NCURA Region V

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					NCURA Region V

University Service Centers – A Primer
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
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
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
--for a fee.
 A business operating within the
  University at break-even.
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
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
   A-133 Compliance Supplement (Part 3,
    Compliance Requirements): April 1999
       Internal service, central service, pension, or
        similar activities
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
   Service center subsidies should NOT be included in the
    F&A rate (i.e.. NOT as a Departmental Administration
University Service Center


 A measurable unit of output can be
        readily determined.

Can you define what are you going to

 The amount of a product or service
     can be measured easily and

      Can you measure usage?

  Individual accounts can be billed for
    products or services based upon
           their actual usage

  Can you bill on a regular basis to
           recover costs?

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

     What are the products or service provided?
     Who will be the primary users?
     What portion of income will be from federal
     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?
Developing the Rate

Determine what you are going to sell.
Define Good or Service to Sell

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

   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
Example-Lemonade Stand
   What could we sell?
 Cups of Lemonade (to participants)
 Cups of Lemonade (to non-
 Rental of Lemonade Machine (machine
   is available nights and week-ends)
Developing the Rate

Determine who your customers will
Evaluate Customer Base
 University Sponsored Program Areas
 University Departments

 Those who do not have a University account number
 Industry
 Students, faculty or staff acting in a personal

Estimate How Many Customers (Rate is a function of
  the Operating Costs/Users (Use) of the Service)

   Who are the potential customers for
    product and services?
   Will they be internal or external?

   Participants
   Employees
   Student Groups
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.
Developing the Rate

Determine how the usage will be
   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.
Examples of Measurable Units

   Page           Labor hour
   Test           Machine hour
   Slide
   Sequence       CPU Unit
   Cup            Per Rack Slot per
                   Daily Rate
 Example – Base to Use

Name       Short Description        Unit Base*

Lemonade   8 oz cup

Lemonade   Use of machine to make
Machine    lemonade
Measurable Units for Lemonade Center

   Cup              Daily Rate
Developing the Budget

Operating Budget
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
   The budget will be determined
    using the standard guidelines
    established by University policy
    and procedures and the Cost
    Accounting Standard guidelines.
Developing the Budget

Generally these costs include:
 Salaries and Wages

 Fringe Benefits

 Supplies and Materials

 Subcontractors and Other Outside
 Repairs and Maintenance

 Carry-Forward Surpluses or Deficits
Budget Components

Salaries & Wages
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.
Salaries & Wages

   If faculty salaries are to be included
    in user rates they will be budgeted
    and paid from the service center
    operating account.
   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
                  BASE SALARY            FTE ON   TOTAL ON CTR
                     (AT 100%            CENTE         (INC.
NAME                    FTE)     BEN %       R       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
Budget Components

Supplies and Materials
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 center’s staff.

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
  Budget Components
Other Expenses
Other Expenses

Actual expenses for items such
 Travel

 Equipment service contracts

 Long distance telephone calls

Travel- training on
machine               $ 1,000.00
Machine upkeep            500.00
SERVICES              $ 1,500.00
  Budget Components
   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.
Depreciation Schedule

Desc/Type of            Depr End   Acquisition    Life
   Equipment               Date        Cost      years Depr in Rate

Lemonade Machine          2011     10,000           5      2,000

Totals                             10,000                  2,000
Operating Principles

Working Capital
Working Capital

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

 Interest earned on fund
  balances must be credited to
  the appropriate center and
  used in the determination of
Unallowable Costs

      such as entertainment
 Costs
 and bad debt expense.
Rate Calculation

Allocate Costs Identified Above to
Individual Services or Products (in
  Allocation of Salaries to Rates

                                         RATE 1      RATE 2

                     FTE   TOTAL INCL.               Machine
NAME         BEN %   Ctr      BENEFITS    Cups       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%
     Example – Supply Allocation
SUPPLIES                                   100%   0%
Lemons (1 bag per day x
  65 days @ $20/bag)        1,300.00   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    150.00     -

SUBTOTAL SUPPLIES           1,677.50   1,677.50   -
Rate Calculation
   A service center may have different
    measurable units for the different
    types and classes of products it

   In our Lemonade example, we have
    a per cup for lemonade and an
    hourly rate for rental of the
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.
Rate Calculation

       Annual Rate
    Annual Costs / Total
       Annual Usage
Example – Annual Cost

                                      Rate 1      Rate 2
                                    Cup of       Machine
Direct Costs                        Lemonade     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
Example – Annual Usage

                      Rate 1       Rate 2
                    Cup of        Machine
Direct Costs        Lemonade      Rental
Total Direct Cost      5,850.00   7,612.50
Estimated Usage      5,850 cups   266 days

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

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
Costing Considerations

Costing Considerations for Internal &
External Users – “What can I
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.
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
 It may be appropriate for
  external, non-federal, users of
  the center.
    Costing Considerations
   Recharge centers may charge
    additional rate to external users and
    the “profit” will be retained by the
   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
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
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..
   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
Reserve Account

   A reserve account is used to hold
    balances and record transactions
    that don’t directly affect the rate
    charged to recharge center
   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.
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.
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
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
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
Costing Considerations

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

   Centers may not mark up billing
    rates to accumulate a reserve for
    equipment replacement and
   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”.

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

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

   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.
Operating Principles

Billing and Receivables
Billing and Receivables

   Recharge and cost centers should
    bill their users in a timely manner
    (generally monthly) based on actual
   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.
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.
Association of College and University

   Over the years a pattern of audit
    findings at Universities has emerged
    that highlights potential accounting
    problems encountered by Recharge
   These problems pose the risk of
    financial loss to the both individual
    Departments and their Universities.
    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.
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
Failing to Separately Identify Expenses
Included in the User rates from Departmental

       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.
Failing to Document Clearly the
Goods/Services Provided

   User bills that don’t carry sufficient
    detail to identify the services
    provided are subject to
           ----- 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.
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
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
OIG Audit - University of Massachusetts
Medical School

   Recharge & Laboratory Supply Center
   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
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.
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
   Equipment costs were expended instead of
   Net interest earned on pooled investment
    balances were not charged back to the fund
    or department that earned the interest.
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.
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.
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.
                     of service
OIG Audit 1994- Review
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
   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.

 Charlene Blevens, CPA, MBA, CRA,
      University of Oklahoma