Full Economic Costing (FEC)

The Transparent Approach to Costing (TRAC) process has caused systems to be set up that allow the University to identify separately the costs relating to the core activities of Teaching, Research and Other (principally the cost of accommodation).

The main output of this has been the publication to HESA of these separate costs, broken down between public and non-publicly funded activities.

However, with these systems in place, it has become possible to cost up activities not only in total (eg the total cost of research in the University) but also at a much lower level: the level of the individual project. Full Economic Costing (fEC) is the name given to the costing of projects using TRAC methods.

("Project" can mean any activity: research project, teaching course, consultancy "job". However, research projects are the focus of attention at present.)

The particular elements of TRAC and fEC that should be noted are:

•  All costs get spread across Teaching, Research or Other. Indirect costs such as the professional services are costed in just as much as the direct cost of (say) a research assistant
•  “Economic” costs are calculated and included. These are the costs of making the University sustainable.

Against a background of reviewing the Dual Support Reform (DSR), the Research Councils are adopting this approach. An illustration of fEC can be seen by comparing their previous “costing” methods (in use until August 2005) with the fEC method.

What you will notice is that fEC includes all costs, academic staff (PIs) costs, space costs, indirect costs (not at a prescribed 46% but at 100%). As it happens, the RCs have committed to paying 80% of the fEC. Please note the distinction between costing and pricing.

The point is that the University will know (within certain tolerance limits) how much it truly costs to provide the service. This is extremely powerful information.

Background and history of FEC

From out of the welter of Higher Education sector acronyms come TRAC and fEC.

TRAC is shorthand for the Transparent Approach to Costing. The government was concerned that despite the size of their budgets, many Higher Education Institutions were unable to say how much they spent on their core activities: Teaching and Research. In financial jargon, separation of costs is known as 'costing'. (confusingly, so is the process of estimating costs for a project, or product).

Hence, via a cascade of groups and bodies come TRAC - the Transparent Approach to Costing. Laid out in 3 manuals were instructions on how an institution was to split its costs between Teaching and Research. There was an 'Other category' and some significant sub and sub-sub categories, but the object was to report a division of costs at the level of the whole institution. The process of implementation was phased over 5 years, with the process being completed by July 2004.

Now comes phase 2. Having set up the appropriate systems in phase 1 (TRAC), Higher Education Institutes now have received TRAC Volume III dedicated to Full Economic costing (fEC). In essence, while phase 1 asked Higher Education Institutions to split their cost for Teaching and Research across the whole institute, fEC is about attributing costs to each individual project or activity. While the current emphasis is on research projects, fEC methodology can be applied to any activity, in particular teaching.

The fEC approach is compulsory for the principal government funders of research, the Research Councils and Higher Education Institutes are encouraged to use it as a basis for all other research funding applications.

History of TRAC and the requirements of phase 1

The Transparency Review is a Government initiative, introduced in the present Administration's first Comprehensive Spending Review in 1998. The CSR awarded £1.5bn of additional funding for Higher Education, but the Treasury made this conditional on the sector becoming more open about the way funds are spent in universities and colleges.

It was a Treasury requirement of the Funding Councils that the sector participated in this review. A Transparency Review Steering Group (TRSG) was set up to implement the policy. The TRSG is chaired by Dr John Taylor (Director General of the Research Councils) and has a number of HE sector representatives.

TRSG delegated the task of developing methods for transparent costing to an existing HE sector body, the Joint Costing and Pricing Steering Group, chaired by Professor David Westbury - Vice-Principal at Birmingham University. JCPSG commissioned J M Consulting to advise on methods that could be used to account transparently across the diverse sector of 175 institutions, and that would also meet institutions' own internal management needs, and those of external sponsors of research.

J M Consulting consulted very widely in the sector - over 50 institutions attended regional workshops, and every institution was invited to a national seminar hosted by CVCP. Their advice was addressed to Government in the Transparency Review (TR) Report. This was endorsed in June 1999 and is now required policy for the sector. Copies of the report are in every institution, and it can also be seen at on the JCPSG website.

Requirements

1. Every university and college has to implement new costing methods which will satisfy the standard in the TR Report.
2. All institutions have to report transparently on the costs of their Teaching (T), Research (R), and other activities (O) for 1999/2000 in July 2001. Research-intensive universities and colleges should have piloted their time allocation method being used to collect data prior to the 1999/2000 exercise.
3. Implementation is phased over five years, with full transparency being achieved by the use of robust methods before the end of 2003/4
4. The key requirement is to calculate the total costs of T, R and O at institutional level (splitting T and R between Publicly funded and non-publicly funded activity), once a year, in a manner that is built up from costs at the level of academic departments.
5. Institutions must also use the department-level costs to calculate new and more robust indirect cost rates for T, R and O in the different type of academic department (classroom based, laboratory-based, clinical)
   

The standards in the TR report build upon good practice in the sector, but no institution was doing (4) and (5) in a way that satisfies the new costing standards and this will be a significant new requirement for every institution. Detailed advice is available in the Guidance Manual, which includes certain mandatory instructions including definitions of Teaching, Research etc.