JCPSG | TRAC Guidance

Part II TRAC Principles

Section A: Overview

  1. Principles and conventions have been set down for TRAC which institutions should meet. These ensure that institutions provide, over time, comparable information of sufficiently high quality that:
    • satisfies requirements for accountability and transparency;
    • is appropriate to justify costs to external sponsors; and
    • is appropriate for use internally in institutions.
  2. The main principles include those of materiality, fairness and reasonableness, flexibility, consistency, and auditability. Common definitions need to be followed.
  3. The costing conventions ensure that costs are based on audited financial statements, adjusted only for the two cost adjustments. All activities are costed on a full cost basis, and activity cost based methods are used.
  4. Ten costing standards must be followed: these are defined as sets of minimum requirements. The word “should” indicates a mandatory requirement.
  5. The robustness of TRAC methods and figures is assured through a set of QA and validation processes – both internal and external. These are designed to satisfy sponsors’ needs for accountability, and to ensure the data is of sufficiently high quality that it can also be relied on internally by institutions.

Section B: Principles and Conventions

Chapter B.1 Scope of TRAC

  1. TRAC, the Transparent Approach to Costing, provides a single costing method for use by HEIs, for both internal and external purposes.

All activities

  1. TRAC covers the costing of research, teaching, and all other activities of institutions.

Costs, not income

  1. The TRAC approach covers costs, not income or funding. It does not attribute income or funds to activities nor require any reporting of bottom-line contributions or surplus/deficit positions. However, these are required for benchmarking, by the Funding Councils when reporting annual TRAC costs, and by institutions when costing (and pricing) research projects.
  2. Such calculations are of use to institutions for their own purposes. At an institutional level they are a valuable tool in assessing the ‘fairness and reasonableness’ of the cost figures being derived and, at project level, provide important information on sustainability and cost recovery.
  3. The HE Funding Councils require information on funding to be reported alongside costs. Annex 16 provides information on the Funding Councils’ requirements for income allocation. This requires income to be reported alongside costs for each of the five activities, plus a further analysis by source of funding, at an institution level.

Costs that can inform pricing

  1. Costs are different from prices. The focus of TRAC is costing, not pricing. However, costs derived from TRAC can inform prices - see:
    • indirect cost rates and estates charges
    • the estimation of research project costs in TRAC fEC and
    • costing and pricing materials published by the JCPSG – see Annex 1.

Institutions’ wider costing strategies

  1. Costs provided under TRAC can provide helpful information for internal processes such as resource allocation, and strategic planning.

Chapter B.2 Minimum requirements

  1. Ten costing standards should be achieved. These are described through sets of minimum requirements. TRAC fEC added a further set of requirements that is specific to the costing of research projects.

    TRAC costing standards

    TRAC minimum requirements

    1

    annual transparency reporting – accountability for public funds:

    • total gross costs of institutional activity on Teaching, Research, Other, as defined under TRAC;
    • calculated by a robust method and reconciled to consolidated financial statements;
    • signed off by head of institution as representing a fair and reasonable view of the actual costs.

    Part III
    annual TRAC
    2

    costing for internal purposes and to inform pricing:

    • calculation of Teaching, Research and Other activities, by department and research sponsor type.
    3

    attribution of academic staff costs to activities:

    • consistent treatment as direct or support
    • in-year time allocation, at least on a sample basis, for academic staff.
    4

    attribution of other costs to activities:

    • direct allocation where possible and cost-effective;
    • at least a cost-driver model with four to six robust drivers, verified by surveys etc. for larger cost pools and used consistently.

    5

    cost adjustment:

    • full economic costs including adjustment for:
      • infrastructure costs;
      • cost of capital employed
    • no other adjustments to gross costs.
    6

    costs in medical and dental schools:

    • attribute time on clinical services to Teaching, Research, Other and Support, on the basis of the services received from the NHS under knock-for-knock.
    7

    review and development:

    • annual review of cost driver information;
    • annual calculation of costs to be reported under TRAC;
    • sponsor rates recalculated every year;
    • time allocation verified (re-collected) on a rolling three-year basis.
    8

    audit:

    • appropriate institutional committee confirms compliance with the set of process standards.

    Part II
    quality assurance

    9

    materiality and dispensations:

    • for institutions with R income of less than £0.5k verification of costs is optional;
    • no requirement to recalculate or re-verify costs if institution can show that impact is minimal or effort disproportionate.
    10

    rate calculation:

    • institutions should calculate indirect cost rates using as a base the cost information calculated for costing standards 1 and 2 above.

