Research Committee

Subject: Implementation of Loughborough University’s Costing and Pricing Strategy

Origin: Mr P A Townsend, Research Manager

Background

The costing and pricing for research, teaching and other services in the UK Higher Education sector has been the focus of the Government’s Transparency Review and more recently the DTI/OST Consultation on the “Sustainability of University Research”. It has been acknowledged that under the Dual Support system Quality Related research funding (QR) has stagnated in comparison with the levels of funding that have been provided primarily by the Research Councils under their individually funded project-specific grants and contracts. Furthermore this pattern is repeated with charitable funding which has also increased at a faster rate than HEFCE core funding.

Consequently, the University needs to be able to identify accurately the full economic costs involved in undertaking its business activities*. This will involve the apportionment and recovery of all relevant direct and equally importantly indirect costs. In addition to the above-mentioned Government drivers, HEFCE have further revised the terms of the financial memorandum under which the University must operate. Key amendments include the need to understand the full economic costs of its activities and to ensure that these are fully reflected within its management/decision making processes. Pricing should be determined by reference to those full economic costs or by reference to prevailing market conditions. Comparing one financial year with another the University is expected to recover in aggregate the full economic costs of all its activities across the full range of its business. HEFCE does not normally expect such activities to be subsidised directly or indirectly by their funds.

(*i.e. public and non-public funded research, public and non-public funded teaching and other.)

Set against this overall background, since the Dearing Report of 1997 and the Comprehensive Spending Review of 1998, the Government has highlighted the “low price culture”, the deficits in research funding and the problems of infrastructure investment, and has provided additional funding into the HE sector. This has been in the form of Science Research Investment Funding (SRIF) combined with extra funding provided under the various spending reviews in 2000 and 2002. The initial focus will be upon the funding provided by Treasury to the UK Research Councils who have been allocated an extra £120M per annum in order to increase the price they pay for their funded research projects. This is the current focus of the implementation of the transparent approach to costing which was launched in late December 2003 and which was finally announced in February 2004 after testing and validation by nine pilot universities.

Approach

With the announcement in February 2004 of the Joint Costing and Pricing Steering Group’s recommended approach to transparent costing (Volume III – Full Economic Costs of Projects) the University is now addressing the issues associated with he implementation of this new approach. This will have significant implications for University procedures and practices, and will also require a significant culture change within the organisation. For the first time the major cost drivers of Principal Investigator time and Estates costs will be eligible for inclusion in the determination of the full economic cost of research. In order to further validate and review the cost data that has been so far generated under the Transparency Review and to oversee the implementation and development of the University’s costing and pricing strategy, a dedicated full-time Costing and Pricing Officer post has recently been approved by Operations Sub-Committee and is currently being advertised. Although based in Finance, the post-holder will be expected to work very closely with the Research Office in this regard. It should be noted that the project team previously known as the Transparency Review Committee, as chaired by the PVC(R), has been renamed the Costing and Pricing Committee. Its membership has been further expanded to include representatives not only from Finance, Research Office and Faculties but also from the Estates Office.

Furthermore the Research Office has recently purchased an upgraded project costing software tool called “RACE 2” which will be supported by a new dedicated server which is currently being procured and installed by Computing Services. This will allow the Research Office to develop the new costing methodologies as determined under TRAC. The Research Office will, over the coming months, be reviewing its processes and procedures in addition to the internal authorisation systems as part of the implementation.

Implementation Timetable

Reflecting the above-mentioned factors, institutions have been requested to draw up implementation plans so that they will be able to estimate the full economic cost of each research project by January 2005, and bid for grants from Research Councils on a full economic cost basis by September 2005. Furthermore they must be in a position to record costs and manage projects for Research Councils on the new full economic cost basis with effect from April 2006. Finally, institutions should have attained full robustness of the methods used by the end of 2009.

Compliance with Sponsor Requirements and Relationship with Research Funders

As mentioned above the initial focus will be upon Research Councils who have indicated that they will be paying between 60%-70% of the full economic costs of research projects. The old system whereby indirect costs were calculated as a fixed percentage of the direct staff component is to disappear and be replaced by an overhead of £ per FTE member of staff as part of the full economic costs.

