Dutch universities and the implementation of a Full Cost System

1. Dutch universities and theimplementation of a Full Cost System Pieter-Jan Aartsen Universiteit van Amsterdam June 2007 E-mail: P.J.Aartsen@uva.nl Tel. +31 20 525 2832

2. Agenda • Governance: “Climate change” in The Netherlands • Preparation for Full Cost • Costing system: differences FP6 – FP7 • Principles Full Cost • Example Full Cost rate (UvA) • Items to discuss

3. “Climate change” in NL Since 1980’s : “Withdrawing” National Government National funding: based mainly on output parameters • Education: # Ba / Ma / PhD degrees / # enrolled students • Research: % on Education budget / competition (Public) universities: fully independant economic responsible • Personnel (salaries, redundancy payments, facilities) • Other costs: asset management, investments, costs of capital, etc. Quality Assurance Education and Research: peer review From 2008 onwards: • Obligation to apply General Accounting principles

4. Preparation for Full Cost Road to implementation FC in a way already prepared by: • adopting “usual economic principles” in management and reporting system • the demand to relate costs and performances • (political) urge to show added “value for money” in society • obligation to avoid cross-financing private activities • national initiatives for monitoring / benchmarking, e.g. • € and time effort academic staff / student; overhead costs / cost driver • rationalizing internal budget allocation (fair principles) N.B. National government is also preparing FC-system for all national research funding

5. Differences FP6 – FP7 • Until FP6: Additional Cost: exception for universities • FP6 AC was: DC * 100% + Flat rate 20%; • FP7 is / will be: FC * 75% or (DC + Flat rate 60 %) * 75% • FP6 and Dutch universities – AC: 11 / FC: 2 • FP7: Obligation to use FC (or FCF) • FCF: only -for the time being- interesting for • Organisations with small overhead costs (from 2010: Flat rate will be 40%) • Organisations without proper accounting system (yet)

6. Principles Full Cost • Eligible costs • Direct costs • Indirect costs • Differentiation and calculation rates • Time recording • Project budget versus Cost statement

7. Eligible costs Not-eligible (FP7): • duties, interest owed • provisions for possible future losses or charges • exchange losses, cost related to return on capital • costs declared or incurred, or reimbursed in respect of another Communityproject, (avoiding double funding ) • debt and debt service charges • excessive or reckless expenditure Some (scholastic) discussions: • with auditors on interpretation some of these notions

8. Direct costs Required in cost statement: actual costs 1. Personnel costs • Actual costs individual / actual hours individual Or optional (to be approved by E.C.): • Actual costs individual / average hours • Average costs homogenous group personnel / average hours (statistical analysis) • Other costs Actual costs, proved by • invoice, declaration • (measured) use of facilities

9. Indirect costs • Method of calculation “real” indirect costs “in line with the general accounting policy of the beneficiary” (one cost accounting methodology has to be applied to all activities) • Basisdata cost pools deriving from financial statements • Costing principle for all university costs: justification by the concern for education and research (sometimes also: medical care)

10. Calculation methodology Steps in settlement overhead costs: 1. Separation all exclusively education- or research-related costs 2. Allocation remaining overhead costs: • Collected in cost pools representing separate support tasks / departments; • via appropriate keys / indicators / cost drivers (sqm / fte / income); • in one (“simplified model”) or in more steps / eventually reciprocal; • mainly to available productive time all scientific personnel; • via time recording finally to individual projects education and reasearch (government funded and contract -i.a. FP7- research)

11. FC rates: differentiation Full cost rates: two components: I. Differentiation personnel costs (when using averages) • Homogenuous salary groups (UvA: 8, from research assistent to full professor) II. Differentiation indirect (overhead) costs • Per faculty, department and / or institute (UvA: 20, subdiscipline α, β, γ, medicine, dentistry, law, economics), depending on use of dedicated infrastructure and laboratories Calculation hourly rate from annual costs per fte: • Available hours C.L.A. (NL: 1659 hpy) • -/- Average sickness leave (human resource system) • -/- Average indirect productive hours (figures from time recording last year)

12. Time recording For reporting direct costs (contract research) • Day-to-day (monthly) active time recording • Only personnel in externally funded projects • Whole work week (even in the case of partial project employment) For overhead calculation (proportion research / education) • Data above completed with time schedules all other personnel (academic / non-academic) Timesheets: filled out in background (UvA) Using computerized system • integrated with financial and human resource information system Characteristics time allocation • Productive hours: research, education, internal (non-academic psnl.) • Indirect productive hours (meetings, acquisition, training etc.) Integrated with absence registration (sickness, holidays)

13. Budget vs. Cost statement Project budget • Direct and indirect (overhead) costs: • Precalculation (negotiated) (Final) cost statement • Direct personnel costs: • rate according to verified calculation (when using averages) • applying yearly correction salary increase • Direct other costs: • invoices / personnel declarations • Indirect costs: • overhead rate according to verified calculation method • applying yearly correction inflation

14. Example FC rate - UvA

15. Items to discuss • Reference for acceptance overhead calculation method • instruction for the auditor for “ system verification” • Applicability cost drivers and rate differentiation criteria • In respect of the notion: a “fair” or “ not subjective” key or driver to distribute costs • Use of precalculated rates • % tolerance postcalculation / conditions for recalculation rates • Eligibility some cost elements, e.g. • Redundancy payments (social benefits / provisions?) • Full housing costs (incl. Weighted Average Cost of Capital - WACC) • Interpretation some notions, e.g. • Not “excessive” and “reckless” expenditure

16. Overhead calculation Non protinus ad censum, de moribus prima quaestio fiet “contra” Iuvenalis (1st c. A.D.)