Service Center Policy
Overview &
Definitions
Policy
Overview
As a recipient of Federal funds, the University must comply with
cost principles and cost accounting standards promulgated by the U.S.
government. An important element in compliance is ensuring everyone that is
involved has a basic understanding of the standards and the related
requirements. UIS businesses that are defined as a Service
Center (see next page for Service
Center Table) must adhere to all aspects of the University Service
Center policy. Applications of the individual policies
within UIS are indicated in “green” throughout each section.
This
policy provides a framework for the fiscal operations of University service
centers that will ensure compliance with federal cost principles, consistency
in accounting and costing practices, and flexibility to meet the needs of
different operations. Although there is a wide variation in size, complexity,
and services provided by service centers, they all should maintain common
administrative practices. This policy
addresses those practices and provides examples of billing rate structures and
the steps involved in building such rates.
The University must comply with the United
States Government's Office of Management and Budget (OMB) Circular A-21- Cost
Principles for Educational Institutions and Cost Accounting Standards, as it pertains
to service centers in section J.44. Compliance with A-21 is implicit in this
policy. Refer to Section J, OMB
Circular A-21 for a list of unallowable expenses
The University's exposure from non-compliance with federal
regulations may involve reimbursement to the government as well as adverse
publicity, which could harm future award applications.
Definitions
Service Center
A
service center is an operating unit, which exists principally to provide goods
or services to Harvard departments, and has more than $500,000 in
annual operating expenses or more than $75,000 in annual direct charges
to federal grants. Operating costs are supported by recharges to the
departments receiving the services. Service centers develop rates based on
incurred cost and should break even over time.
Specialized
Service Center
A
specialized service center is a service center that has over $1,000,000
in annual direct operating expenses and involves the use of highly complex or
specialized facilities. Specialized service centers must recover all costs,
including utilities, operation and maintenance, and building depreciation. For
units which pay rent, these costs may be included in the rent charge. It is the
responsibility of the service center to determine the costs, which are included
in the rent charge.
Auxiliary
Service
An
auxiliary service is a self-supporting entity that exists principally to
furnish goods or services to students, alumni, or faculty and staff acting in a
personal capacity, and charges a fee for the use of goods or services. Auxiliary services generally do not support
Harvard departments. The general public may be served incidentally. Examples
include residence halls, food services, intercollegiate athletics, college
unions, college stores, alumni travel, parking, and shuttle services. Pricing
for auxiliary services may be based on market rates, except when charging for
services provided to federal awards. Auxiliary services are not subject to this
service center policy.
Central
Units vs. Departmental Units
Service centers which provide services to the entire
University community (Central) must recover all costs, including the costs of
utilities, operation and maintenance and building depreciation. For units,
which pay rent, these costs may be included in the rent charge. It is the
responsibility of the service center to determine the costs, which are included
in the rent charge. Examples of Central Units include University Information
Systems and University Operations Services. Service centers, which reside in
academic departments (Departmental) may decide whether or not to recover these
overhead items in the rate.
Types of Users
Internal
Internal
users of service centers are those users whose ultimate source of funds are
within Harvard or flows through Harvard (i.e., Harvard federal awards performed
on campus or at affiliated hospitals). These include academic, research,
administrative, and auxiliary areas, which purchase services to support their
work at Harvard.
External
External users are organizations or individuals whose
ultimate source of funds is outside of Harvard. External users include students
and any members of faculty or staff acting in a personal capacity. Affiliated
hospitals and other Universities are also considered external users unless
Harvard has subcontracted with them as part of a grant or contract.
Rate Development
Principles
For each type of service that is
"recharged" to users, the department must maintain documentation
detailing how the rate per unit has been determined.
A service center rate is the cost per unit of output used
to recover the expenses of the service center. Service center rates should be
calculated by the business manager in each service center for a fiscal year.
When a service center is established in mid-year, rates may be set for longer
than twelve months so that the end of the first break-even period coincides
with a fiscal year end.
