Corresponding with:

OSR Policy 900.1 Research Service Centers

Procedure Statement

The University administers Research Service Centers (“RSCs”, “cores” “recharge or service centers”) in accordance with federal costing standards, State of North Carolina and University policies and procedures. RSCs are created, operated and administered by University schools and departmental business units with central review and oversight from the Office of Cost Analysis and Compliance in the Office of Sponsored Research (“OSR”). Cores may also be subject to additional policies and procedures at the discretion of the governing/administering school or college.

Forms/Instructions

Rate Development

The break-even direct cost rate is determined by relating total estimated annual direct cost and total estimated annual usage (or output) as follows:

break-even direct cost rate = total estimated annual direct cost / total estimated annual usage (or output)

Direct Costs are those costs that can be identified specifically with the operations conducted by the recharge activity or can be directly assigned to the recharge activity relatively easily with a high degree of accuracy. Costs normally treated as a direct cost to a sponsored agreement as set forth in the UNC-CH Cost Disclosure Statement – scroll down to Section 2.1.0 Continuation Sheet beginning on page II-5 are generally considered direct costs for a research service center.

Indirect (or F&A) Costs are incurred for common or joint objectives and cannot be identified readily and specifically with a particular RSC or core facility. Examples include clerical and administrative salaries, general office supplies and building maintenance. Indirect costs are also referred to as Facilities and Administrative (F&A) costs. Under most circumstances, these costs should not be budgeted in determining RSC break-even direct cost rates, nor should these costs be direct-charged to the RSC account.

An internal and an external rate are generally established for each service provided. The break-even direct cost rate is the key basis for establishing both internal and external rates as described below:

1a. Internal users (includes sponsored agreements) are generally charged the break-even direct cost rate. This rate should include all the appropriate allowable direct costs associated with providing the service. Examples include personnel costs (salary & benefits) of individuals expending effort directly in creating the output of the service center; materials and supplies used directly to produce goods or services; cost of maintenance contracts and repairs of equipment used in the service center to produce goods or services; equipment depreciation under certain circumstances and other costs that can be accurately measured to the extent they directly benefit the research service. No internal user or sponsored agreement should be charged less than the break-even rate unless the subsidy (or discount) is funded from another source as described below in 1b.

1b. Internal users may receive a discounted rate when the subsidy is administered to pre-identified groups on a consistent and reasonable basis, and the subsidized portion of the break-even direct cost rate is charged to a prescribed and appropriate funding source when services are invoiced.

2a. External Users – Research Service Centers are established primarily to meet the needs of the Carolina research community. However, circumstances may exist whereby the external research community can benefit from services provided by the recharge center as well. The external community is comprised of entities that are governed and administered independently from the University of North Carolina at Chapel Hill including UNC Hospitals, UNC General Administration and its other constituent institutions, other institutions of higher learning, state and local governments, non-profit organizations and commercial enterprises. External users are charged the higher of the prevailing market rate (when a market exists) or the internal break-even direct cost rate plus the current negotiated on-campus organized research F&A rate effective at the time services are provided.

2b. External research collaborators may receive support from a UNC-CH core facility when such support is allowed under the core sponsor’s terms and conditions, so directed by the core’s lead investigator, and the external collaborator support program is administered in accordance with A-21 cost accounting standards (CAS). Under these circumstances a discount may be extended to the external collaborator/core associate provided that the subsidized portion of the break-even direct cost rate is charged to a prescribed funding source and the appropriate portion of indirect cost is added when services are invoiced.