    Part IV
    indirect cost rates and estates charges

    costing research projects

    Part V
    TRAC fEC

    Other requirements closely linked to TRAC relate to:

    • the attribution of income to be reported alongside annual TRAC costs;
    • bidding for Research Council grants – see the Research Councils’ website accessible at Annex 1.

Chapter B.3 Principles and Conventions

  1. TRAC is based on several key principles and conventions. The main principles that should be followed are:

The main costing conventions are:

Materiality

  1. The effort applied to costing should be proportionate to the significance of the costs being measured. The general principle to be followed is that undue effort or precision should not be put into very small costs: and equally, that proper account should be taken of significant costs. For most institutions, the most important cost elements are:
    • academic staff
    • academic services (library, computing etc)
    • infrastructure costs (chiefly estates).
  2. The Guidance advises on methods on all of these. Institutions must, however, consider what is most important for them. The way to test this is for institutions to consider whether their proposed treatment of a particular cost could make a significant difference to the results for the particular purposes for which they are costing. As a starting point, a difference of 10% or more is worth further consideration.
  3. Formally, an item is material if its omission, or misattribution, in the costs of an activity could be expected to lead to a distortion of the view given by the reported activity costs by a user, such that their judgement would be likely to be influenced if that item were more accurately stated: i.e. would its inclusion or exclusion distort figures? A second order question is – would it be likely to change decisions as the data is progressively used for internal management purposes?
  4. The levels at which materiality can be considered when attributing costs for the annual TRAC exercise are:
    • three discipline-level costs (clinical, laboratory-based and classroom-based);
    • Teaching (T), Research (R), Other (O) and Support (S);
    • PF and N PF;
    • within PFR, the total of Research Council and institution-/own-funded Research.

    Definitions of these terms are given in Annex 6 .

  5. The same principle applies to costing at a lower level, e.g. research projects under TRAC fEC. However, the levels at which materiality would be considered within the overall costs of a project are:
    • each separate cost item, e.g. the time and costs of investigator time
    • the total costs of the project.
  6. The following can be considered:
    • all reported costs should be fairly and reasonably stated. If a change in assumptions or methods could mean a material change to these figures, then that should be considered carefully to ensure that the information finally produced is ‘fair and reasonable’;
    • materiality could be indicated by a broad rule of thumb. If, by altering a cost driver or method in the annual TRAC model, costs in one of the above areas could vary by +/- 10%, then this should be carefully scrutinised to ensure that the most appropriate technique is used. This does not mean that institutions can calculate costs to +/- 10% of T, R, O or S;
    • the total costs of the activity affected would also inform materiality;
    • at a lower-level of costs (e.g. by department) +/- 10% would still provide a useful guide for judging the importance of the many decisions and judgements required – but applied at the level of the cost under consideration at the time;
    • attention should thus be focussed onto the significant costs. Institutions should beware of calculating undue precision over small cost elements, or seeking ‘spurious accuracy’;
    • institutions are not required repeatedly to measure factors that do not change;
    • materiality is different from statistical precision, which is discussed in the context of verifying time allocation methods and data in the annual TRAC process – see Annex 8 (statistical sampling).

Fair and reasonably stated

  1. Costs should be fair and reasonably stated. They should be calculated with a degree of care relevant to the purpose for which they will be used. They should be such that anyone using them would not be given a misleading picture of the entity (institution, activity, project, programme) that is being costed.
  2. Costing requires judgement: even financial statements include figures based on judgement and reasonable estimates, but this does not detract from their ability to be fairly stated.

Flexibility and choice

  1. TRAC specifies standards or objectives to be achieved, but institutions that wish to go further or faster than the minimum required can do so.
  2. This Guidance illustrates methods to achieve the requirements of the Transparency Review (annual accountability) and TRAC fEC (research project costing). However, institutions are free to adopt alternative methods provided it can be demonstrated that these meet the minimum requirements.

Consistency of costing treatment

  1. Once TRAC systems and processes are robust, then institutions should use the chosen methods consistently over time. The only changes will be due to refinement or improvement to methods, from:
    • improvements to quality (e.g. in the cost drivers used);
    • introduction of improved practices (e.g. charging more costs as direct on research projects);
    • development in other systems leading to improved accuracy in the TRAC results (e.g. the development of space charging systems).

