NCURA Region V

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NCURA Region V

• University Service Centers A Primer

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University Service Centers - Primer

• Overview
• Characteristics
• Information to determine
• Rate Development
• Rate Base
• Budget
• Tips from the Association of College University
  Auditors
• OIG Audits that Provide Guidance

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University Service Centers - Primer

• Within the campus, departments use a variety of
  products or services to perform their activities.
  
• When these products or services are provided
  within the university these units function as
  non-profit businesses.

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What is a University Service Center?

• An operating unit within the University that
  provides
• --a service or group of services or
• --product or group of products
• --to users principally within the university
• --for a fee.
• A business operating within the University at
  break-even.

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Can Everyone be a Service Centers?

• Need to determine if the operation is viable as a
  service center under applicable
• University criteria, (policies)
• OMB Circular A-21 and the
• Universitys Cost Disclosure Statement.

6
Can Everyone Be a Service Center?

• Determine if the operation is viable as a service
  center under applicable
• University criteria (policies)
• OMB Circular A-21
• Universitys Cost Disclosure Statement

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Federal Guidance

• HHS Review Guide for Long Form University
  Indirect Proposals
• Audit Guide Adequacy and Compliance Audits of
  Disclosure Statements Submitted by Educational
  Institutions (HHS OIG)
• Federal Audits of Recharge Centers (HHS OIG)
• A-133 Compliance Supplement (Part 3, Compliance
  Requirements) April 1999
• Internal service, central service, pension, or
  similar activities

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Summary of Key Compliance Issues

• Rates should recover no more than the cost of the
  good or service.
• Rates must break-even over time, not each year.
• Rates dont discriminate between users,
  especially Feds
• Surplus from recharge centers shouldnt be used
  to fund unrelated activities
• Must maintain published price list
• Rates may include depreciation expense only, not
  the full cost of the equipment
• Depreciation included in rates cant also be in
  the FA rate
• Service center subsidies should NOT be included
  in the FA rate (i.e.. NOT as a Departmental
  Administration cost)

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University Service Center

• Characteristics

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Characteristics

• A measurable unit of output can be readily
  determined.
• Can you define what are you going to sell?

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Characteristics

• The amount of a product or service can be
  measured easily and accurately.
• Can you measure usage?

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Characteristics

• Individual accounts can be billed for products
  or services based upon their actual usage
• recommendation-monthly.
• Can you bill on a regular basis to recover costs?

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Characteristics

• An operation may not function as a service
  center if it cannot
• --determine an actual usage in measurable units
  of output
• or
• --if monthly (periodic) billing cannot be made.

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Questions to Answer to Start the Process

• What are the products or service provided?
• Who will be the primary users?
• What portion of income will be from federal
  sources?
• Will equipment costing more than 5,000 be used
  in the center?
• How much in start up funding will be needed?
• Who will provide the funds?

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Developing the Rate

• Determine what you are going to sell.

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Define Good or Service to Sell

• Microscope Lab Use of Microscope
• Zebra Fish Facility Fish
• Super Computing Facility Excess CPU
• Technical Rate Rack Space 24 Hour Service
  Connectivity Charge Technical Labor
• Stores Facility Chemicals, Lab Supplies
  Purchasing Services

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Example

• Federal training program provide lemonade daily
  to participants and employees for June through
  August.
• 3 programs with 25 participants and 5 OU
  employees each
• Purchase Lemonade Machine
• Possible use of machine during remainder of year

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Example-Lemonade Stand

• What could we sell?
• Cups of Lemonade (to participants)
• Cups of Lemonade (to non-participants)
• Rental of Lemonade Machine (machine is available
  nights and week-ends)

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Developing the Rate

• Determine who your customers will be.