Government research sponsors have recently been advised in writing by Treasury that they should, with immediate effect, be funding 100% of full economic costs of research, where this has not been subject to competitive tendering. Charities, however, are to be treated on the same basis as Research Councils, although there is currently much debate about the final approach they will adopt given their historic reluctance to pay any indirect costs that cannot be directly linked with an individual research project.

With regard to industry and commerce the concept of cost informing but not necessarily determining price becomes a critical issue. For example for research undertaken with a commercial organisation the price should take account of market conditions, the academic value of the work and whether intellectual property is retained or not. This may lead to a price which could be significantly higher than the full cost (if the University has a unique offering) or that is less than the full cost (if future earnings from retained intellectual property is a realistic possibility and is hence reflected in the price). Strategic guidance on price setting will need to be provided by University senior management. Price setting will be undertaken by the Research Office in discussion with the Principal Investigator and his/her Head of Department as part of the negotiation process. Any shortfall between the full costs and price charged will be monitored by Research Performance Monitoring Group as part of its procedures in assessing a Department’s research strategy and performance.

Managing and Developing a Balanced Portfolio of Research Activity

As previously mentioned, a key aim of the transparent approach to costing and the implementation of full economic costing is to ensure that the financial implications of decisions to undertake a particular activity are fully embedded in that overall process. Set against the previous comments made regarding the relationship between cost and price the University is now charged with developing a pricing strategy that will support a balanced portfolio of research and other activities. This should not only facilitate the achievement of the University’s strategic objectives but should also reflect the more stringent costing and pricing methods and the increasing need to identify the source of any shortfalls that may be identified between the full cost of an activity and the price the University may decide to charge. This then raises the associated issue of the strategic cross-subsidisation of one activity or project from another. Indeed the issue of inter-Departmental or inter-Faculty cross-subsidisation should be recognised, especially where specific subject areas may well be restricted in terms of the sources of funding that are available to them, therefore directly affecting the level of the recovery of costs (both direct and indirect). It is important to emphasise that any pricing strategy must not be purely driven by the financial considerations but must equally reflect the academic value of the activity in the context of the overall mission of the University. The challenge is to strike the right balance.

Senate

Subject: Extract from Resources and Planning Committee Minutes of 4 June 2004

Origin: Unconfirmed Minutes

Minute 45 (iii), PVC (Research)'s Report

Costing and Pricing

The Committee considered a report on the proposed implementation of the University's Costing and Pricing Strategy. As a consequence of the government's Transparency Review initiative, the University would be required in the future to identify the full economic costs associated with the full range of its activities. The initial focus was on research, with institutions being required to be in a position to estimate the full economic costs of each research project by January 2005, and to submit bids to the Research Councils on a full economic cost basis by September 2005. By April 2006, institutions would be required to record costs and manage projects supported by the Research Councils on a full economic cost basis. Fully robust systems and procedures were expected to be in place by December 2009. Research Councils would initially be expected to pay between 60%-70% of full economic costs, and Government research sponsors 100% with immediate effect, where research had not been placed after competitive tendering. In principle, Charities were to be treated on the same basis as the Research Councils. For research undertaken for industry and commerce, the setting of a price having regard to costs would need to be approached skillfully within strategic guidance provided by the University management. In some circumstances, it might be appropriate to set a price higher than the full cost. It was proposed that price setting should be undertaken by the Research Office in discussion with the Principal Investigator and relevant Head of Department, with Research Performance Monitoring Group adopting a monitoring role. The Committee endorsed the statement in the paper that costing and pricing should not be given undue emphasis in determining the University's portfolio of research work. Research should be driven by its academic value and the University's mission. In addition, strategic cross subsidy would be essential, across both Faculty and departmental boundaries. It was noted that the University was currently recruiting to a new post of Costing and Pricing Officer. The Committee recommended that the University proceed to develop relevant tools and systems, whilst implementing full costing and pricing having regard to developments across the sector.

The Committee COMMENDED the implementation proposals to Senate and Council.