Auditability

  1. The reported cost figures under annual TRAC should be:
    • based on and reconciled to the audited financial statements;
    • traceable and verifiable (i.e. backed up by auditable data on academic time and other cost drivers);
    • supported by documented processes, consistently applied, with audit trails.

    There are specific requirements in TRAC fEC covering the verification and validation of costs - see sponsors' QA procedures.

Definitions of activities

  1. Standard definitions of activities should be used.

    diagram of definitions involved in costing processes

  2. Research (R) and Other (O) are the activities which generate income or which could potentially generate income. They are the three core activities to be costed and reported under the annual TRAC process. Individual activities within each, such as a teaching programme or research project, can then be costed as a separate process (see, for example, Part V TRAC fEC).
  3. Costs are either attributed directly to the three core activities of T, R, or O, or attributed to a fourth activity, Support (S). All Support costs are then attributed to the three core activities.
  4. The total costs of T and R activities are analysed between publicly funded (PF) and non-publicly funded (NPF) activities. This categorisation refers to the main source of their funding - see Annex 6.
  5. Research costs are analysed between publicly funded Research (PFR) and non-publicly funded Research (NPF R) on the basis of research sponsor type. Costs in the annual TRAC process are collected for each of seven research sponsor types:

    PFR

    • Research Councils (RCs)
    • institution-/own-funded
    • PGRs
    • Other Government Departments (OGDs)
    • EU

    NPF R

    • charities
    • industrial/commercial/other overseas
  6. Costs are also collected at the level of department, or management unit. These departments are grouped into three subject types or discipline groups: clinical, laboratory, and non-laboratory.

    activity diagram of costing groupings
    discipline/department type
    departments

Development of new costing requirements

  1. The principles set out above should be used for all TRAC processes. When new costing requirements are developed under TRAC, such as for TRAC fEC, the following criteria should be met:
    • existing TRAC methods should be used and developed;
    • the new methods should be robust enough to provide the accountability needed (but not spurious accuracy);
    • they should be capable of being implemented quickly and without undue cost or onerous burden for institutions or for other organisations affected by the requirements (e.g. funders, auditors etc.);
    • they should be capable of development/improvement as required;
    • they should be designed to produce fair and reasonable results – for institutions, for each different type of activity, and for each discipline;
    • they should be holistic – i.e. they can be used by institutions for a variety of types of activity as appropriate, including consultancy, commercial contract research, and Teaching programmes;
    • they should produce consistency of output by and between institutions.

Audited consolidated financial statements

  1. Costs derived from the annual TRAC process should be equal in total, and reconciled, to total expenditure, including extraordinary items, before taxation, in the audited financial statements, subject only to the cost adjustments specified under TRAC. They therefore follow established accounting concepts and are based on consolidated financial statements.
  2. This means that annual TRAC activity costs for a year are reported after year-end, at the beginning of the following calendar year. Indirect cost rates and estates charges based on these costs are available at the same time.

Gross costs

  1. All costs should be included at gross levels. They should not be included net of income.

Adjusted costs

  1. The costs used for the annual TRAC report, and the calculation of indirect costs and estates charges should be those in the financial statements plus two cost adjustments. These are:
    • infrastructure adjustment; and
    • cost of capital employed.

Full costing

  1. All costs should be prepared on a full cost basis; including their relevant share of Support or indirect costs. This means that for annual TRAC reporting, all costs are attributed to all relevant activities; and for TRAC fEC all costs of each project are identified. No costs are to be excluded.
  2. Activities should not be costed on a marginal cost basis (where only variable costs are charged to activities). Costing should not be made on the basis of eligible costs only (where costs are only charged to an activity or a project if the sponsor will pay them).
  3. Staff in many institutions undertake activities which are small (in terms of relative time input) and are not considered a ‘core activity’ by the institution. A common example of this is consultancy work which academics are encouraged to carry out to further their experience, maintain their skills and gain some additional income for the department. Irrespective of the size or type of activity (subject to materiality), the costs of all consultancy and other activities carried out for the institution need to be prepared on a full cost basis.

Absorption costing

  1. All T, R and O activities should bear an appropriate share of Support costs. Residences, catering and other trading activities, as part of O, should bear an appropriate share of Support costs.

