JCPSG | TRAC Guidance

Part V - TRAC fEC

Section E: The fEC total

1. The full economic cost total for a project would have been built up using the methods described above. These costs should all be expressed in terms of the prices for each year that the work is being carried out.

Indexing to year one

2. Investigators should make a realistic estimate of the start date. There is room for improvement in this area. This will affect the fEC, and the price, perhaps materially.
3. Institutions should ensure that the year one costs (i.e. to be charged to the project in year one of its life) have themselves included appropriate indexation. Costs are often quoted to sponsors at year one price levels. However, indirect cost rates, estates charges and charges for other DA costs will initially have been calculated using historical data.
4. A reasonable assumption is for two years’ indexation to be applied to these historical rates when bidding for a research project. This is an average figure, and there will be swings and roundabouts in how appropriate it is for any one research project, but it could provide a relatively simple method of indexing to arrive at the year one rates to be used on any project.
5. (For example, projects bid for in 2005 will be based on 1 February 2005 rates that use 2003/04 data (i.e. 1 February 2004 price levels). These rates are to apply from 1 February 2005 to 31 January 2006. It could be assumed that projects bid for over this 12-month period actually start six months after application. That means that the average mid-point of year one for these projects could be 1 February 2006. This would imply that a two-year indexation of the 1 February 2005 rates is reasonable.)
6. A more detailed calculation could be made, based on the specific (likely) start date of each project, coupled with information that will be available from the Research Councils about their indexation practices. However, this would be complicated and need not be done unless institutions wish to. The two-year indexing assumption for indirect cost rates and estates charges is an acceptable basis for TRAC.
7. In order to arrive at year one rates, an institution should apply the indices that it is using in its planning processes – e.g. those used for their financial forecasts reported to their Funding Council.
8. The salaries quoted at year one prices for investigators should include an element to recognise promotion/increment drift over the life of the project. This was covered above.

Indexing for future years

9. A realistic profiling of costs should be made to ensure that indexing (whether done by the sponsor or by the institution) and therefore the fEC, are appropriate. This applies to all elements of cost in the fEC: DI, DA, and indirect costs.
10. This will help to ensure that the fEC-based prices are appropriate and will give an institution valuable information about the level of the price and the fEC (and therefore their possible contribution). It will also allow standard journal entries to be set up on the accounting system so that future year’s postings of PI costs, estates, and other directly allocated costs such as equipment, can be made easily, at the right price levels.
11. The profiling can, however, be made over the years that the sponsor will be funding the project. This may be a shorter time period than the elapsed period that that the project will actually be ‘live’. Profiling can be made on a linear basis, but it is good practice to profile costs (including PI costs) according to the year they are expected to be incurred. Indirect costs and estates costs could again be spread in a linear fashion, or across years according to FTEs in each year (the latter method is good practice).
12. Pay increments for Research Assistants should be included. These could be based on one spinal point increase each year. Pay increments for Investigators are included when indexing to year one.
13. Indices should then be applied both for pay and non-pay, in accordance with Funding Council planning guidelines, to allow the costs to be expressed in future year’s prices.
14. Institutions can use their own assumptions on indexation rates and cost profiling of costs. Indexation dates could for example be a 12-month period calculated: from the expected start date of the project; or from 1 April each year; or from 1 August each year. There could be separate dates for pay awards. This is an institutional decision; but it is good practice (and less burdensome) to use one method for all projects.
15. It is good practice for an institution to use the same price indices and pay awards as those used by the institution in its internal planning and forecasting.
16. However, the Research Councils will be asking for costs based on year one price levels and will then be using their own indexing methods. Institutions may find it easier to replicate these, if published – see Research Council DSR website accessible at Annex 1.

Project cost form

17. The fEC for each project should be summarised on a project costing form. These should show:
    • the fEC of the project;
    • the funding being proposed (calculated according to the pricing methods applied by each sponsor);
    • the difference between fEC and funding - this will show either a surplus, or a balance of costs to be covered by institutional funds from other sources.
18. Two examples of project costing forms are given in Annex 19.

Use in pricing

19. The fEC calculated under TRAC should be used as the basis for cost-based pricing for public sponsors such as the Research Councils and OGDs. Refer, for example, to the OST and Research Councils websites, and the H M Treasury letter accessible at Annex 1.
20. The fEC as calculated under TRAC should not be either over costed or argued down. Institutions should not build discounts or subsidies into any of the costs shown on a project when calculating prices on a fEC-basis, with the sole exception of differences that might arise from different profiling and indexing assumptions (see indexing, above).
21. Negotiations with funders who are funding on a fEC-basis should take place only on the:
    • time input of academic and research staff
    • grade of academic and research staff, and the named individuals
    • levels of technical and secretarial (and other non-academic) FTE input recorded as a DI cost
    • levels of directly incurred non-staff costs
    • use of major research facilities.
22. For these items, negotiation would form part of the estimating process, with the relevant Research Council panel members considering what resource is, in the case of the Research Councils, needed to achieve the desired outcomes. They would refer to the case for support, justifying the costs, that was submitted along with the research costing form. The result of this negotiation would impact on the budget and the fEC for these items. It is good practice for all negotiations to involve representatives of their institutional finance department (or research services unit) and be signed off by an appropriate administrative authority.
23. However, negotiations with funders who are funding on a fEC-basis should not take place on pay bandings, estates charges and costs, DA laboratory technicians’ costs, charge-out rates for major research facilities, and indirect cost rates and costs.
24. Once agreed, amended levels of resource inputs should be used to recalculate the fEC.
25. When estates charges are being applied to projects on a £/FTE basis, then this basis should be used consistently through any pre-award adjustments. If the estimates of RA or PI time on the bid change during pre-award discussions, then the estates costs charged to the project should reflect this. Indirect costs should also reflect this.
26. If another charging basis is used for estates costs (e.g. square metres used by a project) then the level of these costs should be reviewed if the time estimates alter, pre-award. They may, or may not, then require adjustment, depending on the needs of the project.
27. Some sponsors require different costing and verification methods on a project, for example the EU, ESF and the US Government. It is good practice for institutions to use common costing methods, in accordance with TRAC, on all projects irrespective of funder. However, instructions and calculations used to determine the price of a project will differ by sponsor.
28. The breakdown of the fEC, by type of cost, will normally be required for funders paying on a fEC-based method. If other market-based pricing approaches are used, then it would generally be inappropriate for a full breakdown of the cost to be provided. The calculated costs will provide useful information about acceptable minimum pricing levels. Negotiations, however, should be in terms of inputs and outputs, and costs should not be disclosed.
29. When negotiating, institutions should remember that the fEC is not (yet) a comprehensive economic cost:
    • buildings costs in the fEC may be understated (as the useful life assumed in the calculations, based on institutions’ accounting policies, may not fully take into account the major restructuring costs required during that life);
    • the full costs of equipment are not included (replacement costs are not currently being included in the fEC, neither are costs for equipment initially purchased through a research grant or otherwise fully written-off in the books);
    • the costs will not include time of staff provided to the institution at no–cost (visiting fellows, retired academics, equipment donated by industry, etc.).
30. Prices that are not fEC-based should generally be based on the market value of the work. This will usually result in prices that are greater than the fEC, unless the institution makes a conscious decision to cross-subsidise such commercial projects. Guidance on pricing is available in two JCPSG publications – see Annex 1.