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Evaluate Customer Base

• Internal
• University Sponsored Program Areas
• University Departments
• External
• Those who do not have a University account number
  
• Industry
• Students, faculty or staff acting in a personal
  capacity
• Estimate How Many Customers (Rate is a function
  of the Operating Costs/Users (Use) of the
  Service)

21
Example

• Who are the potential customers for product and
  services?
• Will they be internal or external?
• Participants
• Employees
• Student Groups

22
Customer Base

• Non-university users may be charged a higher user
  rate than University users if they are purchasing
  the service or product with non-federal funds.

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Developing the Rate

• Determine how the usage will be measured.

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Goal

• Use the measurement which allocates costs
  equitably among all users
• For example, a center that performs tests on
  samples has two possible units of measure it
  could charge per test, or per hour. If some tests
  take twice as long as others, and labor is a
  large portion of the cost of performing a test it
  is not equitable to charge each user on a per
  test basis. In such circumstances, the user rate
  will be on a per hour basis.

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Examples of Measurable Units

• Page
• Test
• Slide
• Sequence
• Cup

• Labor hour
• Machine hour
• CPU Unit
• Per Rack Slot per Month
• Daily Rate

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Example Base to Use
Name Short Description Unit Base
Lemonade 8 oz cup

Lemonade Machine Use of machine to make lemonade





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Measurable Units for Lemonade Center

• Cup

• Daily Rate

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Developing the Budget

• Operating Budget

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Developing the Budget

• All allowable costs of a center that will be used
  in establishing user rates will be budgeted in
  and expended through one operating account.
• The budget will be determined using the standard
  guidelines established by University policy and
  procedures and the Cost Accounting Standard
  guidelines.

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Developing the Budget

• Generally these costs include
• Salaries and Wages
• Fringe Benefits
• Supplies and Materials
• Subcontractors and Other Outside Services
• Repairs and Maintenance
• Carry-Forward Surpluses or Deficits

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Budget Components

• Salaries Wages

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Salaries Wages

• Base salary and fringe benefits of employees
  working in the center.
• Anticipated raises for employees in the upcoming
  year.
• For open positions that will be filled in the
  upcoming year, salaries and benefits can be
  estimated by using an average salary for the
  position.

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Salaries Wages

• If faculty salaries are to be included in user
  rates they will be budgeted and paid from the
  service center operating account.

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Example

• Lemonade will be provided to participants daily
  June-August Machine will be rented during
  remainder of year. Technician is needed to
  maintain and clean machine all year.

NAME BASE SALARY (AT 100 FTE) BEN FTE ON CENTER TOTAL ON CTR (INC. BENEFITS)
Direct Salaries  
Technician 10,000.00 33.0 50 6,650.00
Student - Sales 6,000.00 .09 25 1,635.00
Total Direct Salaries 16,000.00     8,285.00
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Budget Components

• Supplies and Materials

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Supplies and Materials

• Supplies and materials costs necessary for the
  operation of the service center.
• Office supplies if consumed solely for the
  operation of the center in deliverance of its
  product or service.
• All supplies and materials charged to the service
  center need to be clearly identifiable and be
  under the control of the centers staff.

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Example
SUPPLIES
Lemons (1 bag per day x 65 days _at_ 20/bag) 1,300.00
Sugar (1 bag per day x 65 days _at_ 3.50/bag) 227.50
Cups 5,850 needed (1 box of 1000 25.00) 150.00
   
TOTAL SUPPLIES 1,677.50
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Budget Components

• Other Expenses

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Other Expenses

• Actual expenses for items such as
• Travel
• Equipment service contracts
• Long distance telephone calls

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Example
SERVICES
Travel- training on machine 1,000.00
Machine upkeep 500.00
  -
SUBTOTAL SERVICES 1,500.00
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Budget Components

• Equipment

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Equipment

• Rates include the depreciation expense only, not
  the full cost of the equipment.
• GAAP requires that cost of the asset to be spread
  over its useful life.
• OMB A-21 mandates the calculation of depreciation
  expenses for Federal costing purposes in a manner
  consistent with that used for accounting for
  depreciation on its financial statements.