To compute this rate, departments should use the following
equation:
Budgeted Expenses +/- Prior Year
Under/Over Recoveries (within +/- 10%)
Budgeted Usage Base
The
budgeted usage base is the volume of work expected to be performed, expressed
in units (e.g., labor hours, machine hours, CPU time or any other reasonable
measurement.) This rate, based on budgeted activity, is applied to the actual
activity when charging users.
For
example: a computer costs approximately $100,000 per year to operate (total
allowable costs) and has an estimated activity level of 1,500 hours per year.
This would result in a rate of $100,000/1,500 hours = $66.67 per hour. If a
researcher uses the computer for four hours for a sponsored project, his or her
award should be charged 4 x $66.67 or $266.68.
UIS businesses must develop rates annually in compliance with Service Center rate development principles
outlined above. In developing customer
rates, each business should consider the following:
- Since
most UIS businesses provide more than one service, each cost
classification should be allocated using activity-based principles (e.g.
effort expended, % utilization, direct allocation, etc.) in order to
identify the true costs of providing each service. There should be no cross-subsidization
between services, especially if the customer user groups (i.e. federally
sponsored grants) vary between the services.
- In
determining the most equitable usage base for cost allocation to
customers, rate models must consider how the service is used, what usage
data is collected, and whether or not the cost allocation model
methodology represents a true and accurate consumption of resources used
to provide the service. Under certain
circumstances, a given service may use more than one type of usage base in
allocating the cost of services (e.g. staff costs may be allocated based
on time expended; equipment costs based on hours of usage).
Non-discriminatory
Rates
A
service center must charge all internal users at the same rate for the same
level of services or products purchased in the same circumstances. Rates should not differentiate among
internal users. (Refer to subsidized users below) The use of special rates,
such as for high volume work or less demanding non-scientific applications, is
allowed, but they must be equally available to all users who meet the criteria.
The
federal government does not object to charging external users a higher rate
than that charged to internal users. However, revenues and costs associated
with external users should be tracked separately to avoid the perception of
overcharging.
Through the use of rate models and standard margins, all UIS
service centers must practice non-discriminatory rate development. All customers within a service level or
volume purchase agreement must pay equally for similar products and services
received.
Subsidized
Users
All
users must be billed for services received. If the University chooses to
provide a service to a particular internal group of users at no charge or at a
lower rate than other users (e.g., audio visual services as part of an
instructional program), the service center billing rate must be calculated for
all internal users based on total service center expenses and total units of
output. The services used by the subsidized user group must be billed out at
this rate, but to an account representing the appropriate activity (e.g., the
instructional budget). The service center must ensure that the rate charged to
this user group is consistent with that charged to others, including accounts
ultimately charged to federal awards.
UIS service centers must bill all customers for all goods and
services provided.
Break-Even
Concept
A
service center must develop rates so that revenues offset expenses over a
reasonable period of time. A service center's surplus or deficit for a given
fiscal year should not exceed 10% of annual operating expenses. To the extent
that a surplus or deficit is within the break-even range of +/- 10%, that
surplus or deficit must be carried forward and the rates adjusted in the
following period.
All UIS rate models must
include consideration for prior year surpluses or deficits, however, since
rates for the upcoming year are frequently developed 6-8 months prior to the
current year-end close, rate adjustments may lag by one fiscal year.
Surpluses
and Deficits
When
it appears at mid-year that the operating results will exceed the 10%
break-even range, the service center should adjust its rates mid-year.
If,
at fiscal year end, the service center's operating results exceed the 10%
break-even range:
·
Surpluses beyond the 10% range must be eliminated through retroactive
adjustments to users, or
·
Deficits beyond the 10% must be funded by another non-federal source and
transferred into the service center
account.
Service centers may also
negotiate a long-term break-even agreement with the University's cognizant
federal agency so that rates reflect actual costs over an accepted period of
time.
Long-Term Break-Even Agreements
In
unique situations, when a service center requires a multiple-year period in
which to recover its operating costs, a long-term break-even agreement can be
negotiated. This usually occurs when operations require initial large capital
equipment and building costs. Such agreements must be negotiated with the
University's cognizant federal agency.
