JCPSG | TRAC Guidance | Part II TRAC Principles

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

The main costing conventions are:

Chapter B.3 Principles and conventions

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