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Establishment of Billing Rates
Service centers bill based on actual usage. The first step in establishing billing rates is to determine the basis for the billings (billing unit). For example, a service center could bill per test, per hour use of a piece of equipment, per labor hour, etc. A service center should choose a billing unit that has a direct relationship with the cost of providing the service. It also should be practical to track this billing unit in order to create bills and support rate calculations.
Service center billing rates per billing unit should be set at a level designed to recover no more than the cost of providing the service. Therefore, the rate calculation is basically an estimate of the operating costs of the center, adjusted for any prior surpluses or deficits, divided by an estimate of the number of billing units. Basing rates on prevailing market rates, rates used at other institutions, or any other method not based on projected costs and volumes is not allowed. As part of the initial proposal and once a year during the operation of the service center, the service center must submit a proposed rate structure to Cost Analysis and Studies. This rate structure will depend on the type of goods and/or services the service center is providing. There are three basic types of service center operations:
- Retail Operations
- Suppliers of Standardized Services
- Suppliers of Specialized Services
Although most services should be able to be costed according to one of the above models, if these models do not work for your service, contact Cost Analysis and Studies for assistance.
Types of Rate Structures
Retail Operations: Retail operations resell goods to internal users. Since the cost of each product identified for sale is known, the rate (i.e., sales price) is determined by adding a markup to the cost of the item. The markup covers the operating costs (i.e., stock room clerk, twine) associated with selling the item. The markup could be calculated based on the cost of goods sold or based on the number of items sold. This determination should be based on what is most equitable. The formula to calculate the markup is as follows:
Based on the cost of goods sold:
Markup % = Estimated Operating Costs / Estimated Cost of Goods Sold
Based on the number of units sold:
Markup per unit = Estimated Operating Costs / Estimated Number of Units Sold
See Appendix B for an example of a rate schedule for retail operations.
Retail operations may not sell to external parties. Doing so may violate the University's purchasing contracts with external vendors. Also, this type of activity will generate unrelated business income and possibly the need to apply sales tax.
Supplier of Standardized Services: Standardized services do not vary significantly from customer to customer. An example may be a month of telephone service or a simple laboratory test. These types of services are more equitably and practically charged out based on a unit of service basis. In the previous examples, a unit of service would be a month of telephone service or a laboratory test. The basic formula to calculate rates for standardized services is:
Rate per billing unit = Estimated Operating Costs / Estimated # of units to be provided
See Appendix C for an example of a rate schedule for standardized services.
Supplier of Services Billed Through Time and Materials: Some services require varying levels of time (personnel and/or machine) and varying levels of supplies to supply the service to different users. An example of this may be a machine shop that fabricates unique pieces of machinery for various users or provides repair services. Another example may be a highly complex laboratory test requiring varying configurations for each client. These types of services are more equitably and practically charged based on a time and materials basis. In this type of billing, materials and supplies that can be identified to each job are charged to that job. The cost of personnel and other costs that cannot be identified to a specific job are recovered through the use of an hourly rate for personnel or machine time.
See Appendix D for an example of a time and materials rate schedule.
Other: If the service your service center is providing does not fall into one of the previous categories, please work with Cost Analysis and Studies to develop an appropriate rate schedule.
Providing Multiple, Related Services
Service centers may provide a single service or several related services. Related services have similar customers, use similar techniques, and/or use similar equipment. When several services are performed, an allocation of the costs of the service center to the various services is required to calculate rates for each individual service. For each line of cost, there should be an allocation methodology employed to allocate that cost to the services to which it is associated. For example, salaries and benefits may be allocated based on an estimate of the percentage of effort each person will spend providing each service, while the depreciation on a piece of equipment may be allocated based on an estimate of the number of hours each service will use a piece of equipment. Some costs may be specifically identified to one particular service and other costs may have more than one service. Once all of the estimated operating costs are allocated to each service, a separate rate calculation should be performed for each service.
It is not appropriate to subsidize one service with the billings from another service. All services should be priced according to their costs.
Unrelated services that do not share significant costs should be set up as separate service centers.
See Appendix E for an example of a rate schedule for a service center providing multiple, related services.