The
need for such an agreement must be presented to and reviewed by the School
Finance Officer and the Office of Cost Analysis.
Transfers
Service
centers, which have accumulated surplus funds through billings to internal
users, may not transfer these funds out of the service center operating
account. The balance must be carried forward and used to adjust subsequent
billing rates.
UIS surpluses and deficits will be maintained in
unrestricted/undesignated accounts (object code 3700) by business unit. Business unit managers are responsible for
the development of business plans and rate models that account for the return
or recovery of yearly surpluses and deficits.
Business plans and models are subject to review by the UIS Financial
Office and the University Office of Cost Analysis.
Working
Capital
In
addition to full recovery of actual costs, service centers may establish and
maintain through its charges a fund balance for working capital needs. The
working capital allowance should not exceed 60 days of annual operating
expenditures.
When longer-term business planning demonstrates the need to
maintain working capital allowances, either to guard against changes in
business models or for rate stabilization during implementation of new business
technologies, up to 60 days of annual operating expenditures may be accumulated
over time and utilized during the period(s) when working capital needs rise. In unique situations, the 60 days of expenses may be
extended to 90 days, when a service center can demonstrate the need to maintain
a higher working capital balance (example: extended length of time may exist
between incurring vendor costs and correct billing of those services). In all cases,
the accumulation of working capital allowances must receive prior approval of
the Office of Cost Analysis.
Cross-subsidization
Pricing
of Multiple Services
A
service center providing more than one service may sometimes make a surplus on
some services and a loss on others.
Service centers must ensure that there is no cross-subsidization between users groups.
Combining the results of various services is not acceptable if the mix
of users of each service is different; that is, if higher prices charged to one
set of users are subsidizing losses charged to a different group of users.
Rates
for External Users
At
a minimum, external users will be charged for the full direct costs of the
service center operation. An allocable
share of the University's indirect cost to the service center operation may be
charged to external users. At no time will an external customer be charged less
than the federal government and internal users for the same service. The
federal government will always be treated as the most favored customer. Sales
tax, when applicable, must be charged to all external users who do not provide
their tax-exempt certificates.
Rate Components
All costs relating to a service center
must reside in the service center account. Costs included in rate development
are restricted to the following guidelines:
Personnel
& Benefits
Direct
Personnel
The
salaries and wages of all personnel directly related to service center activity
(e.g., lab technicians or machine
operators) should be included in the rate calculation and charged to the
service center's operating account
unless charged as a direct cost to federal award. If an individual works on
more than one activity, the costs associated with that individual should be
allocated to the activities based on the proportional benefit. This proportion
may be determined by effort reporting or by a time study.
Administrative
Staff
The
salaries and wages of administrative staff in direct support or management of a
service center should be included in the rate calculation and charged to the
service center's operating account. Administration costs benefiting more than one
service center activity should be allocated to the benefiting services on a
reasonable basis.
Fringe
Benefits
Fringe
benefits related to all personnel costs directly charged to the service center
operating account should be included in the rate calculation.
Materials
& Supplies
The
costs of materials and supplies needed to operate a service center should be
included in the rate calculation. If inventory is accumulated in a particular
year, the service center should not include the costs of accumulated inventory
in its rates. Service centers that maintain significant inventory should
establish a separate inventory account.
Capital
Equipment and Depreciation
Capital
equipment is defined as an item with a purchase price over $5,000 and a useful
life of at least two years. Federal
guidelines do not allow the purchase cost of a capital item to be recovered
through service center rates. However,
it does allow for the recovery of depreciation, external interest, or capital
lease costs associated with the asset. Equipment
that’s not capitalized (purchase price under $5,000) may be treated as an
operating expense in calculating rates.
Refer to the accounting policy on Capitalization
of Property, Plan and Equipment for further guidance. Each service center will have an associated
plant asset account to capture capital equipment purchases.
