Implementing Full Cost

(1)

Implementing Full Cost

Short report from a Dutch experience

Brussels – May 10th₂₀₁₂ _{Pieter-Jan Aartsen}₍_{[email protected]}₎_{– Corporate Controller}

(2)

Full Cost - University of Amsterdam 2

Agenda

I. What preceded the implementation of Full Cost in

University of Amsterdam

II. Aspects of the implemented FC Methodology

III. Effects inside and on funding schemes

(3)

I.

What preceded

the implementation

of Full Cost in

(4)

Preliminary considerations (2004-2005)

Strong desire and support of the Central Board to

 Translating modern Governance model into Finance

 Increased autonomy requires a more businesswise organisation structure

 Rationalizing internal budget allocation

 Raising cost awareness: costs charged to who benefits  Reducing costs by optimizing indirect support facilities  Providing transparent information about real costs of

(5)

Preparatory measures by Board

 Concentrating support staff in “professional” Shared Services

 Zero budget, generating internal income from providing services to faculties

(and to each other)

 Attributing Full Scope responsibility to faculty deans (anchored by

law)

 Concentrating financial and academic policy in one hand

 Designing new internal budget allocation system

 Handing over (90% of ) government budget to faculties

 Relating costs to performance (Faculties as well as Shared Services)  Automatic (built-in) encouraging of “preferred behaviour”

(6)

II.

Aspects of the implemented

Full Cost Methodology

(7)

Main characteristics FC model UvA

Teaching & Research: Reason of Existence Universities, therefore:

 The effort of academic staff (# hrs / # fte) is the primary cost driver Support and facilities are to be justified by added value for T&R at the

most efficient level, therefore:

 All Services and Support Staff are internally charged

 By appropriate (transparently measurable) keys (sqm, students, fte etc.)  At periodically benchmarked / postcalculated rates

 To Research / Teaching institutes within Faculties (directly or indirectly)

Academic activity is highly personnel consuming and most expenses are personnel costs, therefore:

 Collecting data on time spent / time recording and multiplying hours

with rates reflecting Full Cost is the backbone of the model

(8)

Cost drivers agreed upon in UvA

 Support and facilities: Secondary cost drivers

 Time spent by support staff (# hrs / # fte)  Use of space and housing facilities (# sqm)  Use of ICT-facilities (# workstations, # laptops)

 Administrative support (# invoices processed, # headcount, # projects)  Use of university library (# fte academic staff)

 Student support and facilities (# students)

 Use of dedicated research facilities (time used / % cost increase )

 Teaching & Research: Primary cost driver

(9)

(10)

(11)

(12)

(13)

Breakdown Full Cost rate UvA

1 - Personnel costs 5 - Central administration 6 - Work space 8 - Institute costs 2 - Sickness leave 3 - Redundancy payments

4 - Other personnel costs 7 - Departmental costs

(14)

III.

Effects within UvA

and in the environment

(15)

Internal revenue of the FC model

 Budgeting now is focusing on use of facilities and on

performance (numerically) at an understandable scale, not (in first place) about M€

 € is derivative: University heart pulses elsewhere

 Management reporting in one language (Full Cost)

 supported by a sound Information System

 Planning & Control cycle:

 balance between autumn and spring

(16)

Environment - National level

 Ministry of Education (OCW):

 Not yet obligation to implement FC, nor to report on FC

 Funding parameters in national model roughly tuned

 FC provides UvA instrument to address political decisions and budget

rises and cuts internally

 UvA is in close contact with ministry – awareness is awakening

 National Research Council (NWO):

 First steps to adopt principles of Full Cost (traditionally: only recovery

of direct personnel costs)

 Research Grants other Ministries (Economic Affairs):

 Full Cost accepted, recovery % is the only tuning button

(17)

Environment: Intnl. level and private sector

 E.U. Framework Program 7:

 Full Cost Model UvA is certified: recovery rate 75% (excl. tax

and interest!)

 Private enterprises and other third parties:

 Policy: Charging at least Full Cost rate

 Sometimes applied research units are detached,

and hosted by UvA Holding (or sold)

(18)

IV.

Some considerations

related to proposed RoP

(19)

Cost reimbursement for beneficiaries

Current Proposal

 (Eligible) direct costs: 100 % reimbursement

 20 % extra for recovery (all kinds of) indirect costs

 How does this simple formula affect complex

(20)

Nature of indirect costs in universities

 Not linearly related to direct (personnel / material) costs

 Neither salary level of the researcher nor dedicated research

equipment is in general a good indicator for real indirect cost level  Actual necessary use of facilities is determinant

 Medical > laboratory based > desk research

 National setting universities (autonomy) is relevant

 Responsibility for housing costs, social securities, employer’s risks, pensions

Therefore: “Flat rate” on average favours

(21)

Potential side-effects of Flat Rate

 It rewards inefficiency – (recklessness?)

 Single use of equipment is profitable (turns it into direct costs!)

 It invites to “maximize” direct costs

 Audit burden reappears elsewhere

 It can eventually enable beneficiaries making profit

 Think of organisations or projects with low overhead and / or high direct

material costs (with in fact no related overhead)

(22)

Conviction based on UvA experience

Budget allocation / cost recovery based on Full Cost

calculation is a better system to realize a research

agenda at an efficient cost level than any

“uninformed” flat rate system

FC in FP7 helped “fair play” (apart from outcomes of

comparison FC and Flat rate at branche level)

(23)

Keeping FC at least as an option in H2020

 Would help EC getting better added value for money

 Balancing research objectives and costs

 Would help universities to get a fair cost recovery

 Respective to what are real cost levels to them

 Would help to minimize suboptimal incentives and

opportunistic decisions

 Would help to establish a level-playing field

 Is consistent with “well-thought” EC policy of FP7

(24)

Simplification

a mix of

Implementing Full Cost