Estimating Operating Costs
For established service centers with a history of costs, operating cost estimates should be based on historical costs adjusted for inflation and expected growth or decline.
Service centers without a history should build an operating cost budget based on expected needs. Development of operating cost budgets should follow the policies outlined in the "Collection of Costs" and "Equipment" sections of this manual.
Estimating Usage (Volume)
For established service centers with a history of operations, usage estimates should be based on the service center's previous experience adjusted for expected growth or decline. Significant projected increases or decreases in volumes should be explained.
Service centers without a significant history on which to base usage projections should document their assumptions in determining the projected volume and include those assumptions in the rate proposal submitted to Cost Analysis. A common method would be to determine the maximum capacity of the service center and reduce that maximum volume for known non-productive time. For example:
A consulting cost center that was recently established charges users by the hour. It has one employee at 1.00 FTE working on the center. Available hours are used to calculate usage.
|Maximum hours available||2080||40 hours/week x 52 weeks|
|Less: Holidays||(88)||11 days paid x 8 hours/day|
|Less: Vacation and Sick||(120)||10 hours/month x 12 months|
|Less: Non-productive hours (downtime for machine setup, etc.)||(390)||1.5 hrs/day x 5 days/wk x 52 wks|
|Expected Usage||1482 hours|
Considering Prior Years' Cumulative Surpluses/Deficits
After estimating your operating costs for the next year, the previous years' cumulative surplus or deficit needs to be taken into consideration. Since service centers are designed to recover their costs over the long term, future rates should be increased to cover deficits and future rates should be decreased to account for previous surpluses. After estimating operating costs, prior deficits should be added to operating costs and prior surpluses should be deducted from operating costs before calculating rates.
Service centers can retain a surplus balance up to the value of 90 days of expenses to allow for fluctuations in revenues and expenses that will happen in the normal course of business. Therefore, if the surplus balance in the service center chartstring is less than the value of 90 days of expenses, no offset needs to be made in the rate calculation.
Large deficits may not be able to be absorbed by future rate increases. For the appropriate treatment of this situation, please see the section "Review Procedures."
Final Rate Determination
The rate calculation may be rounded to allow for easier billing calculations.
If it is determined that the actual rate calculation is too high and cannot be supported by the current customer base, the service center may set a lower rate. This means that the service center is projecting to run a deficit. Annual rate proposals submitted with the expectation of running a deficit should be approved by the department chair and the Dean's Office. For more information regarding the treatment of this situation, please see the section "Treatment of Deficits."
It is not appropriate to set a rate higher than the calculated rate to build up a "reserve." Rates can only be set to cover the expected costs of providing the service.
Setting Animal Care Facilities Rates
Rates for animal care facilities should be calculated according to the NIH National Center for Research Resources' (NCRR) Cost Analysis and Rate Setting Manual for Animal Research Facilities (CARS). This is available at http://www.ncrr.nih.gov/publications/comparative_medicine/CARS.pdf
Annual Rate Approval Process
On an annual basis, a rate calculation package should be sent to Cost Analysis and Studies for approval. This package should contain a rate calculation sheet as well as a final rate sheet that could be posted to advertise the new rates for the coming year. Rates are set for the period Jan. 1-Dec. 31. Rate calculations should be based on the prior fiscal year's (July 1-June 30) results. Cost Analysis will review the rate calculation to determine:
- Are all costs included in the operating costs allowable costs?
- Are prior period surpluses/deficits taken into consideration?
- Was the appropriate amount of depreciation expense included in the rate calculation?
- Are the estimates of operating costs reasonable?
- Are the estimates of billing volumes reasonable?
All rate packages should be submitted to your Dean's Office no later than Oct. 1. The Dean's Office will forward the rate packages to Cost Analysis and Studies no later than Nov. 1 in order to allow for review and approval of the rates for the next calendar year. Rate packages should disclose any changes in the operation of the service center since the last submission to Cost Analysis (billing procedures, new services, new location, etc.).
Mid-Year Rate Changes
If circumstances (sales volumes or costs) change significantly or if the estimates used to calculate the rates are significantly different than reality, the rates should be adjusted mid-year. A new rate calculation and rate sheet should be sent to the Dean's Office and then to Cost Analysis for approval.