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Example
Depreciation Schedule  
Desc/Type of Equipment Depr End Date Acquisition Cost Useful Life years Depr in Rate
Lemonade Machine   2011 10,000 5 2,000
   
Totals   10,000   2,000
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Operating Principles

• Working Capital

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Working Capital

• Funds that are accumulated in excess of actual
  cost in order to fund future operating
  expenditures.
• A recharge center surplus fund should not exceed
  60 days working capital.

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Acquiring Working Capital

• Service centers can acquire working capital by
  using an existing surplus, adding approved
  surcharges to external users, or transferring
  funds from non-federal sources.

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Surpluses and Deficits

• The fund balance in the operating account less
  working capital is used in determining the
  surplus or deficit at year end.
• Any surplus resulting from the prior year(s)
  operations must be included in the centers
  budget.

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Interest

• Interest earned on fund balances must be credited
  to the appropriate center and used in the
  determination of rates.

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Unallowable Costs

• Costs such as entertainment and bad debt expense.

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Rate Calculation

• Allocate Costs Identified Above to Individual
  Services or Products (in Budget)

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Allocation of Salaries to Rates
RATE 1 RATE 2
NAME BEN FTE Ctr TOTAL INCL. BENEFITS Cups Machine Rental
Technician 33. 50 6,650.00 1,662.50 4,987.50
      FTE for each rate 25 75
2 students 9. 25 1,635.00 1,635.0 -
      FTE for each rate 100 0
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Example Supply Allocation
SUPPLIES 100 0
Lemons (1 bag per day x 65 days _at_ 20/bag) 1,300.00   1,300.00 -
Sugar (1 bag per day x 65 days _at_ 3.50/bag) 227.50   228.00 -
Cups 5,850 needed (1 box of 1000 25.00) 150.00   150.00 -
SUBTOTAL SUPPLIES 1,677.50   1,677.50 -
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Rate Calculation

• A service center may have different measurable
  units for the different types and classes of
  products it offers.
• In our Lemonade example, we have a per cup for
  lemonade and an hourly rate for rental of the
  machine.

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Rate Calculation

• User rates consisting of flat fees that charge
  per range of actual use such as light, moderate
  or heavy use are not in compliance with CAS.

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Rate Calculation

• Annual Rate
• Annual Costs / Total Annual Usage

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Example Annual Cost
Rate 1 Rate 2
Direct Costs Cup of Lemonade Machine Rental
Direct Salaries Fringe Benefits 3,297.50 4,987.50
Travel Services 375.00 1,125.00
Supplies 1,677.50
Depreciation 500. 00 1,500.00
TOTAL DIRECT COSTS 5,850.00 7,612.50
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Example Annual Usage
Rate 1 Rate 2
Direct Costs Cup of Lemonade Machine Rental
Total Direct Cost 5,850.00 7,612.50
Estimated Usage 5,850 cups 266 days

Rate at Cost 1.00 per cup 28.62 per day
Market Rate 75.00 per hour
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Days Machine is Available for Rent

Available for rental 9 months, 75, of year (9/12) Available for rental 9 months, 75, of year (9/12)
Days Available
Days in Year 365
Days used in Summer 65
Days Machine is Idle (Vacation of Technician, Maintenance) 34
Days Machine is available for Rent 266
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Costing Considerations

• Costing Considerations for Internal External
  Users What can I charge?

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Costing Considerations

• Section J47 of OMB Circular A-21 requires the
  cost of each service be charged directly to users
  based on actual use of the service and that rates
  do not discriminate between federally and
  non-federally supported activities, including
  university internal activities.

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Costing Considerations

• The use of market prices to establish billing
  rates for internal customers would not be
  appropriate to the extent that market prices
  include a profit.
• It may be appropriate for external, non-federal,
  users of the center.

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Costing Considerations

• Recharge centers may charge additional rate to
  external users and the profit will be retained
  by the center.
• This additional income is not used in the carry
  forward balances but will be recovered in a
  separate account that can be used to replenish
  equipment.
• This amount must be reported to the controllers
  office for possible tax purposes.

