Service Center WorkshopService Center Workshop

How to Open and Operate – Legally!How to Open and Operate – Legally!

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Sarah ElwellAssociate Director of Operations, Associate Director of Operations, Harvard University Harvard University

Nuala McGowanSenior Manager for Compliance, Senior Manager for Compliance, Harvard UniversityHarvard University

• Goals for Today's Session

– Define a Service Center and its characteristics– Discuss OMB A-21 and other federal requirements– Identify what to budget in the billing rate– Learn the different rate bases that can be used

to calculate the rate – Identify key compliance issues– Learn about the recent audit findings on service

centers

Service Center Definition :

An operating unit within the Institution An operating unit within the Institution that provides a service, or group of that provides a service, or group of services, or product, or group of services, or product, or group of products, to users – principally within products, to users – principally within the institution for a fee.the institution for a fee.

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Federal Definition of a “Recharge” Ctr.?

• Definition of “Recharge Centers” Definition of “Recharge Centers” **– ““Recharge centers at universities, also known as Recharge centers at universities, also known as

specialized service centers, operate as in-house specialized service centers, operate as in-house enterprises that provide goods or services to enterprises that provide goods or services to individual users or other operating units. These individual users or other operating units. These centers function as centers function as nonprofit nonprofit businesses, funding businesses, funding operations through fees from users.”operations through fees from users.”

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* * Summary Report on Audits of Recharge Centers at 12 Universities Summary Report on Audits of Recharge Centers at 12 Universities ~ HHS Office of Inspector General, January 1994~ HHS Office of Inspector General, January 1994

Which of the following best describes your role?

1.1.Central Sponsored Research Administration OfficeCentral Sponsored Research Administration Office

2.2.Department Grants ManagementDepartment Grants Management

3.3.Service Center Facility ManagerService Center Facility Manager

4.4.Compliance OfficeCompliance Office

5.5.At wrong training session, I think… At wrong training session, I think…

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Introductions…

How many years of Service Center related experience do you have?

1.1. Less than 1 yearLess than 1 year

2.2. 1-3 years1-3 years

3.3. 3-5 years3-5 years

4.4. 5-10 years5-10 years

5.5. 10-15 years10-15 years

6.6. Too many to count / >15Too many to count / >15

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Important Considerations

• Determine the need to establish a service center: Is this service available elsewhere on campus? Is our need short-term or long-term? Is this service provided for or subsidized by a federal award?

- Program income vs. service center What portion of our users will be internal vs. external?

- High external user volume may result in tax implications - UBIT (unrelated business income tax)

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Regulations Governing Service and Recharge Centers

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Federal Service Center Guidance– OMB Circular A-21OMB Circular A-21– Other OMB Circulars (A-87; A-122; A-133)Other OMB Circulars (A-87; A-122; A-133)– HHS Review Guide for Long-Form University Indirect Cost HHS Review Guide for Long-Form University Indirect Cost

ProposalsProposals– Cost Accounting Standards (CAS) DS-2Cost Accounting Standards (CAS) DS-2– Audit Guide: Adequacy and Compliance Audits of Audit Guide: Adequacy and Compliance Audits of

Disclosure Statements Submitted by Educational Disclosure Statements Submitted by Educational Institutions (HHS OIG)Institutions (HHS OIG)

– Federal Audits of Recharge Centers (HHS OIG)Federal Audits of Recharge Centers (HHS OIG)

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OMB Circular A-21• Specialized Service Facilities (section J.47) Specialized Service Facilities (section J.47)

– “the costs of services provided by highly complex or specialized facilities operated by the institution, such as computers, wind tunnels and reactors”

• No mention of “service centers” in A-21No mention of “service centers” in A-21• Change to OMB Circular A-21: 5/10/04Change to OMB Circular A-21: 5/10/04

– Specialized Service Facilities (section J.47) • Rates to be adjusted “Rates to be adjusted “no less frequently than bienniallyno less frequently than biennially.”.”

