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Issue 471, 22 October 2001

The University of Leeds

Planning and Resources Committee

Progress Report on Costing and Pricing and the Transparency Review

This paper provides members with an update on progress of the Costing and Pricing of Research Projects as well as an update on the Transparency Review both nationally and at Leeds.

Costing and Pricing of Research

The university research costing and pricing policy is to ensure continued financial viability whilst providing maximum scope for flexibility in relation to University and Resource Centre objectives for academic excellence. It is anticipated the overall portfolio of a resource centre must recover the immediate costs of carrying out research whilst also making a significant contribution to maintaining research infrastructure.

The contribution should be in line with the resource centre operating statements and plans so the financial status of a resource centre's overall research portfolio may severely limit flexibility. Contribution rates lower than our peers. Rise to average rate for our peers equivalent to a gift of £3m. If the price is too low resource centres should consider rejecting the work or reducing the scope so that it brings costs in line with income. Additionally, the University should not normally accept extensions or supplements to research contracts at worse conditions than those included in the original contract. The Research Project Appraisal forms (RPAs) supports the decision making process by capturing cost and anticipated benefits. RSU also provides specific guidance on the types of funder

Resource Centres are monitored on their performance through the Resource Centre Monitoring Committee. Such university policies also demand improved management information systems and improved negotiation skills.

In comparison to our peer universities the contribution rate at Leeds is significantly below that of other institutions. Other universities have:
Significant in-depth costing processes , in all cases 'full' justification is required where the price of the research does not meet its costs before a sponsor can be approached. Many Universities have different range of overheads depending on the sponsor. There is central intervention in the costing of research projects as well as monitoring under-performance centrally. In some cases the central research units over-ride any negotiation previously carried out by the Principal Investigators (PI).

Current best practice at Leeds in acquiring good contribution rates is found in Dentistry and includes peer to peer interaction, Head of Department willing to turn down work that would be under-funded, group largely self funding from a variety of sponsors, group 'knows' their target marked and has spent years cultivating appropriate research industrial contacts, development of strong negotiation skills and proportion of overhead goes to PI as an incentive.

A balance must be achieved between costing and pricing. Costs include the project resources, existing resources and infrastructure. The benefits include both quantitative and qualitative including the project fee, long term exploitation, academic kudos, publication rights, use of results, RAE related income, access to equipment. Ultimately it is for a Head of Resource Centre to decide whether or not a particular piece of research should be undertaken.

National Progress of the Transparency Review

Professor David Westury, Vice-Principal of the University of Birmingham and Chair of the Joint Costing and Pricing Steering Group and Dr Jim Port, JM Consulting visited the University to report on progress of the review.

Two main objectives of the review were to ensure the transparency of costs of publicly funded research and to ensure public funds were being spend cost effectively. The focus of the review is on expenditure as the majority of University income is from non-public sources. There is no agreed method for allocating income and although this means there is no measure of profitability, it also means that institutions do not report potentially commercially sensitive information.

We are required to report the expenditure as per the financial statements to HEFCE over the five mandatory activity classifications. Two accounting adjustments are then made and added to total expenditure as follows:

1. Infrastructure adjustment - an additional amount is calculated to represent the present productive capacity to ensure that the assets of the institution are maintained in their current state. This is based on government formula and highlights Universities are spending less on, for example, building maintenance, than is required to maintain the estate.
2. Cost of capital employed - an additional amount to ensure that institutions account fully for the economic cost of capital. This covers:
· Financing costs of institutions covering the existing costs of borrowing and the opportunity cost of institutional cash used for financing.
· A surplus for the rationalisation and development of the institutions business capability and capacity.

Based on unofficial results these adjustments account for 7% of sector expenditure. In cash terms this is £950m for the sector for the infrastructure adjustment alone.

The first year results have shown that both publicly and non-publicly funded research are in deficit. Publicly funded teaching is in deficit, but this is relatively small. There is no evidence public funds are supporting non-publicly funded activities. Indeed the results show that non-publicly funded teaching and other activities support deficits elsewhere.

In particular the results for research show that most research sponsors pay inadequate overheads. This can be attributed to both cultural and historical reasons as historically the sector has a low price culture reinforced by the dual support system and the RAE focuses on volume rather than contribution - both academic and financial.

