Part I - Overview

Section A: General Overview

TRAC fEC – full economic costing for research and other projects

During 2003 and 2004 the Office of Science and Technology led a reform of the Dual Support System for higher education research.^vii Under Dual Support institutions receive:
- a block grant of core research funds from the Funding Councils (called quality-related funding or QR, allocated on the basis of the Research Assessment Exercise, the RAE) that they use for some of their own blue-skies research, and to develop and maintain infrastructure for research that is carried out for external sponsors in the ‘public scientific good’;
- a second stream of project-related grant funding from the Research Councils.

The latter had covered only the direct costs of projects (excluding academic investigators’ time) plus a contribution to infrastructure costs. Over many years, faster growth in project-related funding (including significant growth in income from charities, the EU and industry) than in the block grant has put stress on institutions’ cost recovery on research, and thus on the sustainability of their research activity and infrastructure.
Coupled with this, the absence of robust data on the full costs of research led many institutions to underestimate the costs of research and other projects, so that even commercial research and consultancy, for example, has often been sold to the private sector at below cost. This has contributed to what has been called the ‘low price culture’ in higher education.
From 2005 the Government provided additional funds for the recurrent costs of research supported by the Research Councils. These are to be used to make this research more sustainable – not to increase volumes of activity.
To give effect to this policy, HEIs applying for future research grants from public funders now have to identify the full economic cost (fEC) of carrying out the project in question, including an appropriate share of all infrastructure costs and of the cost of capital employed. Funding is either at 100% of fEC (the normal case with non-competitive research funded by government departments),^viii or 80% of fEC (from the Research Councils^xi where the Dual Support arrangements are in place). For most projects this is a significant increase over the former price. It is the Government’s intention that Research Councils will move to paying close to 100% of fEC by the start of the next decade, thereby further freeing up institutions’ own research funds.
Funding for competitive projects and for commercial work for industry (market-priced) is not affected by this, but a better knowledge of the costs helps institutions to avoid inadvertently subsidising work which should at least be at ‘full cost’. Institutions need to make a surplus on their commercial or contract research work, as part of their balanced portfolio. It has never been allowable to subsidise such work from public funds, but institutions have been reminded of these responsibilities through a new edition of the Financial Memorandum under which they operate with the Funding Councils.
Institutions implemented TRAC fEC during 2004 and 2005. The main changes detailed in the guidance are that institutions now have to:
1. forecast/estimate academic staff costs robustly at project level – typically a Research Council funded project lasts three years and involves a mix of different types of Principal Investigator, co-investigator, etc.;
2. allocate costs directly to projects for space; major research facilities such as animal houses, ships, telescopes; and technicians - using charge-out rates derived from the annual TRAC process;
3. attribute support costs to projects using a robustly calculated indirect cost rate, expressed as a £ per full time equivalent (FTE) academic/research staff.

These three new elements of cost, plus the directly incurred costs that have always been identified (research assistants, consumables, equipment purchases etc.), make up the fEC of a research project. These costs are profiled over the life of the project, and adjusted for pay increments and inflation. This provides the basis for the cost-based price (e.g. 80% or 100%).
If it is less than 100% of fEC, the institution calculates the contribution required from themselves and ensures that either they have sufficient public funding to subsidise the ‘scientific public good’ research; or that the research project is of sufficient strategic interest for institutions to subsidise through any other funds that they may have available. It is not necessary for the HEI to account publicly, at a project level, for where this subsidy comes from, but it should be able to reassure itself that across its portfolio of activities, in aggregate, taking one year with another, this subsidy does not exceed the funds available.
Other requirements for project costing remain as before, in particular the need to record and account for directly incurred costs (research assistants, consumables etc.) in an auditable manner. There is no need formally to account for the actual time spent on projects by academic staff – other evidence of time spent such as records of meetings, laboratory notebooks etc., that are a standard part of project management, are all that is needed. Similarly, there is no need to monitor actual use on a specific project of any of the estates and other directly allocated costs. Academic staff costs and directly allocated costs are charged to projects at the standard costs originally estimated, and do not change throughout the project (unless there is a significant change to the programme of work).
Overall, TRAC fEC has been a more significant implementation task than annual TRAC was. It is also being phased in over five years – 2004 to 2009. Institutions which have very large numbers of research projects are generally making major changes to their financial and research systems to be able to estimate and record the fEC of projects: this was previously not a figure that was recognised or funded by public bodies and therefore rarely calculated or recorded by institutions.
The methods in TRAC fEC could also be used for costing Other projects, such as consultancy, but at present there are no detailed requirements on how to do this and institutions are therefore free to apply the TRAC principles as appropriate.