Activity based costing

  1. TRAC is based on the principles of activity based costing. For further explanation of this concept refer to the costing and pricing materials produced by the JCPSG – see Annex 1.
  2. Costs are attributed to activities through either direct allocation, or apportionment using cost pools and cost drivers.

Cost-plus basis

  1. Costs should be provided on a cost-plus basis i.e. including a cost of capital employed. This covers both financing costs and a margin that meets the costs of restructuring and future development needs.

Costing definitions

  1. Standard definitions are used to describe the different methods of attributing costs to activities, projects, departments, and so on. The use of this terminology is particularly important in relation to TRAC fEC. This TRAC Guidance uses these terms consistently:

    cost attribution

    directly incurred

    directly allocated

    apportioned

Section C: Quality assurance and validation

  1. TRAC processes are designed to be robust, and to produce quality, fit for purpose, cost data. These include techniques for:
    • verifying time allocation data – see Part III Chapter C.1;
    • attributing estates costs robustly – see Part III Chapter D.5;
    • attributing library costs robustly – see Part III Chapter D.4;
    • using appropriate cost drivers in other areas – see Part III Chapter D.1;
    • avoiding double-charging – for example for TRAC fEC see Annex 18 (for equipment) and Part V Chapter C.4 (for academic salaries);
    • providing audit trails by which institutions can demonstrate the validity of their cost calculations and of their charges to projects – for example, see Part V Section F.
  1. Quality assurance processes are used to confirm that an institution is using methods that meet TRAC requirements. They include processes to validate the figures produced. There are five types of quality assurance and validation process:
    • Internal review
    • Institutional committee confirming compliance
    • Internal audit
    • benchmarking
    • Sponsors' QA procedures
  1. Costing standard 7 covered two of these quality assurance procedures:
    • a review by the internal audit service to advise the institution on their compliance with the TRAC costing standards and the full set of minimum requirements;
    • an appropriate Committee of the Board, or equivalent, to confirm this compliance.
  1. Costing standard 8 allows institutions whose research activity is not material to apply dispensation if they wish.
  2. TRAC fEC introduced a new requirement for institutions to participate in an external quality assurance process, and to provide benchmarking data.

Chapter C.1 Internal review

  1. Institutions should understand the data and any unexpected or outlying results. Tests for reasonableness should be carried out. The results of these should be presented to the Finance Committee or appropriate Committee of the Board, or equivalent, to give assurance that the outcome is fair and reasonable.
  2. Examples of these comparisons and tests are:
    • study the results – do they match the records, observations and expectations of heads of department?
    • compare with results from previous comparable periods – are the data consistent?
    • match with income – are the results understandable, explainable and fair and reasonable?
    • benchmark – compare with data from other (peer) institutions; or with sector data;
    • plot results – prepare a graph of time or costs of each activity by department against student numbers, and against income;
    • compare with information produced by external bodies – calculate an average pay cost per FTE student and compare with relativities for each subject type with those used in the relevant Funding Council’s funding methodologies for Teaching;
    • carry out a small number of surveys or interviews to test the validity of results;
    • carry out a sensitivity analysis on key cost drivers and cost pools – test equally appropriate but different cost drivers or weightings in the cost drivers. (An example here might be to use weighted cost drivers in the estates cost pool which reflect actual, or standard, costs of each building or campus);
    • convene a small group to discuss the profile of academic activity in a year – they could consider what activity took place during the various periods (Easter, term, vacation etc) or for different purposes (library services used by students; estates used by PGR students).
  1. ‘Outliers’ can be investigated through surveys, interviews or workshops. It is important to give heads of department, the TRAC implementation project group, and the senior management team an opportunity to understand and comment on the figures. When they do so, their comparability with other figures from the management accounts, the resource allocation model and/or the strategic planning model, needs to be understood.
  2. The results of these tests and checks should be given to the relevant institutional committee to provide assurance that the outcome is fair and reasonable.