Establishing the Operating Account, New Rates and Rate Revisions

RSCs are required to have a separate financial system account to charge fees to users and obtain reimbursement for services. A formal proposal must be submitted to the OSR director of cost analysis and compliance for institutional approval to create an account and to establish new rates and revisions. Proposal submission materials are located on the OSR web site. Information submitted in proposals is reviewed to ensure sufficient and complete information is provided to document costing compliance with federal regulations (i.e. break-even cost rates in accordance with patron usage) and rate amounts for all user groups. Proposals require:

  1. Information related to key contacts and management personnel, moveable equipment, space resources, funding subsidies and patrons using core services.
  2. A description of all services to be provided and rates to be charged. Calculate a separate rate for each category of service when there are different costs or different user populations for multiple services.
  3. An annual operating budget documenting all direct costs by object code specifically identifiable with Core operations, including salaries and benefits of technical and other staff who directly provide effort to create core goods and services or in sole support of the recharge center, direct materials needed for jobs, cost of contracts to maintain equipment in operating order, equipment lease or rental costs, repairs, machine and lab supplies and other direct expenses. Unallowable costs must be specifically excluded from the service center direct cost budget (entertainment, bad debts, non-recruitment advertising, public relations, alcohol, etc.).
  4. Total budgeted direct cost for each object code must be distributed to the proposed rate or service category that the cost item benefits, accurately reflecting the causal and beneficial relationship between the budgeted cost, proposed service, and fee to be charged. If the cost item benefits more than one service, this process requires specific identification of the cost to the service, or at minimum, utilization of a reasonable allocation methodology which accurately measures the causal and beneficial relationship between the budgeted cost and proposed service category with a high degree of precision. The allocation basis that achieves this result depends on the circumstances and cost benefit relationship of the specific activity. Examples of allocation bases that may be appropriate include effort, usage and statistically valid cost drivers such as costs or square footage.
  5. Estimated usage or output for each service (such as number of units). All usage must be accounted for and included in the distribution across service category. Once the initial operating account is established and charges to patrons commence, usage estimates for ongoing services presented in periodic rate review proposals to OSR should be supported by historical use logs.
  6. Calculate direct-cost based rate for each service and determine any other rates (subsidized, external, market, etc.) for each service or user group as appropriate under the proposal.
  7. Include supporting information, usage logs, objective calculations and other documentation to support rate and costing compliance.
  8. The proposal should be signed by the responsible department chair, dean of the school, or director of the center or institute and provide a default account as a guarantee to cover operating shortfalls. In the event deficit funding is required, OSR will consult with the school or college to identify the actual source of deficit funding.

Forward proposals to: Trent Riley; Office of Sponsored Research; Campus Box 1350 (or by email to: trent_Riley@unc.edu). If the proposal is for a new account the OSR will request the RSC account from the Accounting Services department when the proposal is approved, and will notify the department that the account has been established. If the proposals is for review of an established RSC account OSR will provide updated documentation to Accounting Services and advise the department to commence using new approved rates.

Administering Ongoing Operations

When a new service center is established, the direct-cost use charge is estimated using the best data available at the time, and the initial rate may be too high or too low. The goal is to establish an internal use charge that recovers total direct cost over the operating cycle. Accordingly, the operating unit and the academic administration should review new account fund balances frequently to determine if rates are appropriate. With appropriate monitoring, departmental management will continue to improve its understanding of the service center’s cost structure and relevant cost-benefit drivers. Moving forward the variance between budget estimates and actual historical cost will be reduced.

Maintain a log system to record all equipment usage and Core output. Equipment and output logs provide key historical statistics and an internal control to ensure that every unit has been appropriately billed and accounted for. The Core should reconcile activity monthly and ensure all use and services rendered are accounted for and charges processedin accordance with the OSR-approved rate schedule. Equipment use and output logs should be submitted to OSR as part of the periodic review.

Ensure timely payment of costs to recognize expenditures incurred to operate the service center and processing of billings and collections to realize revenues. Ensure all services and output are accounted for and invoiced to patrons per the OSR-approved rate schedule. Monitor financial activity, resulting fund balance trends and reconcile timing differences to ensure rate compliance and break-even operating results (see Fund Balance and Periodic Review Requirements in the Special Costing Issues section of this procedure).