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Specialized Service Center (A-21)

• Cost of service includes direct and F&ACost of service includes direct and F&A• Cost will be charged directly to usersCost will be charged directly to users

– based on actual usebased on actual use– using rates that don’t discriminate between federal and using rates that don’t discriminate between federal and

non-federal usersnon-federal users• Rates don’t have to equal cost during one fiscal Rates don’t have to equal cost during one fiscal

year - reviewed and adjusted at least biennially year - reviewed and adjusted at least biennially • Rates shall take into consideration over/under Rates shall take into consideration over/under

applied costs of the previous period(s)applied costs of the previous period(s)

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Other Sources of Federal Guidance

• OMB Circular A-122: Cost Principles for Non-OMB Circular A-122: Cost Principles for Non-Profit Organizations Profit Organizations – ““Specialized Service Facilities”Specialized Service Facilities”

• OMB Circular A-87: Cost Principles for State, OMB Circular A-87: Cost Principles for State, Local and Indian Tribe GovernmentsLocal and Indian Tribe Governments– ““Billed Central Services”Billed Central Services”– ““a working capital reserve of up to 60 days cash a working capital reserve of up to 60 days cash

expenses is considered reasonable…”expenses is considered reasonable…”

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Service Center Accounting

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Service Center Accounting…

• Revenues should equal costs, over timeRevenues should equal costs, over time• Accurate accounting for service center costs Accurate accounting for service center costs

and revenues is criticaland revenues is critical– Service Center operating account must “match” Service Center operating account must “match”

revenues with expensesrevenues with expenses– Inaccurate accounting will distort the financial Inaccurate accounting will distort the financial

picture and create a deficit or surplus in the picture and create a deficit or surplus in the service center account service center account

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Typical Service Center Operating Costs

• Salaries and WagesSalaries and Wages• Fringe BenefitsFringe Benefits• Depreciation expenseDepreciation expense• Materials and SuppliesMaterials and Supplies• Outside servicesOutside services• Repairs and MaintenanceRepairs and Maintenance• Carry-forward surplus/deficitCarry-forward surplus/deficit

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Guidance for Calculating Serv. Ctr. Rates

• Step 1Step 1 - Identify all services provided - Identify all services provided• Step 2Step 2 - Determine direct costs associated - Determine direct costs associated

with with eacheach service, regardless of how it is service, regardless of how it is fundedfunded

• Step 3Step 3 - Identify other costs associated with - Identify other costs associated with service center operationsservice center operations

» Salary of service center administrator / billing personnelSalary of service center administrator / billing personnel» General suppliesGeneral supplies

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• Step 4Step 4 - For specialized service facility, identify - For specialized service facility, identify University-wide indirect costs to be included in University-wide indirect costs to be included in billing rates in accordance with University billing rates in accordance with University policypolicy

• Step 5Step 5 - Identify and segregate unallowable - Identify and segregate unallowable costs in accordance with the cost principlescosts in accordance with the cost principles

• Step 6Step 6 - Add prior period variances (surplus - Add prior period variances (surplus /deficit) in accordance with University policy/deficit) in accordance with University policy

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Guidance for Calculating Serv. Ctr. Rates

• Step 7Step 7 - Develop a reasonable method to assign - Develop a reasonable method to assign service center operating costs to each serviceservice center operating costs to each service

• Step 8Step 8 - Accumulate/estimate future usage for - Accumulate/estimate future usage for each service to establish the rate base(s) each service to establish the rate base(s) i.e., billable unitsi.e., billable units

• Step 9Step 9 - Calculate cost-based rate for each service - Calculate cost-based rate for each service

• Step 10Step 10 - Determine the rate that will actually be - Determine the rate that will actually be chargedcharged

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Guidance for Calculating Serv. Ctr. Rates

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Exercise :Rate Calculation

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Comparison of Service Center Rate Calculations (Specialized vs. Regular)

Specialized Service FacilityEstimated expenses:Technicians (10) 1,000,000

Supplies 250,000

Maintenance contracts 250,000

Equipment depreciation 750,000

Addt’l expenses in "fully loaded" rate:Building depreciation 30,000 Building loan interest 400,000 Operations & Maintenance 200,000

Total expense budget: 2,880,000Estimated units of service: 10,000Rate per unit of service = *288

*Note: That $288 may be a rate that the users of the facility will be unwilling to pay, in which case the SSC may have to charge a lower rate and the unit "owning" SSC will underrecover.

For the F&A Rate Calculation - Addit’l costs not included in Service Center Rate: $630,000.