Equipment
Inventory
It
is important that the government not be charged for the depreciation of a piece
of equipment through a user charge and again through the University's F&A
rate. To avoid this, service center capital equipment will be identified to the
service center function and captured within an associated plant asset account
within the Oracle chart of accounts. Service centers will reconcile their
equipment to the plant asset account
biennially.
All UIS businesses must adhere to University and Service Center
capital equipment policies as outlined in the UIS Capital Process
Management Policy. All UIS
capital assets are reconciled with Central Administrative systems on a monthly
basis
Depreciation
The
depreciation of all capital assets will be charged to the service center
operating account using the straight-line method over the useful life of the
asset. Such treatment ensures that users pay only for equipment cost associated
with the usage in the given year. Each year, service centers will need to
budget depreciation amounts to be used in establishing rates for the following
year. Refer to the General Accounting
Policy for specific
guidelines.
Useful
Lives
Service
center equipment must be depreciated using the useful lives outlined in the
accounting policy for Capitalization and Depreciation of Property, Plant, and
Equipment. In certain circumstances, service centers with
"specialized" equipment, or equipment, which is unique in the nature
or extent of its use, may need to estimate a more accurate useful life.
Specialized equipment is unique to the specific service center activity and not
common to other University departments. Approval to deviate from standard
useful lives must be obtained from the University's Office of Cost Analysis and
a special asset class will be established for each specialized asset.
Federally
Funded Equipment
Depreciation
of equipment purchased by the federal government, whether or not title has
reverted back the University, cannot be included in the user rates. Where the
University has specifically agree to "cost-share" a piece of
equipment in a federal award, the depreciation of the University-funded portion
is also unallowable in the rates. Federal funding of equipment will be
identified through the source segment in the University's chart of accounts.
Debt
Funded Equipment
Federal
regulations do not allow for principle payments on debt to be recovered through
service center rates. However, service centers may recover the external
interest associates with the debt if all three of the following criteria are
satisfied.
·
An external financing source was used
·
Equipment costs are over $25,000
·
The arrangement is agreed to by the federal cognizant agency.
Contact
the Office of Cost Analysis, Judy Ryan@Harvard.edu for more information.
See UIS Capital Process
Management Policy for compliance with Service Center Guidelines. With few exceptions, all UIS equipment is
funded using debt. For the purposes of
rate development, only depreciation and interest (from external sources) are
included in UIS cost recovery.
Operations
& Maintenance and Utility Costs (O&M)
O&M
and utility costs are assigned to all University departments and central units.
Central service centers and specialized service centers are required to recover
these costs; departmental service centers may decide whether or not to include
these costs in the rates. If the costs are not included in the service center
rates, the University will forego recovery through the indirect cost rate.
Other Expenses
Other
operating expenses to be included but not limited to the following items:
- Rental and service
contracts
- Equipment operating
leases
- Software and Equipment
maintenance
- Professional Services
Unallowable
Costs
OMB
Circular A-21 specifies costs that are allowable and unallowable. Unallowable
costs include but are not limited to the following items:
- Full cost of capital
equipment purchases (only depreciation expense is allowed)
- Bad debts or
uncollected billings
- Internal interest
- Alcohol
These
unallowable charges must be excluded from internal user rates, but may be
recovered only through charges to external users, or funded through the
University’s budget. Refer to Section J,
OMB
Circular A-21 for a list of unallowable expenses
Responsibilities
and Internal Controls
Responsibilities
Rates
will be calculated annually by the Business Manager of each service center and
submitted for review to the appropriate Financial Officer.
The
Financial Dean or equivalent will be responsible for reviewing the rates and
ensuring compliance with this policy.
The
Office of Cost Analysis will be responsible for training and assisting the
Financial Officers with the monitoring of service centers.
Midyear Review
Service
center managers should evaluate their financial position and rates periodically
throughout the year to assess their position with respect to break-even. Under
special circumstances, the Business Managers and Financial Officers will adjust
rates through a mid-year reduction/increase in rates provided that midyear rate
adjustments are subject to review. Mid-year rate adjustments will be treated as
exceptions.
