Managing research with Full Economic Costing (FEC) John Green January 2006 For dissemination by Faculty Operating Officers to Faculty Administration meetings

Managing research with Full Economic Costing (FEC)

John GreenJanuary 2006For dissemination by Faculty Operating Officers to Faculty Administration meetings and to Divisional/departmental executives

Topics to be covered

• Equipment• Pricing• Allocation of new income• Challenges

Components of a project’s FEC

FEC of a project comprises

• Directly incurred costs: research staff, travel, consumables, dedicated technical (timesheets)/clerical staff costs, non-staff costs

• Directly allocated costs: - PI & CoI time- “estates” costs [= no of FTEs x “estates rate”], out of which ~10 major facilities costs have been removed- charge-out rates for ~10 major facilitiesand later … charges for pooled/shared lab technicians

• Indirect costs: general office and basic lab consumables, central services, admin/ secretarial [= no of FTEs x “indirect cost rate”]

“Estates” rate

• Term imposed by TRAC methodology – standard term used by HEFCE, Research Councils etc.

• Does not reflect what it includes nor fit with Imperial terminology

• The “estates” rate includes:– Rents, rates, repairs, refurbishments, insurance– Infrastructure adjustment– Depreciation of our estate– Pooled technicians (until 2007) and equipment

• At Imperial, these costs borne by various cost centres:- departments- faculties- College centre (Finance department)- … and Imperial’s Estates department

Equipment and facilities (1)

For Research Councils• New equipment and associated maintenance/service

costs must be recovered as directly incurred costs• Up to 2006: existing equipment costs are included in the

College wide “estates” rate (within directly allocated costs)• From end Jan 06, ~10 items of equipment and CBS will be

charged on a usage-basis (with their costs subtracted from the “estates” rate)NB Competitors only stripping out CBS from Jan 06 so our “estates” rate will decrease comparatively – GOOD NEWS

• From 2007 all major items have to be extracted from the “estates” rate and charged for separately

Equipment and facilities (2)

So how do we fund replacement equipment and facilities?

• Theoretically (TRAC), when facilities in “estates” rate, costs recovered into the College’s FEC Investment Fund (FIF), which should therefore fund replacement

• BUT from 2007 all depreciated costs will be recovered from usage based charging so money will flow to faculties

• Therefore faculties will have to build up ear-marked funds to replace equipment (or get from funders)

• Facilities will need to be more actively managed by faculties/departments (monitoring usage, recording running costs etc.)

PricingRCs• price = cost (80% thereof in short-term)

Charities• as now – some movement by some charities to pay some FEC

elements (but know there is additional HEFCE money)

Industry, OGDs, other non-RC, non-charity funders:• InfoEd will include the expected price, i.e. the price we need to

charge in order to recover at same level as hitherto(i.e. lose no more than we have been doing up until now!)

BUT how do we price to industry? – first, look at the way in which resources will flow

Recall

• In 2003-04 Imperial’s price recovered only 53% of FEC across all sponsors

• Old concept of “overheads” not identifiable with FEC – 100% “overheads” not equal to FEC!

• Objective of FEC is sustainability and transparency• TRAC calculates that 18% of “Estates” charges and 21%

of indirect costs required to maintain and replace infrastructure

• How does the College ensure it builds an FEC Investment Fund (FIF) in a post SRIF era?

Resource Allocation Model (1)FEC will bring additional resource to College:• £8M from Research Councils in 2006-07• ~ £6M p.a. from an increase in HEFCE contribution for Charities• RC will increase year on year until steady state in ~ 3 years

(providing research volume from RCs maintained)

TRAC methodology predicts the following allocation of additional RC income (steady state of ~ £24M p.a.) and of the HEFCE income for peer-reviewed charities (~ £6M):

• £20M will go to faculties and £10M to FEC Investment Fund (FIF)

1/3 of new money goes to FIF and 2/3 goes to Faculties

Resource Allocation Model (2)

• New income stream for Faculties – the additional income from those funders who will pay a price higher than before

• Primarily from Research Councils and the HEFCE charity subsidy for FEC

• Objective of FEC is sustainability and transparency• SO we must not overtrade with the additional income (e.g.

Faculty fund to replace facilities)• FEC includes the cost (as calculated by TRAC) to cover the

college infrastructure in the long term

FEC Investment Fund (FIF)

FEC Investment Fund (FIF)

The College must build up FIF to meet the post SRIF, long-term FEC requirement of sustainability BUT …

• build up will be gradual • will recognise that not all sources of income will obtain

prices at FEC• the reserve will be built up increasingly as our price begins

to recover more of the FEC (in varying amounts from different funders)

• the contribution to FIF will change year on year in accordance with the prices achieved from different sources; corresponding amounts will be transferred to the FEC Investment Fund

Research Income by Source 2004/05

UK Research Councils UK charities

UK Govt. depts UK Industry

European Commission Other (overseas)

FEC should not dictate our funding strategy but we must do everything possible to extract maximum benefit