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Costing Considerations

• Multiple Services
• Recharge centers providing multiple services may
  not subsidize the cost of certain services by
  charging excessive rates for other services.
• Consideration should be given to size, complexity
  and equity in setting multiple rates for a
  recharge center.

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Costing Considerations

• Developing an Hourly Rate
• When charging on an hourly basis, the total
  maximum hours available for a full time employee
  is 2080 per year. This would be the starting
  point and adjusted downward for vacation, sick
  leave, downtime, etc..

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Example

• Maximum hours available 2,080
• 40 hours/week x 52 weeks
• Less Holidays ( 80)
• Less Vacation Sick ( 264)
• Available Hours 1,736
• Less Non-productive hours(downtime for machine
  setup, etc)( 0)As applicable to individual
  centers.
• Expected Usage 1,736 hours

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Reserve Account

• A reserve account is used to hold balances and
  record transactions that dont directly affect
  the rate charged to recharge center customers.
• If recharge or cost centers want to include
  equipment depreciation or an equipment use
  allowance in the recharge rates, they should have
  a reserve budget.

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Reserve Account

• Activities the Account is Used For
• Purchase of Equipment
• Recapture of Depreciation
• Additional charges for external customers
  profit can be recorded in this account.
• Not used in the calculation of surplus/deficit
  at year end.

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Costing Considerations

• Recharge centers have the option of not including
  all costs in the rates (should not be included in
  account, should be paid from departmental
  account).

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Costing Considerations

• Any partial subsidy of a center either included
  as part of the budget or absorbed as a deficit at
  the end of the year, needs to be identified as an
  unallowable cost for FA rate calculation
  purposes

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Costing Considerations

• In order to estimate usage, prior year(s) numbers
  can be used as a starting point and adjusted for
  anticipated changes.
• Centers without sufficient usage history can use
  available units as a starting point and adjust
  for downtime and other intervening factors.

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Costing Considerations

• Recharge centers should use the same account for
  all of their revenue and expenses to aid in
  reconciliation and documentation.

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Depreciation

• Centers may not mark up billing rates to
  accumulate a reserve for equipment replacement
  and additions.
• This is a violation of OMB A-21 which states,
  charges for the use of specialized services
  should be designed to recover not more than the
  aggregate cost of the services.

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Depreciation

• Depreciation costs of recharge centers must not
  be included in indirect cost pools.

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Other

• Program income and recharge center activity will
  be recorded in separate accounts.
• A recharge center may not have program income.

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Sales Tax UBIT

• Sales tax will be collected in certain
  circumstances for some types of sales to external
  users.
• Unrelated Business Income Tax (UBIT) is a tax
  that is charged on external sales that do not
  meet certain prescribed exemptions.

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Space

• Space occupied by all service centers must be
  identified and designated as such during the
  annual space survey.
• Space which is occupied by the center equipment
  must be assigned as center space, rather than
  department space.

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Operating Principles

• Billing and Receivables

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Billing and Receivables

• Recharge and cost centers should bill their users
  in a timely manner (generally monthly) based on
  actual usage.
• Centers that have significant revenue are
  recommended to bill more frequently.
• The billing process may depend on whether the
  customer is an internal user or an external user.

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Billing and Receivables

• Usage logs may be used to generate the billing
  they should track
• account numbers or customers charged,
• service performed or product sold
• rate charged
• This information is used to generate the billing
  and can be used to make usage estimates for
  future rate proposals.

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Association of College and University Auditors

• Over the years a pattern of audit findings at
  Universities has emerged that highlights
  potential accounting problems encountered by
  Recharge Centers.
• These problems pose the risk of financial loss to
  the both individual Departments and their
  Universities.

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Inadequate Rate Documentation

• Results from user rates being set arbitrarily
  without regard to the actual costs of providing
  the goods or services.
• User rates must be supported by cost
  calculations based on historical costs and
  service levels.
• An adjustment for known or anticipated changes in
  service levels or services should be clearly
  documented.
• Estimated rates may only be used in the first
  year of operation.