Year-End Rate Performance Review
At
fiscal year end, all service centers will be required to submit their actual
financial results to the School Finance Officer and the Office of Cost
Analysis.
Due to the cyclical nature of
many UIS businesses, mid-year “snapshots” are not always representative of the
yearly performance of the business, as revenues may not “catch up” to fixed
costs until the fiscal year is closed.
Therefore, each business will complete a minimum of one year-end
forecast using at least 5 months of financial information. The group’s Director and the UIS Executive
Director will review year-end forecasts. The group’s Director should be
prepared to present financial and business plans to address excessive surpluses
and deficits. The UIS Financial Office
will review all financial results with the Office of Cost Analysis annually.
Establishing Service Center Account
All
service centers must maintain a separate account. The Financial Officers are
responsible for ensuring that all service centers have established a separate
account. Likewise, the Financial Officers for desirability, feasibility, should
review the establishment of new service centers and to ensure they will operate
in accordance with the University’s policy manual.
Each UIS
Service Center
business will utilize a separate combination of Org, Activity, or Sub-Activity
in the UIS chart of accounts for the purposes of posting both revenues and
expenses related to the provision of services.
Furthermore, UIS surpluses and deficits will be maintained in
unrestricted/undesignated accounts by business unit in order to track balance
carry-forwards from year-to-year.
Billing Procedures and Record Retention
Billings must be based upon measured
and documented utilization, which is properly authorized for the account
charged. All billings should be processed on a timely basis and will be at
established service center rates. The support for the charges, including
documentation of expenses and usage, should be retained by the service center
to answer any user inquiries or in case of an audit.
All
invoices must provide the following information:
·
The nature of the services rendered (e.g., photocopying)
·
The number of units (e.g., pounds, hours, # of items)
·
The amount charged per unit
The
user of these services is responsible for documenting the purpose of the
charge, and basis for allocation of charges among several account numbers, when
applicable.
A service should not be billed until the service has been
rendered; that is, prepayments are not appropriate. Each service center must
operate in accordance with the University's fiscal year. Service centers should
handle each year-end billing consistently, to ensure that twelve months of cost
recovery are associated with twelve months of incurred cost, and thereby
provide a more accurate break-even calculation at year-end.
Each UIS business unit manager is responsible for developing and
maintaining business systems and processes that ensure compliance with the
billing procedures and record retention policy outlined above. Systems and processes must be able to pass
audit controls and testing.
UIS businesses will also practice accrual accounting with respect
to the billing of customers for services provided. Customers will not be billed
until products are delivered or services are provided. “Pre-billing” customers at year-end for
products and services delivered in subsequent fiscal years is prohibited.
Credits
to Expenditure Accounts
Credits
to expenditure accounts are normally used to record amounts received for
returned goods and other expense-related adjustments. Service center revenues should not be
recorded as credits to expenditure accounts. Such treatment would misstate both
revenues and expenses and effect calculation of service center rates in the
following periods. Refer to the General
Accounting Policy for specific guidelines.
UIS businesses must utilize one of the verified revenue object
codes (for external customers) or intertub object codes (for internal
customers) to record customer income.
Use of expense object codes for this purpose is not allowed.
Effective Date of Policy
The service center policy is effective as of fiscal year
2000.
Glossary of Terms
Auxiliary. A self-supporting entity
that exists principally to furnish goods or services to students, alumni, or
faculty and staff acting in a personal capacity, and charges a fee for the use
of goods or services. Auxiliary services generally do not support Harvard
departments. The general public may be served incidentally. Examples include
residence halls, food services, intercollegiate athletics, college unions,
college stores, alumni travel, parking, and shuttle services.
Break
even. The
point at which revenues equal expenses. The policy establishes that service
centers should break even over a reasonable period of time and, on an annual
basis, the surplus or deficit should not exceed 10% of annual operating
expenses.
Capital
Equipment.
