total direct costs are calculated academic
  staff time and direct non-staff costs like
  consumables
• Indirect costs and Estates costs are allocated to
  the project based on the rates calculated
• The Full Economic Cost is the sum of the Direct,
  Indirect and Estates costs
• The price negotiations for the project should be
  informed by the FEC the final price should be
  driven by market factors and the FEC should form
  a lower limit to the price set, except when the
  institution has clear strategic reasons to fund a
  shortfall

9
Principles of FEC

• How much will funders pay?
• Research Councils will pay 80 of FEC the
  balance is deemed to be made up by direct QR and
  SRIF funding (the dual support mechanism)
• Government Departments are expected to pay 100
• Charities are unlikely to meet the FEC of
  research projects but MAY pay more direct costs
  than they currently do.
• Industry should pay a minimum of 100 FEC as we
  need to ensure we do not subsidise commercial
  research.
• EU will not currently meet the FEC of the
  projects, but government is lobbying for them to
  pay a greater

10
How will you be affected?

• Academic staff will have been asked to take
  part in the time allocation survey in 2004-05 (to
  be repeated in 2007-08 at the latest)
• Staff preparing research applications since
  September 2005 costing will have been prepared
  under FEC rules.
• Heads of Department will take part in annual
  surveys of space usage and non-academic staff
  time

11
Where will it end?

• NIE statements for departments, and IE
  statements for trading areas, will incorporate
  allocations of indirect and estates costs rather
  than 40 tax on income
• Staff engaged in consulting will be able to cost
  projects up on an FEC basis
• Ultimately, teaching courses will be costed on an
  FEC basis, and fees set with reference to the FEC
  
• HEFCE are engaged on a review of the funding of
  teaching in Universities, and are employing FEC
  principles in so doing

12
Conclusion

• To manage activities on a sustainable basis the
  University must
• Establish recognise the full economic cost of
  activities
• Manage the activity strategically.
• Secure better prices for activities.
• Improve project management and cost recovery.
• Invest in the infrastructure of the University
  physical, human and intellectual.