Part II - TRAC Principles

Section C: Quality assurance and validation

Chapter C.4 External QA process

1. The methods used by institutions to calculate the indirect cost rates, and estates charges for Research, are to be periodically reviewed by an external quality assurance team. Approval of institutions’ methods may be conditional upon the institution addressing any action points raised by that team. All institutions should be involved in this QA process.
2. In years one and two of implementation of TRAC fEC, this process was designed to focus particularly on aspects of the methods that materially affect indirect cost rate calculations or other aspects of project costing. The process resulted in the production of constructive advice to institutions covering any changes required.
3. The external QA process carried out in 2004/5 is described in HEFCE circular letter 05/2004 – accessible from Annex 1. It comprised:
   • the completion of a 'self-assessment checklist' by institutions
   • their participation in three benchmarking exercises
   • a visit by HEFCE’s internal audit team, which resulted in the identification of any ‘significant issues’ that could be materially affecting the robustness of the estates charge or the indirect cost rate calculations, as well as other developmental issues
   • resolution of any significant issues, followed by a review by the institutions’ internal auditors and confirmation by an appropriate committee to the QA team, that this had been done.
4. The QA process had to take place before an institution’s indirect cost rate or estate charges could be accepted as a basis for including indirect or estates costs on Research projects for cost-based pricing.
5. Until an institution is able to satisfy the QA team about any identified outstanding areas of robustness, then a non-compliant default indirect cost rate (determined by the OST/Research Councils) has to be used as the basis for cost-based pricing (if this is lower than the institution’s own rate). If the lack of robustness affects the estates charge, then no estates charge can be applied (the non-compliant default rate on estates is zero). However, when determining the total cost (fEC) on each of their projects, the institution’s own indirect cost rates are still to be applied, not the non-compliant default rate. For Research Council and OGD projects, the price recovered on these projects is likely to be significantly less than a price calculated on the fEC.

Benchmarking

6. The external QA process includes benchmarking. Institutions should calculate the following for benchmarking purposes:
   1. a single £/academic and research staff FTE indirect cost rate for Research;
   2. two £/academic and research staff FTE estates charges for Research: for both laboratory and non-laboratory (with clinical departments included in the laboratory group);
   3. a cost per square metre of each of the four (or more) categories of space (optional before August 2007).

   (a) and (b) do not mean that institutions have to use these FTE rates to charge estates costs to Research projects – alternative methods could be used.

7. Other information should be provided for the QA process, similar to the benchmarking carried out in the sector in 2004 (for example, including income and costs by type of activity, and an analysis of academic staff time and of total Support costs).
8. If an institution’s indirect rate or estates charges fall above the upper quartile (UQ) of the sector rates, then they should be prepared to justify these higher rates, or should use the non-compliant default rate.
9. Justification can be provided:
   1. by the rate being below the sector UQ issued from the most recent benchmarking exercise;

      or

   2. by the institution providing assurance that their processes are robust i.e.
      1. all other significant issues raised by the QA team have been addressed; and
      2. they have:
         • carried out a sensitivity analysis on their cost allocation model to identify possible reasons for the differential from benchmarking data, and have reviewed the appropriateness of this;
         • understood why their rates are above the UQ (e.g. very low direct time, or high Support time; or generally acknowledged through other exercises that they are a higher or lower cost institution); and
      3. by the institution’s head of Audit or Finance Committee signing a statement to the effect that their rates are above the sector UQ; that they understand that because they are being funded from public funds it is important that they are satisfied that it is a true cost; that, having considered other information (e.g. the nature of the estates, academic workload/productivity, and EMS statistics – see Annex 1 on the efficiency of the estate) they are satisfied that these are real costs incurred on Research and are a legitimate basis for funding through the public purse.