All allowable direct operating expenditures should be recorded in the subsidiary ledger (SL) operating account and revenue from all sources should be recorded in the general ledger (GL) operating account. Federal auditors are primarily interested in operating accounts to determine if federal funds are being used to subsidize other users through inflated rates. Track any conceptual surpluses generated from depreciation and external revenue components (see the Special Costing Issues section of this procedure) in approved rates in order to reconcile and determine actual fund balance surplus or deficit. Book fund balance must be reconciled to determined actual fund balance in order to make appropriate rate adjustments. Under normal operating conditions, if a significant surplus occurs in the GL operating account the use rate may be too high; if the account goes into deficit, the use rate may be too low.

Internal Revenue– Record internal revenue at least monthly in the university accounting system. Billings should be supported by sufficient documentation to identify each charge. Keep adequate records to support the number of hours or other measure of services and/or output which form the basis for customer billings. Internal use charges to patrons are normally credited to the general ledger operating account object code 0506 (Sales Intra University). Please call OSR or Accounting Services if you have any questions about the appropriate object code to use for recording internal revenue.

External Revenue– Please refer to the required special monitoring and documentation procedures for external revenue located in the Special Costing Issues section of this procedure.

Invoice users external to UNC-CH no less frequently than monthly at approved external rates. Invoices for external use should specify a “due date” no more than 30 days from invoice date. Deposit payments with the Student Accounts and University Receivables Office using the Departmental Deposit System or Daily Cash Transmittal Report. Credit external revenues to the general ledger operating account object code 0599 (Other Outside Sales).

Accounting Services Policy 20 specifies that accounts receivables should be billed monthly and a “concerted effort should be made to collect all accounts…unpaid billings due the University should be turned over to the Attorney General for collection no more than 60 days after the date of the billing.” For help with collections from external entities, please contact the Accounting Services Cash Management Office.

Uncollected external revenue is the responsibility of the departmental unit. The original revenue transaction must be reversed and charged to a departmental account. The cost of uncollected revenues cannot be charged to or absorbed by other patrons.

Submit Proposals to OSR to Fulfill Federal Periodic Compliance Review Requirements– Notify OSR when use charges should be revised and forward the rate materials, including the proposed new rate schedule, for review. For assistance developing use charge rates or if you have questions regarding operating procedures please contact Trent Riley at 962-6632 or trent_riley@unc.edu.

Special Costing Issues

Capital Equipment and Equipment Depreciation– Capital equipment is defined as equipment with an acquisition cost of $5000 or more and a useful life of more than one year. The cost of capital equipment may not be included in Core rates. However, under certain circumstances, equipment depreciation may be included in Core rates. There must be an OSR-approved depreciation component in the service center rate structure in order for conceptual depreciation fund balance reserves to be generated. Service center management must maintain a strict accounting of the operating surplus generated from charging the depreciation component of the approved rate. Depreciation surplus is a reconciling item in analyzing financial system fund balance to determine if the operating account surplus or deficit exceeds the allowable 90 day threshold. When the Core operating account has accumulated sufficient depreciation reserve funds and the operating account is not otherwise carrying an excessive deficit, the depreciation reserve portion of the operating account may be used to purchase capital equipment. Depreciation reserves must be used solely to purchase capital equipment.

The depreciation component of the service center fee is documented when rates are reviewed and approved. The use of generated depreciation reserves to purchase capital equipment must be approved in writing by the OSR in advance of the purchase. Surplus operating account fund balances that are not generated by an approved depreciation rate component may not be used to purchase equipment.