- 2.1%

- 3.4%

+ 9.5%

+ 0.2% - 6.4%

+ 27.5%

How much NEW money will Faculties get? (1)Our research portfolio:

Research councils

UK charities

OGD and UK

industries

EU, overseas

etc

Total

Research income (£M)

45 57 36 33 171

Faculty A 20 7 8 6 41Faculty B 13 1 9 7 30

Faculty C 12 49 19 20 100

How much NEW money will Faculties get? (1)Our research portfolio:

Research councils

UK charities

OGD and UK

industries

EU, overseas

etc

Total


45 57 36 33 171

Faculty A (20)44% (7)12% (8)22% (6)18% 41Faculty B (13)29% (1) 2% (9)25% (7)21% 30

Faculty C (12)27% (49)86% (19)53% (20)61% 100

We now apportion the new money between Faculties according to these %

How much NEW money will Faculties get? (2)

So e.g. in Year 1, we obtain £8M from RCs, £6M from HEFCE (for charities)

Faculty A Faculty B Faculty C

From RCs £8M

From HEFCE £6M

From the rest £0M




From RCs £8M £3.52M

(44%)

£2.32M

(29%)

£2.16M

(27%)

From HEFCE £6M £0.72M

(12%)

£0.12M

(2%)

£5.16M

(86%)

From the rest £0M £0M

(20%)

£0M

(23%)

£0M

(57%)




From RCs £8M £3.52M

(44%)

£2.32M

(29%)

£2.16M

(27%)

From HEFCE £6M £0.72M

(12%)

£0.12M

(2%)

£5.16M

(86%)

From the rest £0M £0M

(20%)

£0M

(23%)

£0M

(57%)

New money £14M £4.24M £2.44M £7.32M


Doing this for each year (assuming research volumes same) gives:

Year 1 Year 2 Year 3

Faculty A £4.24M £7.85M £11.40M

Faculty B £2.44M

£4.73M

£7.04M

Faculty C £7.32M

£9.42M

£11.56M

£14M £22M £30M

Note: have used research volumes (£) as surrogate for apportionment; could use others, e.g staff FTEs

How will the FEC Investment Fund (FIF) be built up?

• Research Council income will contribute to the FIF allocation according to TRAC (£8M of £24M, after 3 years)

• Charity income attracts the new HEFCE money & will contribute to FIF (£2M of £6M)

• Other funders will contribute at a level commensurate with the price achieved against cost, but we shall recognise the need for a gradual move

• EU – no contribution, probably

How will the contribution to FIF be taken? (1)

• Previously anticipated that each grant would contribute to FIF as if the price obtained was 100% FEC– but now will only calculate the contribution to FIF

based on actual new money coming in

• Contribution to FIF will not now be taken project by project but calculated as a block amount for each Faculty (the “Investment Charge”)

• Oracle Grants will automatically distribute to Faculties and can, if Faculties choose, replicate this distribution to departments/divisions

How will the contribution to FIF be taken? (2)

• Directly Incurred (DI) costs will go to project• Everything else to Faculty• Faculty will top up DI costs to 100% (for RCs)• New HEFCE charity money will also all flow

to Faculties• So Faculties all gain…but they will contribute

to the FIF by paying the Investment Charge so College builds up the fund to pay for refurbishment and renewal of infrastructure

How will the contribution to FIF be taken? (3)Taking it as an investment charge on faculty …• much simpler transactions• enables different levels of contribution to FIF for grants from

different funders, so a Faculty’s funding profile influences its contribution to the FIF

• sets direction of travel for recovery from other funders – gradual increase in investment charge as prices move nearer to FEC

• allows College to set the size of FIF needed –obtains it from (known) RC and charity new monies & a gradual contribution from other funders (as price increases are obtained above ‘status quo’, towards FEC)

• To become sustainable (i.e. replace decrease in SRIF) College needs £40M p.a. to FEC Investment Fund (FIF)

• 8 years to achieve

How do we build up the FIF from the funds available? (1)

Yr 1 Yr 2 Yr 3

New money from …

RCs (£8M, £16M, £24M, £24M …)

2.67M 5.33M 8.00M

HEFCE (charity)(£6M …)

2.00M 2.00M 2.00M

Elsewhere ? ? ?

TRAC calculates that approx 1/3rd of new money goes to FIF

How do we build up the FIF from the funds available? (1)

Yr 1 Yr 2 Yr 3

FIF contribution 5.0M 10.0M 15.0M

New money from …

RCs (£8M, £16M, £24M, £24M …)

2.67M 5.33M 8.00M

HEFCE (charity)(£6M …)

2.00M 2.00M 2.00M

Elsewhere 0.33M 2.67M 5.00M

If we decide we need £40M p.a. to FIF fund in 8 years’ time …

How will a Faculty’s investment charge be calculated? (1)