Chapter C.2 Institutional committee confirming compliance

  1. An appropriate Committee of the Board (or equivalent) should confirm compliance with TRAC requirements. Compliance is the responsibility of institutional managers and institutions would generally wish to involve their Finance Committee in ensuring that this is achieved. The Audit Committee can, independently, on the advice of the internal audit service, confirm this compliance.
  2. The Audit Committee should oversee the programme of internal audit and should receive reports from the internal auditor. The Audit Committee should report to the Governing Body that it has done this and whether it is satisfied on the extent of the compliance with the TRAC requirements. The Audit Committee may advise the Finance Committee (or other appropriate committee).
  3. TRAC reporting to the relevant Funding Council is made by the head of institution as accounting officer. He/she would satisfy him/herself that the institution has complied with the TRAC requirements, reassured by advice from internal audit. Depending on the committee structure and governance relationships, the Finance Committee or other appropriate committee should receive a report on the compliance and maintain a strategic overview of the development of costing and other financial management initiatives in the institution.
  4. To give the Committee assurance that the outcomes are ‘fair and reasonable’ it should also be provided with information on:
    • key assumptions, with a rationale that indicates that their use is fair and reasonable;
    • supporting evidence that shows that the cost drivers for the larger items of cost represent the use of or benefits from those resources;
    • the results of tests for reasonableness and other checks on the time allocation and cost attribution figures;
    • the results from the time allocation method.
  5. Management should present these to the Finance or other appropriate committee along with the information to be reported under TRAC. A reconciliation with the audited financial statements should be included as part of this.
  6. It is worth reiterating a key principle of TRAC requirements. Institutions are free to use alternative methods to those suggested in the costing standards, and discussed in the Guidance. However, to do this, they must be able to demonstrate that the information reported is at least as robust as that under the methods suggested in the Guidance.
  7. The Audit Committee (informed by the internal audit service) should satisfy itself that this is the case.

Chapter C.3 Internal audit

  1. Internal audit can provide assurance on the systems used for ensuring compliance with TRAC standards and minimum requirements, as set out in this Guidance. A review to assess the extent of this compliance should be built into their audit programme, which will be agreed by the Audit Committee. It should be undertaken periodically.
  2. It is not a TRAC requirement that external auditors scrutinise or audit the calculations or methods used.
  3. The internal audit programme should help to:
    • ascertain that accounting and other information is reliable as a basis for producing accounts, and financial, statistical and other returns;
    • ascertain the integrity and reliability of financial and other information provided to management, including that used in decision-making.
  4. The internal audit review should cover all TRAC systems, and in particular the annual TRAC process, and TRAC fEC. Any additional information included on a TRAC report (e.g. income allocation on the annual TRAC return) should also be covered.
  5. The internal audit review could be planned around the TRAC minimum requirements:

    principles and conventions

    annual TRAC

    income allocation

    indirect cost rate and estates charges

    TRAC fEC

  6. A full systems audit should be carried out every three years (the end of the second TRAC cycle relates to 2007/08 data and should be carried out before 31 January 2009). A full systems audit covers a review of the controls in systems designed to meet TRAC minimum requirements.
  7. Following assurance that new TRAC systems have been robustly introduced, or previous systems are operating effectively, the reviews should then be planned on an on-going basis following institutions’ normal risk analysis. This should be planned in the knowledge that a considerable amount of implementation of TRAC fEC will still be taking place up to 2007 – and that by 1 August 2007 full robustness should have been achieved. However, full implementation of TRAC fEC will only be possible by December 2009.
  8. The work to be carried out should depend on the institution’s view of:
    • the risks;
    • the controls and checks needed and those that are in place;
    • the tests of these controls and checks that are necessary to assess their effectiveness;
    • whether the methods being used are ‘tried and tested’ (e.g. described in the Guidance and in wide use in the sector) or developed and used by only a small number of HEIs;
    • the quality of TRAC project management during the development and implementation stages;
    • other objectives that the institution is seeking to satisfy, which rely on TRAC data or systems, e.g. pricing decisions and other internal decision-making.
  9. The particular risks to be considered under TRAC would include:
    • the risk of not reporting (perception of a poorly managed institution that is unable to provide information);
    • reporting results that are not robust (not in compliance with the costing standards) – and asking the head of the institution to underwrite these results;
    • the inability to provide information that would be considered to be sufficiently robust by external sponsors (loss of stakeholder confidence; potentially lower recovery rates on work);
    • using inadequate or misleading information for internal decision making;
    • implementation of an overzealous or inappropriate approach to implementation (including towards internal audit work in this area) – diverting institutional time from other priorities.
  10. The TRAC internal audit plan should be designed in a way that respects the principles which underpin the design of the TRAC requirements. These principles require the TRAC process to be minimally burdensome and as helpful to institutions as possible. Institutions are allowed flexibility in the systems and methods they use, and can improve and adapt the guidance within the overall standards and requirements set out.
  11. The methods should focus attention on important costs and do not require repeated measurement of factors which do not change year-to-year, or undue precision over small cost elements. Materiality is an important principle, along with recognition that there will always be elements of judgement in cost allocation.
  12. Audit does not require precise judgement in all areas. Several areas in costing involve judgement and discretion. Perhaps the most obvious of these is the allocation of staff effort, where even the most costly methods are not easily auditable in the sense of being externally verifiable.
  13. Modern approaches to audit relate to a judgement based on risk, materiality, and the appropriateness of the methods used, in other words, a normal systems-based audit. This can be interpreted to imply that the costs produced under TRAC should fairly represent the full economic costs of the activity. The principles to be adopted here are:
    • focusing particular effort on the most significant costs;
    • ensuring that the method is defensible and is signed by the head of institution as showing results that are commensurate with the real cost of the activities reported.
  14. The number of days required for these reviews will depend on several factors:
    • the risks identified;
    • the types of system being introduced;
    • the approach and level of assurance identified for the reviews;
    • the quality of the systems and project management arrangements found to be in place.
  15. The internal audit approach to TRAC audit is expected to rely largely upon management assurances, supported by limited testing, as opposed to carrying out detailed compliance testing.
  16. The internal audit process is in addition to external QA, and sponsors’ QA processes.