Add to F&A numerator => higher F&A rate

Service CenterEstimated expenses:Technicians (2) 200,000Supplies 50,000Maintenance contracts 50,000Equipment depreciation 150,000Total expense budget: 450,000

Estimated units of service: 2,000Rate per unit of service = 225

Service Center Compliance Issues

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Summary of Key Compliance Issues

1.1. Rates should recover no more than the Rates should recover no more than the cost of the good or servicecost of the good or service

2.2. Rates must breakeven over time, not each Rates must breakeven over time, not each yearyear

3.3. Rates don’t discriminate between users, Rates don’t discriminate between users, especially those paying with federal fundsespecially those paying with federal funds

4.4. Surplus from service center shouldn’t be Surplus from service center shouldn’t be used to fund unrelated activitiesused to fund unrelated activities

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5.5. Must maintain published price listMust maintain published price list

6.6. Rates may include depreciation expense Rates may include depreciation expense only, not the full cost of equipmentonly, not the full cost of equipment

7.7. Depreciation included in SC rates can’t Depreciation included in SC rates can’t also be in the F&A ratealso be in the F&A rate

8.8. Service center subsidies should Service center subsidies should NOTNOT be be included in the F&A rateincluded in the F&A rate

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Summary of Key Compliance Issues

1.1. Must all users be charged the same rates?Must all users be charged the same rates?

2.2. Can we charge F&A costs on service center Can we charge F&A costs on service center charges made to grants?charges made to grants?

3.3. Can we include a “reserve” amount in the Can we include a “reserve” amount in the rate to purchase new equipment?rate to purchase new equipment?

4.4. Do we add F&A costs to service center Do we add F&A costs to service center charges made to external parties?charges made to external parties?

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Discussion Questions

5.5. Can we charge users based on “market” Can we charge users based on “market” rates, or what rates, or what otherother institutions charge? institutions charge?

6.6. Can we charge external users more than Can we charge external users more than the cost of the good or service provided?the cost of the good or service provided?

7.7. If we earn a surplus, do we have to give a If we earn a surplus, do we have to give a refund to users in the same year?refund to users in the same year?

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Discussion Questions ( cont’d)

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Top 10 Elements for Effectively Managing Service CentersTop 10 Elements for Effectively Managing Service Centers

1.1. Be able to identify the active service centers at your Be able to identify the active service centers at your university.university.

2.2. Understand the mechanics behind service center Understand the mechanics behind service center accounting.accounting.

3.3. Know the workflow (and the parties involved) in setting Know the workflow (and the parties involved) in setting up a center.up a center.

4.4. Recognize operations that may become service centers in Recognize operations that may become service centers in the future.the future.

5.5. Have a solid (and realistic) business plan for operating the Have a solid (and realistic) business plan for operating the center.center.

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Top 10 Elements for Effectively Managing Service Centers (cont.)Top 10 Elements for Effectively Managing Service Centers (cont.)

6.6.Have written policies and procedures in place for the Have written policies and procedures in place for the management of service centers.management of service centers.

7.7.Templates should be made available to assist with rate Templates should be made available to assist with rate calculations.calculations.

8.8.Rates should be reviewed and approved at least every two Rates should be reviewed and approved at least every two years.years.

9.9.External usage (sales to non-university customers) should be External usage (sales to non-university customers) should be monitored and tracked. monitored and tracked.

10.10.Use software or some other means to invoice and collect Use software or some other means to invoice and collect regularly.regularly.

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# 1 : Be able to identify the active service centers at your University# 1 : Be able to identify the active service centers at your University

Create/Maintain an inventory that includes all of the following:Create/Maintain an inventory that includes all of the following:

Name (and account number) of the centerName (and account number) of the centerRelated accounts (capital accounts)Related accounts (capital accounts)Contact information Contact information Date when rate submissions were receivedDate when rate submissions were receivedDate when rate submissions were approvedDate when rate submissions were approvedActual rate submission documentsActual rate submission documents

Identifiers in the accounting system (Fund Type, Class, Internal Revenue Identifiers in the accounting system (Fund Type, Class, Internal Revenue codes)codes)

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# 2 : # 2 : Understand the mechanics behind service center accounting.Understand the mechanics behind service center accounting.

Proper account codes Proper account codes ExpensesExpensesRevenuesRevenues

HR set up to get people paid out of the right placeHR set up to get people paid out of the right place

Expenses and revenues accounted for in the centerExpenses and revenues accounted for in the centerPayroll expenses Payroll expenses FringeFringeDepreciationDepreciationSuppliesSuppliesCollectionsCollections

Carry-Over? Deficit funding?Carry-Over? Deficit funding?