Equipment with a purchase price over $5,000 and a useful life of at least two
years. The purchase cost of a capital item may not be recovered through service
center rates however; the depreciation and external interest costs associated
with the asset may be recovered in the service center rates.
Central
Units.
Service centers which provide services to the entire university community
(Central) must recover all costs, including the costs of utilities, operation
and maintenance and building depreciation. Examples of central units include
the University Information Systems and University Operations Services.
Departmental
Units.
Service centers, which reside in academic departments (Departmental) may decide
whether or not to recover these overhead items in the rate.
Deficit. A deficit occurs when the
service center's expenses exceed revenues for a given fiscal year. To the
extent that the deficit is within the 10% break-even range, that deficit must
be carried forward and the rates adjusted in the following period. Deficits
beyond the 10% break-even range must be funded by another non-federal source
and transferred into the service center account.
Direct
Operating Costs. Outflows or charges relating to the rendering of services and related
support undertakings (i.e., administrative activities) that can be identified
specifically with the service center. Direct operating expenses include
salaries and wages, employee benefits, supplies and non-capital equipment, and
equipment depreciation and interest expenses. This does not include
institutional overhead costs such as building depreciation and general
administration.
External
Users.
Organizations or individuals whose ultimate source of funds is outside of
Harvard. External users include students and any members of faculty or staff
acting in a personal capacity. Affiliated hospitals and other Universities are
also considered external users unless Harvard has subcontracted with them as
part of a grant or contract.
Federal
Facilities & Administration ("F&A") Rate. This percentage is applied
to the expenditures of federally sponsored projects in order to recover
University overhead costs related to building and equipment depreciation,
interest and general administration.
Internal
Users. Users
whose ultimate source of funds is within Harvard or flows through Harvard
(i.e., Harvard federal awards performed on campus or at affiliated hospitals).
These include academic, research, administrative, and auxiliary areas, which
purchase services to support their work at Harvard.
Long-term
break-even agreement. OMB Circular A-21 Section J.44 provides the opportunity for service
centers to establish a plan for recovering its operating costs over a
multiple-year period. Such arrangements must be agreed to by the University's
cognizant federal agency. The need for
such an agreement must be presented to and reviewed by the School Finance
Officer and the Office of Cost Analysis.
OMB
Circular A-21 Cost Principles for Educational Institutions. This Circular provides the
principles for determining the costs applicable to research development,
training, and other sponsored work performed by colleges and universities under
grants, contracts, and other agreements with the Federal Government.
Operating
Costs.
Outflows or charges relating to the rendering of services and related support
undertakings (i.e., administrative activities). Operating expenses include salaries and
wages, employee benefits, supplies and non-capital equipment, interest
expenses, space and occupancy, and depreciation. Note that principle payments
are not expenses.
Service Center. An operating unit which
exists principally to provide goods or services to Harvard departments and has
more than $500,000 in annual operating expenses or more than $75,000 in annual
direct charges to federal grants.
Specialized
Service Centers. A service center that has over $1,000,000 in annual operating expenses
and involves the use of highly complex or specialized facilities. Specialized
service centers must recover all costs, including utilities, operation and
maintenance, and building depreciation.
Surplus. A surplus occurs when the
service center's revenues exceed expenses for a given fiscal year. To the
extent that a surplus is within the 10% break-even range, that surplus must be
carried forward and the rates adjusted in the following period. Surpluses
beyond the 10% break-even range must be eliminated through retroactive
adjustments to users, unless a long-term break-even agreement has been established.
Unallowable
Costs. The
federal Cost Principles for Educational Institutions, OMB Circular A-21,
establishes guidelines for the allowability of costs in Section J. Costs that
are "unallowable" may not be recovered in the service center rates.
Examples of allowable costs include alcohol, internal interest, lobbying and
advertising.
Working
Capital.
Operating funds available to cover current needs and to maintain reasonable
stability in user charges when fluctuations in expenditures occur. Service centers
may establish and maintain a fund balance for working capital needs not to
exceed 60 days of annual operating expenditures.