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

  1. 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.

  2. 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).
  3. 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.
  4. 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.

Chapter C.5 Sponsors’ QA processes

  1. Sponsors rely on the TRAC quality assurance procedures, and sometimes augment this with their own quality assurance procedures.
  2. The Research Councils operate a programme of dipstick testing – refer to their website accessible at Annex 1.
  3. OGDs and charities generally rely on TRAC and Research Council procedures to provide the required reassurance.
  4. The EU does not rely on TRAC procedures or systems. They operate various types of procedure on EU-funded Research, ESF and ERDF projects – see references to information provided at Annex 1.

Chapter C.6 Dispensation

  1. Institutions should always have regard to materiality. Some institutions’ volume of Research activity is not of a level that, taken with the sector as a whole, requires the same degree of verification and validation for either the annual TRAC process or TRAC fEC. Dispensation allows for this.
  2. Institutions with a Research income of less than £500k have dispensation on the testing and validation requirements. This means that although they should report costs, and meet TRAC requirements, they do not need to introduce a robust method of time allocation, nor a fully robust set of cost drivers. However, they may wish to use these for their own reasons.
  3. Research income is defined for this purpose as total income for publicly funded research activity (Funding Councils, Research Councils, OGDs), calculated as an average over the last five years.
  4. Institutions may wish to consider whether they actually want to take up dispensation, as it is likely that they will wish to use robust costing information internally. Funding Councils are also interested in the application of TRAC to costing Teaching. Although dispensations are currently allowed, this is likely to change as HEFCE develops a new funding method for Teaching (which is to be informed by TRAC).
  5. A dispensation does not mean exemption from annual TRAC reporting (Part III of the Guidance), or from the requirement to bid for research projects on an fEC basis (Part V). TRAC requirements still apply to these institutions. However, they do not have to use fully robust methods. This means that they do not have to:
    • obtain time allocation data from academics (heads of department could, for example, provide this information);
    • use more than four to six cost drivers as they allocate indirect costs;
    • identify space use across the whole institution (as opposed to just that used for Research);
    • commission a full systems audit;
    • calculate an indirect cost rate or estates charges;
    • meet any of the requirements required under TRAC fEC for 1 August 2007, specifically:
      • a robust calculation of FTEs
      • taking into account the type of space when allocating space costs
      • directly allocating laboratory technicians and research facility costs, separately from estates charges.
  6. Under TRAC fEC, institutions that are applying their right to dispensation do not have fully robust systems, and therefore:
    • should only apply the lower of their own indirect cost rate; or a dispensation default indirect cost rate, to research projects;
    • should only apply the lower of their own estates charge; or a dispensation default sector estates charge, to research projects.
  7. The dispensation default rates are set by the OST/Research Councils.
  8. The situation of institutions eligible for dispensation is therefore different from that of other institutions with higher levels of Research activity. More Research-intensive institutions without TRAC-compliant systems can only apply a non-compliant default rate for indirect costs. The non-compliant default estates charge for these institutions is zero.