Capital equipment purchased with sponsored funds may not be included in service center rates. A Core may include annual equipment depreciation in the break-even rates when all of the following apply:

  • The equipment is tagged and accounted for by University asset management.
  • The annual depreciation amount is in accordance with the University schedule of annual depreciation.
  • The equipment was not purchased with sponsored funds.
  • The equipment item is used solely (100%) by the Core or a use log is presented with the fee proposal documenting historical use by the service center that accurately supports the fractional use proposed.
  • There is a method of allocating the annual depreciation amount to benefitting activities/services with a high degree of accuracy.
  • Department management accepts responsibility to set up, generate, monitor, and account for the equipment reserve portion of the fund balance. The conceptual surplus generated from charging for depreciation must be tracked as a separate reserved portion of the fund balance.

External Revenue– Departmental management must observe special monitoring and documentation procedures when carrying out transactions with external parties. External revenue is comprised of two components, the break-even portion of external revenue and the above-cost portion of external revenue. Both components of external revenue must be monitored and separately documented by the operating unit.

1. The break-even portion of external revenue is defined by the applicable internal rate multiplied by the quantity of service output supplied to the external patron:

break-even external revenue = approved internal rate X quantity supplied

2. The above-cost portion of external revenue is determined by multiplying the quantity of service provided to the external customer by the difference between the approved external rate and the applicable internal rate:

above-cost external revenue = (approved external rate – internal rate) X qty. supplied

Both the break-even and above-cost components of external revenue must be documented by the operating unit in order to appropriately monitor financial compliance and reconcile fund balance for rate adjustment purposes. When a service center is consistently establishing internal rates that through ongoing operations reimburse its total break-even direct costs in all material respects as determined by OSR, the above-cost portion of external revenue will generate a conceptual external revenue general ledger operating account surplus. External revenue general ledger operating account surplus is not subject to rate carry-forward adjustments and can be set aside to be used by management solely for the benefit and improvement of service center operations.

Fund Balance and Periodic Review Requirements– Fund balance is the working capital financial position of the service center. Book fund balance is provided as a line item of the general ledger operating account (GL operating account) in the university accounting system at any point in time. Disregarding any funds transfers in or out of the general ledger operating account, book fund balance is the difference between recorded revenues and expenditures from the time the account was first established to the present:

book fund balance = posted revenues – posted expenditures

A GL operating account surplus is identified by a credit fund balance. Surpluses are generated when revenues exceed expenditures over time. A GL operating account deficit is identified by a debit fund balance. Deficits are generated when expenditures exceed revenues over time. Cores should not accumulate large surpluses or deficits. Federal regulations specify that rates should be established to achieve a break-even operation over an operating cycle, usually one year.

Once a research service center account has been established and operations have commenced, Core management should monitor transactions and operating account fund balance to ensure the operation is breaking even over time. Break-even is achieved when the operating account’s fund balance results in zero after all outstanding revenues and outstanding expenditures have been recorded and posted to the financial system as of a given point in time.

Since RSCs are going concerns that conduct operations on an ongoing basis, it is not practical to stop operations to allow time for all completed revenue billings and all committed expenditure outlays to be processed and posted to the financial system in order to determine the GL operating account’s actual fund balance. The delay of time between when revenues are earned and when they are realized (i.e. posted to the GL) or when expenditures are incurred from when they are recognized (i.e. posted to the SL) is a financial concept referred to as timing differences. Accordingly, book fund balance must be adjusted for timing differences in order to reconcile book fund balance to actual fund balance.

In addition, any external revenue or depreciation components contained in approved service center rates will cause a planned surplus fund balance to be generated because an off-setting expenditure for the depreciation component is not recorded in the GL operating account, and the above break-even portion of the external rate is an added component of the external rate that by definition exceeds actual direct cost. Therefore, in addition to timing differences, book to actual fund balance reconciliations must include adjustments for external revenue or depreciation if these components are in approved rates.

Actual fund balance is defined as book fund balance that has been analyzed and adjusted as of a selected cut-off date for timing differences (such as unbilled sales, prepaid supplies and unpaid invoices) and any equipment depreciation or external revenue reserves contained in book fund balance that have been conceptually generated from approved rates.

actual fund balance = book fund balance (+ or – timing differences) – conceptual reserves

Periodic oversight should include a review of actual fund balances and billing rates to avoid the accumulation of unallowable surpluses and deficits.