Research councils

UK charities

OGD and UK industries

EU and overseas etc

Total


45 57 36 33 171

Faculty A 20 7 8 6 41Faculty B 13 1 9 7 30

Faculty C 12 49 19 20 100

Recall our overall research portfolio …


Research councils

UK charities

OGD and UK industries

EU and overseas etc

Total


45 57 36 33 171

Faculty A (20)44% (7)12% (8)22% (6)18% 41Faculty B (13)29% (1) 2% (9)25% (7)21% 30

Faculty C (12)27% (49)86% (19)53% (20)61% 100

We now apportion the required contribution to FIF between Faculties according to these %


So e.g. in Year 1 FIF needs £5M, obtained from:


From RCs £2.67M

From HEFCE £2.00M

From elsewhere £0.33M

£5.00M




From RCs £2.67M £1.17M

(44%)

£0.77M

(29%)

£0.72M

(27%)

From HEFCE £2.00M £0.24M

(12%)

£0.04M

(2%)

£1.72M

(86%)

From elsewhere* £0.33M £0.07M

(20%)

£0.08M

(23%)

£0.19M

(57%)

£5.00M

* i.e. for non-RC, non-HEFCE money




From RCs £2.67M £1.17M

(44%)

£0.77M

(29%)

£0.72M

(27%)

From HEFCE £2.00M £0.24M

(12%)

£0.04M

(2%)

£1.72M

(86%)

From elsewhere £0.33M £0.07M

(20%)

£0.08M

(23%)

£0.19M

(57%)

TOTAL to FIF £5.00M £1.48M £0.89M £2.63M

How will a Faculty’s investment charge be calculated? (3)Doing this for each year (assuming research volumes same) will give:

£M Year 1 Year 2 Year 3

Faculty A 1.48M (0.07) 3.16M (0.53) 4.82M (1.10)

Faculty B 0.89M (0.08) 2.19M (0.61) 3.51M (1.25)

Faculty C 2.63M (0.19)

4.65M (1.52)

6.68M (2.85)

£5M (0.33) £10M (2.67) £15M (5.00)

This shows how much each Faculty contributes to FIF

( ) = element for which no new funding specifically obtained

What is the net effect for Faculties?


Year 1: new investment charge

Net gain

£4.24M

£1.48M

£2.76M

£2.44M

£0.89M

£1.55M

£7.32M

£2.63M

£4.69M


Net gain

£7.85M

£3.16M

£4.69M

£4.73M

£2.19M

£2.54M

£9.42M

£4.65M

£4.77M


Net gain

£11.40M

£4.82M

£6.58M

£7.04M

£3.51M

£3.53M

£11.56M

£6.68M

£4.88M

So how does this give guides as to how to price for non-RC, non-charity sponsors? (1)

• Aim to recover additional money to FIF by increasing price to other funders & from alternative new sources of money (including e.g. IP)

• Need to generate additional income on non-RC, non-charity volume of £69M: £0.33M in year 1; £2.67M in year 2; £5M in year 3

• Currently our total portfolio achieves 53% of FEC• So to recover required contributions to FIF our price

to industry and other sponsors will have to increase

So how does this give guides as to how to price for non-RC, non-charity sponsors? (2)

To recover on base of £69M

Price must

be X% FEC

Year on year % increase required on

price

Discount on FEC in InfoEd

(currently 47%)

Year 1 £69.33M 54% 54/53 = 1% 46%

Year 2 £71.67M 57% 57/54 = 5% 43%

Year 3 £74.00M 60% 60/57 = 5% 40%

Assuming that additional money met by price increase to other funders rather than from other sources

Key points

• All Faculties will receive additional benefit from FEC• The College will be building up a reserve gradually and

working to ensure that– the build up does not penalise any source of income

(especially industry)– the weightings for the investment charge from different

sources of income will vary from year to year• Departments and Divisions will need to work with their

Faculties to establish an equitable distribution of the additional resource

• Can raise the additional money to FIF either by increasing price to other non-RC funders, year on year by 1% … 5% … 5% …or from other sources (e.g. IP revenues)

Challenges ahead for Faculties

• Price alignment of identical facilities with different costs

• Consistency of prices to each industry within and across faculties

• Responsibility of FPs & HoDs for approvals becomes ever more critical – delegation of rights is not sensible!

• Decide how faculties distribute resources and monitor consequences (e.g. distribute same amount as overhead of “status quo price”, allocate (e.g.) any recovery for pooled technicians from the “estates” recovery withinDA and keep rest at centre of faculty?)

• Manage facilities (in terms of utilisation and resourcing) and strive to reduce costs

Challenges ahead for the College

• FEC must not drive changes in our funding portfolio• How does the College ensure it builds a sufficient

FEC Investment Fund in a post SRIF era?• We will engage with RC panellists to get feedback on

RC behaviour and we will educate our peer reviewers to understand component parts of “estates” and indirect rates

• Partnership with industry is critical in going forwards• Integration with JeS

This presentation & FAQs on:

www.imperial.ac.uk/rs/changes

Email questions to:

[email protected]

Discussion?

Documents

Managing research with Full Economic Costing (FEC) John Green January 2006 For dissemination by Faculty Operating Officers to Faculty Administration meetings