HEIs are not-for-profit organisations but they cannot survive if they do not invest for the future. This implies managing costs, responding to market and generating surpluses. However, as PFT is just in balance and R in deficit institutions cannot afford the required level of investment. Any increase in public funds will be conditional on institutions managing assets and activity. Transparency is one of the sector's most powerful tools to demonstrate funding needs and manage its resources.

The Treasury has recognised the under investment in science infrastructure and the Joint Infrastructure Funding (JIF) and the Science Research Infrastructure Funding (SRIF) has been provided to address this. Although the University received £20.3m SRIF funding it is not recurrent. JM Consulting are currently reviewing the recurrent Research and Human Resource infrastructures and the reports due at the end of November should feed into the next Comprehensive Spending Review. A parallel study is also being undertaken for teaching, arts and humanities. Although the Arts and Humanities Research Board (AHRB) was established in October 1998 to address issues in the Arts this body does not look at the infrastructure. In particular a further study to look at Libraries is expected to review the underfunding of Libraries and the impact on the Arts.

All sponsors of research projects, including charities, research councils and the EU pay less than the full economic costs. HEFCE QR funding supports the infrastructure for research councils via the dual support system but in recent years the QR grant has grown much slower than the volume of research creating an infrastructure gap. As part of the transparency review the recommendation is that government sponsors should use the TR process as a basis for negotiating prices.

Charity funding of research is an important source of funding in a number of areas. Although they do not pay overheads they will pay for infrastructure and additional direct costs. In particular:
"The medical research charities were not established to invest in bricks and mortar… Nor were we set up to pay for lighting; heating, water, security, building maintenance or uniforms. Rather, our mission is to help the State find cures for disease and to increase knowledge for the health benefit of mankind" - Mike Dexter, Wellcome Trust
To address this JM Consulting has recommended to HEFCE additional QR grant to remove the difference between charity and Research Council projects. In addition HEIs must be more business-like and professional during contract negotiations and managing projects.

The Joint Costing and Pricing Steering Group are taking a number of initiatives forward over the next 12 months and these include costing and pricing for the sector and the use of indirect cost rates. JM Consulting will also reviewing best practice for the transparency review by looking at time allocation methods and the allocation of indirect costs. Cost adjustments are also being reviewed with the possibility of a further adjustment for staff to recognise their contributions.

Progress of the Transparency Review at Leeds

The results of the first Transparency Review exercise for 1999/2000 were sent to HEFCE by the end of July 2001 and a copy of the institutional return is enclosed (appendix 1). The results were discussed at the seminar on 3rd October and subsequently the results by Resource Centre were distributed to HoRCs for their comments (appendix 2). In summary both publicly and non-publicly funded research were in deficit and these were offset against surpluses in non-publicly funded teaching (short-courses and overseas students) and other activities.

The 2000/2001 annual retrospective exercise is currently underway and resource centres have been asked to complete schedules for the allocation of staff and non-staff costs. This is identical to the exercises in previous years, however, the exercise is being completed earlier in the academic year due to the HEFCE deadline being moved.

For those Resource Centres who took part in the 2000/2001 in-year verification exercise, the results of the diary exercise are being analysed and statistical techniques applied. Although the required response rate of 80% was not achieved, it is hoped the results will be statistically valid in order to avoid a repeat of the exercise. These results of this exercise will be signed off by the HoRC and will inform the 2000/01 annual retrospective time allocation. Discussions will then take place with the Resource Centres to provide feedback for improving the process in future years.

Transparency Review processes must improve over time and discussions are taking place with the non-academic areas, in particular Estates Services and the Academic Services in order to improve the allocation of their costs. Changes will be made in the 2000/2001 return and there is expected to be a refinement of the methods over time.

The results of the 2000/2001 exercise must be reported to HEFCE by 31 January 2002 and a benchmarking exercise is planned for December/January to compare the results with other institutions.

During June and July meetings were held with the HoRCs and staff meetings attended for those resource centres taking part in the 2001/02 in-year verification exercise. Staff were also contacted individually giving details of the exercise, including the weeks (up to 6) they are asked to complete. In order to improve the response rates staff are being e-mailed in advance of the week they are due to complete. The average response rate as at 25 September for weeks up to and including 3rd September is currently 47%, however this does exclude staff who are on leave and the response rates are expected to pick up. Staff who have not made returns have been e-mailed and if no returns are forthcoming the HoRCs will be informed.

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