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Failing to Maintain Current Equipment
Depreciation Schedules

• Problems have also arisen when the University did
  not ensure the items recovered in the user rate
  are removed from the indirect cost pool used to
  calculate the equipment use charge.

83
Failing to Separately Identify Expenses Included
in the User rates from Departmental Expenses

• If you cant demonstrate that the cost was
  incurred, you cant include it in the user rates.
  
• Additionally, if you include costs in the user
  rates, you must be able to show they were paid by
  the Recharge Center and not included in one of
  the indirect cost pools or from other Federal
  extramural funds.

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Failing to Document Clearly the Goods/Services
Provided

• User bills that dont carry sufficient detail to
  identify the services provided are subject to
  disallowance,
• ----- it is important the customer
  gets a detailed bill for services provided.
• The type of bill would depend on the service.
  Users must be provided with detailed bill in a
  timely fashion.

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Failing to Identify the Users Source of Funds at
the Point of Purchase

• It is important from the standpoint of the
  Federal auditors that a customer identify what
  project(s) are to be charged at the time of
  purchase.

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DOJ - 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, 2006

87
OIG Audit - University of Massachusetts Medical
School

• 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

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OIG Audit 06/03- Northeastern University

• Animal care costs Animal care facility set up
  as a recharge center, in proposal PI put direct
  salary in budget for animal care technician
  instead of rate. OIG determined that this made
  it a direct cost and required time and effort
  report.

89
OIG Audit 11/05-University of Colorado

• A Review of Recharge Centers
• Rates based on actual cost of materials plus a
  percentage markup, which was not based on cost.
• University did not have written policies and
  procedures for recharge centers
• Surplus funds were transferred to other accounts
• Equipment costs were expended instead of
  capitalized
• Net interest earned on pooled investment balances
  were not charged back to the fund or department
  that earned the interest.

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OIG Audit 09/95- Washington University- St Louis

• Review of University Recharge Centers
• University did not develop billing rates based on
  actual costs of providing services.
• Surplus and deficit fund balances were not
  properly accounted for.
• Surpluses and deficits were included in the
  calculation of the indirect cost rate, the
  proposed rate may have been overstated and may
  have resulted in duplicate recovery of costs.
  (Surplus balances included in the indirect cost
  pool understate the rate deficit balances
  overstate the indirect cost rate.)
• Comment on animal rates which are less than cost.

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OIG Audit 1995 - University of Utah

• A Review of Recharge Centers
• Billing rates not adjusted to eliminated
  operating surpluses and deficits.
• Recharge centers had not made cost studies to
  ensure that billing rates approximated costs for
  individual services.
• Equipment costs from operating to reserve
  accounts were not based on equipment depreciation
  schedules maintained for the recharge center
  operations.

92
OIG Audit 1995- University of Iowa

• A Review of University Recharge Centers
• Some centers did not periodically adjust billing
  rates to eliminate operational surpluses and
  deficits
• Some centers developed rates based on goals
  conflicting with A-21 provisions
• One center billed at rates which provided net
  income of 20 to fulfill the annual dept service
  requirement required by its bond covenants.
• One center billed at rates to provide surplus
  funds to purchase a new computer
• Another center billed at rates below cost to
  remain competitive in obtaining sponsored
  agreements for the University.
• One center offered some users rates below the
  scheduled billing rates.
• Some centers expensed equipment during the year
  of purchase.

93
OIG Audit 1994- Review of service centers at 12
Universities

• Summary Report of Audits of Recharge Centers at
  12 Universities - Findings
• billing rates were not adjusted for accumulated
  surplus and deficit fund balances
• included duplicate or unallowable costs in the
  calculation of billing rates
• included recharge costs in the calculation of
  indirect cost rates
• used funds of recharge center account for
  unrelated purposes
• billed some users at reduced rates.

94
Questions

• Charlene Blevens, CPA, MBA, CRA, CFE
• University of Oklahoma
• 405-325-6992
• cblevens_at_ou.edu