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Panel: Managing Service Centers – Costing, Process, and Strategy. Presenters: Bill Lawlor , Director of Financial Compliance and Cost Analysis, University of Nebraska Medical Center Josh Rosenberg , Director of Cost Studies, Emory University. AGENDA. Overview of Service Centers

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Panel managing service centers costing process and strategy

Panel: Managing Service Centers – Costing, Process, and Strategy

Presenters:

Bill Lawlor, Director of Financial Compliance and Cost Analysis, University of Nebraska Medical Center

Josh Rosenberg, Director of Cost Studies, Emory University


Agenda

AGENDA Strategy

Overview of Service Centers

Compliance requirements

Rate Calculation Process

Applying rates – internally and externally

Best practices for center management

In closing….


Overview

OVERVIEW Strategy

What are “service centers?”

They are often described as “departments or functional units which perform specific technical or administrative services for the benefit of other units within a reporting unit for a fee.”

Service Center Categories

Specialized service facilities (Animal Care Facility)

University-wide recharge centers (Facilities Management)

Core Facility (Immunology Core)

Departmental recharge centers (Machine Shop)


Overview key compliance issues

OVERVIEW—Key Compliance Issues Strategy

What are “service centers?”

They are often described as “departments or functional units which perform specific technical or administrative services for the benefit of other units within a reporting unit for a fee.”

Service Center Categories

Specialized service facilities (Animal Care Facility)

University-wide recharge centers (Facilities Management)

Core Facility (Immunology Core)

Departmental recharge centers (Machine Shop)


Compliance

COMPLIANCE Strategy

Governmental Concerns

Inadequate policies, procedures and/or oversight

Inappropriate billing rates

Full amount of purchase of new equipment in service center expenses

Using replacement cost versus depreciation expense for equipment

Monitoring of fund balances & treatment of surplus (too large = Fed overpaid)

Consistency of like costs in similar circumstances (CAS 501 & 502)

Direct charging Department Administrative costs – 26% cap from OMB A-21

Double dipping (costs included in center rates and in F&A rate, e.g. equipment depreciation)

Claiming additional costs that should have been included in indirect cost recoveries. These are frequently seen as 3-4% Departmental surcharge in addition to indirect cost recovery


Compliance1

COMPLIANCE Strategy

Governmental Concerns

A-133 Compliance Supplement – Internal Service Central Service

Computation of retained earnings / fund balances

Working Capital Reserves not greater than 60 days expenses

No transfers to other funds (or Feds get to share)

All users billed consistently

Billing rates exclude unallowable costs

Billing rates based on actual costs


Rate calculation

RATE CALCULATION Strategy

At a high level, what goes into the rates?

Numerator

Direct Operating Expenses

Any subsidies

Carry Forward Balances

Denominator

Projected number of goods/services sold


Rate calculation1

RATE CALCULATION Strategy

Billing Rates

Rate Structure

Based on actual cost - cost study is required

Can bill users different rates

Factor non-paying users in rate (imputed revenue)

Watch operating reserve (normally 60 days working capital)

Consistent Costing

26% threshold applies

Treatment of costs normally in IDC

Unallowable costs (e.g. Marketing, equipment replacement reserves, entertainment, visas) – see Section J, A-21


Rate calculation process

RATE CALCULATION PROCESS Strategy

60-day Rule:

Working capital reserves cannot be excessive in amount (generally not greater than 60 days for cash expenses for normal operations incurred for the period exclusive of depreciation, capital costs and debt principal costs)


Rate calculations

RATE CALCULATIONS Strategy

Allowable Surplus

The ending cumulative balance is equal to or less than 60 days worth of operating expenditures for a fiscal year.

Example: $120,000 Expenses for the year

= 20,000 allowable surplus


Rate calculation2

RATE CALCULATION Strategy

Equipment Depreciation

Central administration (usually Cost Studies) must approve equipment depreciation in order to include it in your rates.

If depreciation is approved, then specialized accounting procedures will apply.

Cost Studies will calculate the annual depreciation for service centers to include in their rate calculations.

Note: Purchase cost of capitalized equipment is not an operating cost.


Rate calculation3

RATE CALCULATION Strategy

EXAMPLE

Dr. Kirk spends 20% of her time in a lab, at a salary of $15,000 a month.

Dr. Spock spends 40% of his time in the same lab, at a salary of $8,000 a month.

