NCURA Region III May 2008

1. NCURA Region IIIMay 2008 Introduction to Recharge Centers

2. Recharge Centers • Overview • Characteristics • How to identify • Rate Development • Costs/Budget • Rate Base • Best Practice Suggestions • Past OIG Audit Findings

3. Service Centers – Recharge Centers • Described in the DS-2, Part III, item 3.2.0 as “Service Centers” • Described as “departments or functional units which perform specific technical or administrative services for the benefit of other units within a reporting unit.” • Service centers include “specialized service facilities”and “recharge centers”. • Financial Objective: A business operating within the University to break-even.

4. Specialized Service Facilities • OMB A-21, Section J.47 addresses Specialized Service Facilities (SSF) • The costs of services provided by highly complex or specialized facilities operated by the institution, such as computers, wind-tunnels, and reactors are allowable, provided the charges…meet the conditions of subsections b. or c.…and include applicable credits.

5. University-wide Recharge Centers • These service centers are not SSF, but are operated by the university to provide support to both the university and possibly the non-university community. Might include: • Copy/duplicating • Mail distribution • Central stores • Facilities repair and maintenance

6. What is A Recharge Center? An operating unit within the University that provides: --a service or group of services or --product or group of products --predominate users are within the University --a fee is charged for the service or product

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

8. University Service Center Characteristics

9. Characteristics Can you define what are you going to sell? • A measurable unit of output can be readily determined. Can you measure usage? • The amount of a product or service can be measured easily and accurately. Can you bill on a regular basis? • Individual accounts can be billed for products or services based upon their actual usage recommendation-monthly.

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

11. Starting 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? • Is there similar services/products available in the area that will meet the needs?

12. Developing the Rate It’s just a fraction right? Cost / Usage = Rate

13. 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

14. 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)

15. 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.

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

17. Job Costing • The best method for costing out the service may be to use job costing. • Direct labor + Direct supplies + Percent of Administration of the Recharge Center = Job Cost

18. Developing the Budget • All allowable costs of a center that will be used in establishing user rates must 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.

19. 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

20. Rate Calculation

21. Rate Calculation • A service center may have different measurable units for the different types and classes of products it offers. • External users may be charged a higher rate. • Ideally the less rates the easier to administer. • 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. High volume discounts are not permissible. • Off peak rates are permissible.

22. Rate Calculation Annual Rate = Annual Costs / Total Annual Usage

23. Operating Principles Working Capital

24. Working Capital • Funds that are accumulated in excess of actual cost in order to fund future operating expenditures/expansion. • A recharge center surplus fund should not exceed 60 days 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.

25. Costing Considerations Who can I charge and what can I charge?

26. 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.

27. 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.

28. Costing Considerations • Partial versus full cost rates: • Institutions sometimes charge only the cost of the materials and supplies through the billing rates. The salaries of the personnel that operate the center or provide the service are not included in the billing rate. They are allocated as either GA or DA. • Government views this as CAS 502 violation, similar costs in like circumstances as both direct and indirect.

29. 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 should be recovered in a separate account that can be used to replenish equipment.

30. 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.

31. 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 in the recharge rates, they should have a reserve budget.

32. 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.

33. 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).

34. 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

35. 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.

36. Costing Considerations • Recharge centers should use the same account for all of their revenue and expenses to aid in reconciliation and documentation. • Reconciliation should be done at least annually.

37. 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. Discuss this with the appropriate office at your institution.

38. Space • Space occupied by all service centers must be identified and designated as such during the space survey (e.g, for F&A Proposal purposes). • Space which is occupied by the center equipment must be assigned as center space, rather than department space.

39. Operating Principles Billing and Receivables

40. Billing and Receivables • Recharge and cost centers should bill their users in a timely manner 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.

41. 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.

42. Best Practices • 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.

43. 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.

44. 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.

45. 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.

46. 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.

47. 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.

48. 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

49. 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

50. 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.