Effective costing and pricing approaches

The pressures for universities and colleges to change the way they work have continued under the coalition government. Higher education institutions are preparing for a new fees regime against a backdrop of severe cuts and must get used to receiving less government money.

Accurate costing is a key management tool. Institutions must know and understand the costs of their activities in order to make informed decisions about how they price their learning and teaching programmes – of crucial importance with the advent of the new fees structure from September 2012. Institutions are also keen to explore opportunities for new sources of funding and it is essential that cost models are consistent and robust. Institutions need to know and understand the full costs of work – such as consultancy – that is intended to be charged at a surplus.

A transparent approach
In higher education, costing and pricing methods for research and subsequently teaching, have developed around a process called ‘transparent approach to costing’ (TRAC). Supported by the UK funding bodies and the British Universities Finance Directors’ Group Costing and Pricing Group, this initiative has aimed to develop and embed consistent costing and pricing methods that will ultimately integrate with decision-making on financial and academic issues at institutions.

Research carried out by higher education institutions is funded on the basis of the ‘dual support’ system. There are two elements to this. Firstly, there is the block grant provided by the funding councils, which pays for core staff and physical infrastructure such as buildings and facilities. Then there is funding for research projects provided by sponsors such as research councils and charities.

Prior to, and the catalyst for, the development of TRAC, the dual support system became significantly imbalanced to the point that the infrastructure was at risk of not being able to support the growth in commissioned research.

The faster growth in project-related funding relative to growth in the block grant of core research funds put considerable strain on the sustainability of institutions’ research activity and infrastructure.

Contributing to this situation was the absence of robust cost data on which informed business decisions could be made about research strategy and individual projects. This in turn led many institutions to underestimate the costs of research and other projects. In practice, much research had been charged for at a level well below its full cost. This situation was unsustainable.

Trac objectives
In response to these concerns, the ‘Transparency Review’ was established by the government following the 1998 comprehensive spending review in order to develop a better understanding of the shortfall in funding across all university activities, and to ensure a greater level of accountability for public funds. As part of this, the first TRAC process was introduced and taken forward by the sector-wide Joint Costing and Pricing Steering Group (JCPSG).

Over a decade TRAC has become the standard method now used for costing in higher education in the UK. TRAC allows all of the costs of the institution to be analysed and attached to activities. It has four principal objectives:

1. to provide consistent and robust information about the cost of activities to assist institutional planning and management
2. to provide a basis for the pricing of activities
3. to meet the requirement for accountability, particularly for the use of public funds, when the institutional portfolio includes a complex mix of activities
4. to provide at both institutional and national level an appropriate and comprehensive cost model to guide investment for the future.
TRAC meets these disparate requirements through a common costing and data platform and common processes and systems as far as this is possible.
The main TRAC processes and outputs used by higher education institutions are summarised in Figure 1.
An overview of the cost attribution process is shown in Figure 2.

Requirements
While there is no standard TRAC method (or software), there is a set of mandatory standards to be achieved by institutions, and these are expressed as the TRAC Statement of Requirements. Institutions assess their compliance with TRAC guidance against these minimum requirements.

The costs covered by the annual TRAC process are taken from the institution’s annual accounts, plus two cost adjustments. Firstly, an infrastructure adjustment for buildings to reflect the full long term costs of maintaining the institution’s infrastructure in a safe and productive state. Secondly, there is an adjustment for the return for financing and investment (RFI). This covers the surpluses required for rationalisation, redevelopment and investment and also the costs of raising and servicing capital including short-term borrowing.

Staff time needs to be attributed to activities, using a robust method, which then allows other costs to be attributed. For some staff this is relatively easy (for example, staff who work in a research office or teaching-only academics).

There has been much debate about the appropriateness and practicality of attributing academic staff time to activities. TRAC allows a range of methods to be used in academic staff time allocation as long as they meet the requirements for robustness – all academics must provide information covering all periods of a year within a three year cycle. Information must be recorded by activity, including by the main research sponsor groups.

A National Framework
Having implemented the TRAC methodology, institutions have established the full costs of their research at project level and are using this information to inform cost recovery and pricing strategies for all sponsors of research. The government has accepted that TRAC is a robust costing method and TRAC is used to inform national funding policy. A National Framework for costing teaching in English higher education institutions based on the TRAC principles has also been developed. TRAC for teaching or TRAC(T) is being used to cost the main funding council funded teaching at subject level with the aim of informing the public funding of teaching.

TRAC specifies standards, principles and conventions that must be used by higher education institutions when costing. The base figures are the audited accounts of institutions; and there are defined sets of minimum mandatory requirements to ensure that costs are fair and reasonable, and are calculated in a consistent manner across the sector.

The use of TRAC costing information within the higher education institution is expanding and has other applications. For example, TRAC EC-FP 7 is an optional costing application which can be used by institutions with European contracts. Over the next few years it will be a key management enabling tool to support institutions make important decisions regarding their teaching and research activities in the changing financial climate.

For more information
Web: www.jcpsg.ac.uk