Employee fringe benefits are 25% of salaries for this lab.

Supplies cost approximately $10,000 annually.

The lab receives $20,000 annual subsidy from the Vice Chancellor of Research to help cover salaries.

The lab has a prior year surplus carry-forward of $8,000.


Rate calculation4

RATE CALCULATION Strategy

Example – Yearly Budgeted Expense:

Dr. Kirk (20% x $15,000 per month x 12 months) $36,000

Dr. Spock (40% x $8,000 per month x 12 months) $38,400

Salaries & Wages $74,400 TOTAL

Benefits ($74,400 * 25%) $18,600

Supplies $10,000

Total Budgeted Expenses $103,000


Rate calculation5

RATE CALCULATION Strategy

Example – Carry Forward & Subsidies

Total Budgeted Expenses (from prior slide) $103,000

Less Prior Year Carry Forward (8,000)

Less Subsidy from Vice Chancellor Research (20,000)

Amount Used for Rate Configuration $75,000


Rate calculation6

RATE CALCULATION Strategy

Example – Lab assumptions

Assume the lab performs a service charged on an hourly basis and takes an average of 3 hours to complete.

The lab expects to perform 500 tests of “Service A” based on past history and best estimate of the future year.


Rate calculation7

RATE CALCULATION Strategy

Example – Rate Configuration Calculation

(3 hrsx 500 hours) * (Unknown Rate) = $75,000

Solve for Unknown Rate = $50 per hour

Total cost per service = $50 per hour x 3 Hours =$150.00


Rate calculation8

RATE CALCULATION Strategy

Example – Budgeted Revenue vs. Expense

Total Budgeted Expenses $103,000

Less Service A @ $50/hr. * 3 hrs* 500 Services = ($75,000)

Less Previous Year Carry Forward Surplus ($8,000)

Less Subsidy from NRI ($20,000)

Net Surplus $ 0


Rate calculation9

RATE CALCULATION Strategy

Example – Allowable Surplus

Total budgeted expenses for year $103,000

Expense per month 8,583

Times 2 months (approx. 60 days) 17,167

$17,167 is the approximate allowable surplus for the lab (per OMB A-133)


Applying rates

APPLYING RATES Strategy

Internal versus External

All internal users (users within the university) should be charged the same rate

External users (outside of the university) may be charged rates higher than internal users


Applying rates1

APPLYING RATES Strategy

Discounts and Prepayments

Discounts

Generally not allowed

Only allowable if volume discounts are equally available to

all users

Prepayments

Prepayments from federal grants are not allowed in

service centers


Applying rates2

APPLYING RATES Strategy

Example 1

Lab XYZ asks some of their regular customers to prepay for upcoming services and also offers them a discounted rate. They plan to use the prepaid funds to purchase a piece of equipment.

What is wrong in this example?


Applying rates3

APPLYING RATES Strategy

Example 2

Lab PQ performs a service where extensive set-up/configuration is needed per customer and then very little time is needed per service after the initial set-up has occurred. As such, the lab director has decided to price services with a 20% discount given when multiple tests are run using the same initial set up.

What is wrong in this example?


Best practices

BEST PRACTICES Strategy

Be able to identify the active service centers in your university.

Create/Maintain an inventory that includes all of the following:

Name (and account number) of the center

Related accounts (capital accounts)

Contact information

Date when rate submissions were received

Date when rate submissions were approved

Actual rate submission documents

Identifiers in the accounting system (Fund Type, Class, Internal Revenue codes)


Best practices1

BEST PRACTICES Strategy

Understand the mechanics behind service center accounting.

Proper account codes

Expenses

Revenues

Expenses and revenues accounted for in the center

Payroll expenses (HR set up to get people paid out of the right place)

Fringe

Depreciation

Supplies

Collections

Carry-Over? Deficit funding?


Best practices2

BEST PRACTICES Strategy

Know the workflow (and parties involved) in setting up the center.

Who is involved in each step of the set-up process?

Who is involved once the center is up and running?

What approvals are required during set-up and beyond?

School/Department

Budget Office

Accounting

Cost Studies


Best practices3

BEST PRACTICES Strategy

Recognize operations that may become service centers in the future.

Internal activity identified

Internal revenue account codes used

“Word of Mouth”

Not on active inventory yet, but should be

Discussions on potential centers


Best practices4

BEST PRACTICES Strategy

Have a solid (and realistic) business plan for operating the center.