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# 3 : Know the workflow (& parties involved) in setting up the center.# 3 : Know the workflow (& parties involved) in setting up the center.

Who is involved in each step of the set-up process?Who is involved in each step of the set-up process?

Who is involved once the center is up and running?Who is involved once the center is up and running?

What approvals are required during set-up and beyond?What approvals are required during set-up and beyond?

School/DepartmentSchool/Department Budget OfficeBudget Office AccountingAccounting Cost StudiesCost Studies

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# 4: Recognize operations that may become service centers in # 4: Recognize operations that may become service centers in the future.the future.

Internal activity identifiedInternal activity identified

Internal revenue account codes usedInternal revenue account codes used ““Word of Mouth”Word of Mouth” Not on active inventory yet, but should beNot on active inventory yet, but should be

Discussions on potential centersDiscussions on potential centers

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# 5 : Have a solid (& realistic) business plan for operating the center.# 5 : Have a solid (& realistic) business plan for operating the center.

Market for goods/servicesMarket for goods/services Is there a demand for the products and services offered?Is there a demand for the products and services offered?

Are you able to charge rates that will allow you to cover costsAre you able to charge rates that will allow you to cover costs Centers are not just a source of “revenue”Centers are not just a source of “revenue”

School level understanding of potential deficitsSchool level understanding of potential deficits If the center loses money, will school cover it?If the center loses money, will school cover it? Expectations versus RealityExpectations versus Reality

Administrative Requirements: Managing budgets, billing, etc.Administrative Requirements: Managing budgets, billing, etc.

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# 6 : Have written policies and procedures in place for the # 6 : Have written policies and procedures in place for the management of service centers.management of service centers.

Is everything clearly defined?Is everything clearly defined? Steps for set-upSteps for set-up Steps for maintenanceSteps for maintenance

Roles and responsibilitiesRoles and responsibilities Does everyone know their role and what they are responsible for?Does everyone know their role and what they are responsible for?

Thresholds for establishment of centersThresholds for establishment of centers Frequency of activityFrequency of activity Number of grants chargedNumber of grants charged Dollar volumeDollar volume

Carryover of surplus and deficitCarryover of surplus and deficit

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# 7 : Templates should be made available to assist with rate # 7 : Templates should be made available to assist with rate calculations.calculations.

Standard templates in place versus freedom of centers to use their Standard templates in place versus freedom of centers to use their own.own.

Capture:Capture: SalariesSalaries FringeFringe EquipmentEquipment SuppliesSupplies Usage EstimatesUsage Estimates

Advantages and disadvantages to both optionsAdvantages and disadvantages to both options

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# 8 : Rates should be reviewed and approved at least every two # 8 : Rates should be reviewed and approved at least every two years.years.

How often are rate calculations approved at your university?How often are rate calculations approved at your university?

Things to look forThings to look for

Salaries and effort (individual)Salaries and effort (individual)Correct fringe rates usedCorrect fringe rates usedDepreciation on equipmentDepreciation on equipmentSurplus/Deficit carryoverSurplus/Deficit carryoverRates at or below costRates at or below cost

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# 9 : External usage (services / sales to non-university customers) # 9 : External usage (services / sales to non-university customers) should be monitored and trackedshould be monitored and tracked

UBIT risksUBIT risksSales to other not-for-profits/hospitals/educational institutionsSales to other not-for-profits/hospitals/educational institutionsSales to corporations.Sales to corporations.

Thresholds for external usageThresholds for external usageDe minimus vs.De minimus vs.SignificantSignificant

Rates charged to external versus internal usersRates charged to external versus internal users

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# 10 : Use software or some other means to invoice and collect # 10 : Use software or some other means to invoice and collect regularlyregularly

Centers need to track:Centers need to track: UsageUsage Invoices Invoices CollectionsCollections

University accounting system or specific service center softwareUniversity accounting system or specific service center software

Break - 15 minutes

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Audit Findings: Past and Present

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Summary of HHS OIG Audit Findings (1994)

• Audits at 12 universities to determine whether recharge Audits at 12 universities to determine whether recharge centers complied with “OMB A-21”centers complied with “OMB A-21”

• OIG Identified $3.2m in overcharges for:OIG Identified $3.2m in overcharges for:

– Surplus Balances ($1.3m)Surplus Balances ($1.3m)– Duplicate and unallowable costs ($1.2m)Duplicate and unallowable costs ($1.2m)– Recharge costs and Indirect costs ($0.4m)Recharge costs and Indirect costs ($0.4m)– Funds used for unrelated purposes ($0.2m)Funds used for unrelated purposes ($0.2m)– Inequitable billing ($0.1m)Inequitable billing ($0.1m)

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• Examples of significant issuesExamples of significant issues

– Six universities accumulated $6.6m in surplus fundsSix universities accumulated $6.6m in surplus funds– Five universities did not analyze and adjust billing Five universities did not analyze and adjust billing

rates resulting in overcharges ($1.2m)rates resulting in overcharges ($1.2m)– Two universities didn’t credit recharge accounts for Two universities didn’t credit recharge accounts for

interest earned on excess fund balancesinterest earned on excess fund balances– One university improperly classified $0.7m One university improperly classified $0.7m

inventory as expense; inventory not consumed in inventory as expense; inventory not consumed in year of purchase is unallowableyear of purchase is unallowable

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Summary of HHS OIG Audit Findings (1994)

• Examples of significant issues (continued)Examples of significant issues (continued)– One university improperly included surpluses/deficits of One university improperly included surpluses/deficits of

recharges in the calculation of IDC rates, overcharging recharges in the calculation of IDC rates, overcharging Federal projects by $0.4mFederal projects by $0.4m

– Four universities used $3.5m of surplus funds for Four universities used $3.5m of surplus funds for unrelated purposes; supplementing an athletic unrelated purposes; supplementing an athletic department, developing an accounting system, and department, developing an accounting system, and renovating academic officesrenovating academic offices

– One university charged inconsistent rates to users of One university charged inconsistent rates to users of computer services, subsidizing students and staff, computer services, subsidizing students and staff, overcharging federally sponsored researchovercharging federally sponsored research 42

Summary of HHS OIG Audit Findings (1994)

HHS OIG Findings: Reasons for Overcharges

• Universities did not:Universities did not:– Establish or adhere to policies and proceduresEstablish or adhere to policies and procedures– Maintain adequate accounting recordsMaintain adequate accounting records– Analyze and adjust billing rates, or monitor recharge Analyze and adjust billing rates, or monitor recharge

centers on a regular basiscenters on a regular basis

• OMB Circular A-21 does not provide specific OMB Circular A-21 does not provide specific instructions for when and how to adjust for instructions for when and how to adjust for surpluses and deficits in fund balancessurpluses and deficits in fund balances

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Recent Audit findings…University of Connecticut: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 44

Recent Audit findings…U Mass Medical:U Mass Medical:• 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 45

10 Most Common Mistakes 1.1. Inadequate policy and/or oversightInadequate policy and/or oversight2.2. Billing rates based on “market” rates, not actual costsBilling rates based on “market” rates, not actual costs3.3. Surpluses not carried forwardSurpluses not carried forward4.4. Invoicing not done on a timely basisInvoicing not done on a timely basis5.5. Depreciation included in s.c.rates and F&A Depreciation included in s.c.rates and F&A 6.6. Unallowable costs included in billing rateUnallowable costs included in billing rate7.7. Surpluses used for unrelated activitiesSurpluses used for unrelated activities8.8. Mismatch of s.c. expenses and revenues, especially depreciationMismatch of s.c. expenses and revenues, especially depreciation9.9. Charging lower costs to external customers (e.g. No O/H)Charging lower costs to external customers (e.g. No O/H)10.10. Improperly accounting for costs of subsidiesImproperly accounting for costs of subsidies

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Mitigating risk at your Institution

1.1. Do you have an office responsible for oversight of Do you have an office responsible for oversight of service centers?service centers?

2.2. Who is monitoring your service center activity? Who is monitoring your service center activity? Set-up of new service centersSet-up of new service centers Review and approval of ratesReview and approval of rates Identify and resolve large surplus / deficitsIdentify and resolve large surplus / deficits Establish a clear differentiation between service, recharge Establish a clear differentiation between service, recharge

and specialized service centers in your policyand specialized service centers in your policy Dissolve inactive service centersDissolve inactive service centers Review / revise policy as neededReview / revise policy as needed 47

Questions…

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