Fund Balance Ratio and Days of Working Capital Requirements– Actual fund balance should not exceed 90 days of working capital (or 25% fund balance ratio) surplus or deficit as determined by multiplying the fund balance ratio by 360. To calculate days of working capital, first determine the fund balance ratio (stated as a percentage):

fund balance ratio % = actual (reconciled) fund balance / average annual expenditures

Next calculate days of working capital (stated in number of days):

days of working capital = fund balance ratio X 360

Reconcile the fund balance and calculate the fund balance ratio and days of working capital regularly. Actual fund balance should be essentially zero after allowing for timing differences (such as pre-paid replacement parts or planned unpaid service, unpaid billings, etc.) and reserves. Pay particular attention to actual surplus and deficit fund balances and the trend. Understand the cause of the trends, whether the fund balance can be explained by timing differences, conceptual reserves generated from depreciation or external sales, if approved rates are too low to reimburse costs or approved rates are too high and generating excessive surpluses.

Operating units should implement rate adjustments by submitting a proposal to OSR for rates review and/or modification at least every two years (biannually) and more often if necessary, before the actual fund balance surplus or deficit consistently exceeds 90 days of working capital (or a 25% fund balance ratio). In addition, OSR reviews Core book fund balances periodically. If the GL operating account has a surplus or deficit book fund balance that is consistently greater than 90 days of working capital, OSR may request that an interim proposal (between bi-annual review periods) to modify rates be submitted for review and carry-forward adjustments. During OSR reviews, a fund balance ratio of 10% surplus (approximately one month of working capital) is generally targeted when establishing new rates to eliminate excessive surpluses or deficits.

An excessive surplus fund balance is eliminated by reducing current rates in future periods or crediting over charges back to users. An operating account fund balance surplus may not be reduced by purchasing equipment or incurring other expenditures which would not be reasonably expensed in normal operations.

An excessive deficit fund balance is eliminated by increasing rates in future periods, back charging users or charging the default or other designated department account.

Other Compliance Requirements

Conflict of Interest and External Professional Activities for Pay– Policies and procedures must be observed by all employees performing activities associated with a research service center. Questions should be directed to the Research Compliance Program at 843-9953.

Value of Year-end Inventory and Accounts Receivable– The University’s annual financial statements must be prepared in accordance with generally accepted accounting principles. Therefore any units that have unrecorded accounts receivable or normally carry or anticipate having on hand at the end of the fiscal year a two month or greater prepaid supplies or commodities inventory, must contact the Accounting Services Department (emily_coble@unc.edu) to arrange fulfilling year-end financial reporting requirements.

Unrelated Business Income (UBI) from External Revenue– The University is required by the Internal Revenue Service to monitor and report unrelated business income. Units conducting relationships with outside parties to generate external revenue should complete and submit the questionnaire developed by the Controller’s office for that office to review and determine if UBI exists.

Percentage of Effort– The amount of salaries for any employee charged to the recharge SL operating account must be commensurate with that individual’s percentage of effort expended in direct support of the RSC.

Document Retention– Document all operating activities and usage and maintain records for 5 years to support expenditures, billings and transfers. These records include:

a. Documentation on how the rate was calculated

b. Published rate schedules

c. Usage logs supporting equipment utilization and level of activity

d. Time cards for hourly staff used to allocate time to multiple services

e. Billing records

Revision History

The policies in the Office of Sponsored Research Policies & Procedures Manual supersede any OSR policies, procedures and appendices previously included in the University Business Manual, a publication of UNC Chapel Hill’s Division of Finance. This policy supersedes OSR Policy 13: Research Service Centers and OSR Procedure 15: Detailed Information Required for Establishing a Research Service Center.