Market for goods/services

Is there a demand for the products and services offered?

Are you able to charge rates that will allow you to cover costs

Centers are not just a source of “revenue”

School level understanding of potential deficits

If the center loses money, will school cover it?

Expectations versus Reality

Administrative Requirements: Managing budgets, billing, etc.


Best practices5

BEST PRACTICES Strategy

Have written policies and procedures in place for the management of service centers.

Is everything clearly defined?

Steps for set-up, maintenance

Roles and responsibilities

Does everyone know their role 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


Best practices6

BEST PRACTICES Strategy

Templates should be made available to assist with rate calculations.

Standard templates in place versus freedom of centers to use their own.

Capture:

Salaries

Fringe

Effort

Equipment

Supplies

Usage Estimates

Advantages and disadvantages to both options


Best practices7

BEST PRACTICES Strategy

Rates should be reviewed and approved at least every two years.

How often are rate calculations approved at your university?

Things to look for

Salaries and effort (individual)

Correct fringe rates used

Depreciation on equipment

Surplus/Deficit carryover

Rates at or below cost


Best practices8

BEST PRACTICES Strategy

External usage (sales to non-university customers) should be monitored and tracked.

UBIT risks

Sales to other not-for-profits/hospitals/educational institutions

Sales to corporations.

Thresholds for external usage

De minimus vs.

Significant

Rates charged to external versus internal users


Best practices9

BEST PRACTICES Strategy

Use software or some other means to invoice and collect regularly

Centers need to track:

Usage

Invoices

Collections

University accounting system or specific service center software


Best practices10

BEST PRACTICES Strategy

Billing Rates – should/should not

Service center losses should not be recovered through the F&A Rate

Excess (accumulated) reserves in service centers should be used to adjust future billing rates.

Cannot be used to purchase equipment

Cannot be used to fund other service units within the recharge center operating at a loss

Cannot be used to fund salary increases


Best practices action plan

BEST PRACTICES: Action Plan Strategy

If you have not been accounting for service centers, a few ideas:

If Federal charges > $10,000all rates will be reviewed and approved by a Central Office.

Education classes on rate setting

Create/update your policies

Standardized accounting for each service center

Create list of capitalized equipment

Create new cost center for Equipment purchases and Depreciation

Establish a monitoring plan

Monitoring & review if surplus > 60 days of expenses


Best practices action plan1

BEST PRACTICES: Action Plan Strategy

Remember!

Expenses included in the rate must be for the benefit of the service center

Prepaids are not allowed

Discounts to certain PI’s are not allowed

Rates must be based on costs

Billing should be monthly, not semi-annually.


Best practices roles

BEST PRACTICES: Roles Strategy

Responsibilities of Core Facilities:

Work with Office of Research and Cost Studies to set rates

Post approved rates publicly i.e. webpage

Maintain documentation on rates

Identify a contact person for any auditors


Best practices roles1

BEST PRACTICES: Roles Strategy

Responsibilities of central office:

Review and approve rates for all core facilities that have greater than

X dollar threshold in federal charges

Develop and update Policy on Service Centers

Assist Controller & A-133 Auditors with service center identification

Consult with department administrators as needed


Best practices billing

BEST PRACTICES: Billing Strategy

Billing and Documentation

Billing

Billing should be done on a timely basis (monthly)

RA Core Facility Management Billing System

Documentation

Documentation should be kept to support all billing charges (including the expenses and usage)


Best practices fund transfers

BEST PRACTICES: Fund Transfers Strategy

Fund Transfers Out

Transferring funds out of service centers is not allowed.

Fund Transfers In

Transferring funds into a service center is allowed. This can be done to provide additional support to the service center.


Best practices deficits

BEST PRACTICES: Deficits Strategy

If a core lab has deficits that grow each year, what do you do?

Does senior leadership have a direction or policy for core labs with deficits?

Consider raising rates despite pressure from PI’s?

Are expenses properly recorded and allocated in correct funds?

Could services be performed at a lower cost by outside provider?

What is the Communication or do deficits simply grow at your campus?


In closing

In Closing…. Strategy


Questions contacts bill lawlor wlawlor@unmc edu josh rosenberg josh rosenberg@emory edu

Questions/Contacts StrategyBill [email protected] [email protected]


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