1. NCURA Region V University Service Centers – A Primer

2. 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

3. 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.

4. 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.

5. 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  University’s 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  University’s Cost Disclosure Statement

7. 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

8. 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 don’t discriminate between users, especially Feds  Surplus from recharge centers shouldn’t 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 can’t also be in the F&A rate  Service center subsidies should NOT be included in the F&A rate (i.e.. NOT as a Departmental Administration cost)

9. University Service Center Characteristics

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

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

12. 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?

13. 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.

14. 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?

15. Developing the Rate Determine what you are going to sell.

16. 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

17. 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

18. 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)

19. Developing the Rate Determine who your customers will be.

20. 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.

23. Developing the Rate Determine how the usage will be measured.

24. 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.

25. Examples of Measurable Units  Page  Test  Slide  Sequence  Cup  Labor hour  Machine hour  CPU Unit  Per Rack Slot per Month  Daily Rate

26. Example – Base to Use NameShort DescriptionUnit Base* Lemonade8 oz cup Lemonade Machine Use of machine to make lemonade

27. Measurable Units for Lemonade Center  Cup  Daily Rate

28. Developing the Budget Operating Budget

29. 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.

30. 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

31. Budget Components Salaries & Wages

32.  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.

33. Salaries & Wages  If faculty salaries are to be included in user rates they will be budgeted and paid from the service center operating account.

34. 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 CENTE R TOTAL ON CTR (INC. BENEFITS) Direct Salaries Technician 10,000.0033.0%50% $6,650.00 Student - Sales 6,000.00.09%25% 1,635.00 Total Direct Salaries 16,000.00 $8,285.00

35. Budget Components Supplies and Materials

36.  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 center’s staff.

37. Example SUPPLIES Lemons (1 bag per day x 65 days @ $20/bag) 1,300.00 Sugar (1 bag per day x 65 days @ $3.50/bag) 227.50 Cups 5,850 needed (1 box of 1000 = 25.00) 150.00 TOTAL SUPPLIES 1,677.50

38. Budget Components Other Expenses

39. Actual expenses for items such as  Travel  Equipment service contracts  Long distance telephone calls

40. Example SERVICES Travel- training on machine $ 1,000.00 Machine upkeep 500.00 - SUBTOTAL SERVICES $ 1,500.00

41. Budget Components Equipment

42.  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.

43. Example Depreciation Schedule Desc/Type of Equipment Depr End Date Acquisition Cost Useful Life yearsDepr in Rate Lemonade Machine 201110,000 5 2,000 Totals 10,000 2,000

44. Operating Principles Working Capital

45.  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.

46. 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.

47. 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 center’s budget.

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

49. Unallowable Costs  Costs such as entertainment and bad debt expense.

50. Rate Calculation Allocate Costs Identified Above to Individual Services or Products (in Budget)

51. Allocation of Salaries to Rates RATE 1RATE 2 NAMEBEN % FTE Ctr TOTAL INCL. BENEFITSCups Machine Rental Technician33.%50% 6,650.001,662.504,987.50 % FTE for each rate25%75% 2 students9.%25% 1,635.00 1,635.0 - % FTE for each rate100%0%

52. Example – Supply Allocation SUPPLIES100%0% Lemons (1 bag per day x 65 days @ $20/bag) 1,300.00 - Sugar (1 bag per day x 65 days @ $3.50/bag) 227.50 228.00 - Cups 5,850 needed (1 box of 1000 = $25.00) 150.00 - SUBTOTAL SUPPLIES 1,677.50 -

53. 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.

54. 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.

55. Rate Calculation Annual Rate Annual Costs / Total Annual Usage

56. Example – Annual Cost Rate 1Rate 2 Direct Costs Cup of Lemonade Machine Rental Direct Salaries & Fringe Benefits 3,297.504,987.50 Travel & Services 375.00 1,125.00 Supplies 1,677.50 Depreciation 500. 001,500.00 TOTAL DIRECT COSTS 5,850.007,612.50

57. Example – Annual Usage Rate 1Rate 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

58. Days Machine is Available for Rent Available for rental 9 months, 75%, of year (9/12) Days Available Days in Year365 Days used in Summer65 Days Machine is Idle (Vacation of Technician, Maintenance)34 Days Machine is available for Rent266

59. Costing Considerations Costing Considerations for Internal & External Users – “What can I charge?”

60. 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.

61. 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.

62. 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 controller’s office for possible tax purposes.

63. 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.

64. 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..

65. 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

66. Reserve Account  A reserve account is used to hold balances and record transactions that don’t 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.

67. 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.

68. 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).

69. 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 F&A rate calculation purposes

70. 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.

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

72. 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”.

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

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

75. 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.

76. 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.

77. Operating Principles Billing and Receivables

78.  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.

79. 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.

80. 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.

81. 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.

82. 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 can’t demonstrate that the cost was incurred, you can’t 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.

84. Failing to Document Clearly the Goods/Services Provided  User bills that don’t 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.

85. Failing to Identify the User’s 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.

86. 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

88. 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.

90. 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.

91. 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@ou.edu