Costing and pricing

Cost:   there is a project costing form (PCF) under development to meet fEC requirements (See What is fEC?). In its final form, it will exist in several versions specific to the main sponsor/customer groups.

In addition to the cost elements identified by fEC, the PCF is also intended to ask for certain non-financial information that may have a bearing on the price eg Retention of Intellectual Property Rights (IPR).

Price: costing and Pricing in the HE sector have become alarmingly confused because of the way many sponsors operate.

The Research Councils (RCs) offer a particularly good example. The RCs ask for "real" costings, and if the application is successful, the grant value is the same as the sum of these costs. This leads everyone involved into equating cost with price.

However, the costings requested by the RCs are selective and do not cover all types of cost. Therefore the RC “costing” is only part of the fEC and should be regarded as a pricing exercise rather than as a costing exercise.

Setting price

Emphasis on Research projects.  The price will depend on:

• The type of sponsor/customer
• The market for the service
• The nature of the competition.

In general, pricing should follow the price to fEC cost relationship shown below.

Selling at below FEC

The basic rule is that public money should only support work for the public good. Therefore it is unlikely that selling services at below fEC to the private sector can be justified.

From the University’s point of view, pricing at below fEC puts a demand on resources. In the graph “Cost and Price by Sponsor Group”, the red areas indicate the income shortfall that requires a top-up.

This shortfall must be met from other funds, principally the Quality Research (QR) fund. (The level of QR funding is determined by performance in the last Research Assessment Exercise (RAE) of 2001.).

Using QR as subsidy

QR is allocated to schools in a transparent manner via the IDM. It is a finite amount, and plans for research activity must be based on it.

All things being equal, and assuming the average project to have a 3 year life span, 2/3rds of a given year’s QR budget would already be “booked” to projects that started in the previous 2 years.

This leaves 1/3rd of the QR budget to support projects starting in the current year. All will be well with Projects 1 to X (in the graph). But Project Y has a problem. The last dollop of QR was allocated to Project X and there is none left.

In this case the School may review its Projects 1 to X and express disappointment that such a large allocation of QR was made to Project W on behalf of the EU; or to Project V, which investigates an area that is perceived as peripheral to the School’s main research interests. If the projects have started, then it’s too late.

Of course, in reality project Y may find funding from elsewhere, but this does serve to illustrate the problems facing the Head of School when he/ she is asked to approve a research application.

School strategy and pricing

As is hinted at in “Using QR as subsidy”, the Head of School needs to be armed with an overall research strategy and financial forecasts based on that strategy.

The strategy may address:

• Valid areas of research, and their relative importance to the school;
• The likely sponsors of such research;
• The sponsor funding equation: the balance between the fEC recovered through the price, and the shortfalls met from QR and other sources.

As indicated in the graph “QR funding to live projects”, committing to a project has a multi-year impact (Dependant on duration of project). A sub-fEC priced contract will appropriate to itself a chunk of QR or other funding for a time span of 3 years (Dependant on duration of project). This “future impact” also needs to be reconciled with the School’s strategic plan.

What is the difference between costing and pricing?

Example 1

You buy a product for £100 and sell it for £150. The product cost £100 and its price was £150.

Example 2

A research project for one of the Research Councils has the following costs:

In the context of the Research Councils, far removed from the ordinary world of commerce and the everyday language of transactions, the price is called a grant, and in this example it is £220.

Does the table actually show you the cost of the project? No! What it does show are some of the cost elements that this particular sponsor agrees to pay.

This collection of costs in total are a long way removed from a “real” total cost of the project. For that, we need to calculate the Full Economic Cost.

Resources

• FEC: making pricing decisions.  An 18 page document first circulated to Heads of School in 2004.