Conducting a Rate Study

The Financial Services Rate Studies team can assist University of Arizona departments with evaluating a cost recovery opportunity and determine if a rate study needs to be completed.

To determine if an "opportunity" fits all the specific guidelines to be considered a service center, we must consider several factors such as: What type of services will be provided? Who will be the primary users? Will there be customers using grants/contracts for payment? Will this new center be in any direct competition with other similar service centers on campus? What type of operational costs will be associated with the new center?

If it is determined that a service center is appropriate, the Rate Studies team will work with department staff to compete a full analysis of the operations.

Process Overview

  1. Compile financial data (operational costs, personnel costs, non-capital equipment costs, etc.).
  2. Define what type of service(s) will be provided.
  3. Perform analysis and allocation of the data.
  4. Complete rate studies template. Rate Studies along with the help of the department will conduct a thorough review of the data and allocations.
  5. Once this is completed, Rate Studies will issue an approval letter and the service center can implement rates and begin the cost recovery process through the rates.

Information Required from Service Unit

Information:

  1. Salary & Wage
  2. ERE
  3. Employee effort
  4. Operational costs
  5. Equipment depreciation
  6. Overhead
  7. Units of service

Data:

  1. Actual expenses – prior full fiscal year of data
    • For new service centers, new services, or service centers that expect major changes in operation or activity, it may be necessary to estimate operating costs. Please see Estimating Costs below.
  2. Supporting documentation (Ex: employee effort, total amount of units billed)

Determining Expenses

Allowable Expenses:

  1. Expenses that directly benefit the services being provided
  2. Payroll
  3. Operational expenses (Ex: Service contracts, supplies)
  4. Travel (needs to directly relate to the service center and provides a direct benefit to current customers)

Estimating Costs:

When a service center needs to estimate costs, the estimation can be more accurate by distinguishing variable costs from fixed costs:

  • Fixed Costs are expected to be constant despite changes in service center volume of activity. Examples include:
    • Service Maintenance Agreements
    • Equipment Rentals
    • Licenses and Fees
    • Salaries and Wages
  • Variable Costs change in proportion to volume of activity in the service center. If a cost falls into this category, the total cost is the cost per unit of activity multiplied by total units of activity. Examples of variable costs include:
    • Supplies and materials, such as chemicals, syringes, and needles
    • Technical procedure fees, shipping, and data storage
  • For a new service center, fixed costs should be estimated based upon the knowledge of the resources the service center expects to use. Variable costs should be estimated based upon realistic volume estimates.
  • Established service centers should utilize historical data as a starting point for fixed costs, and then include necessary changes and projections. Variable costs should be based upon projections.
  • Total Estimated Costs = Fixed Costs + Variable Costs

Examples of Unallowable Expenses:

  1. Alcoholic beverages
  2. Entertainment
  3. Bad debt expense
  4. Donations, gifts & contributions
  5. Communication user FTE charge

Common Mistakes:

  1. Charging market rates: using market rates to establish billing prices for internal customers is unacceptable to the degree market prices create a profit.
  2. Delayed invoicing
  3. Misuse of depreciation: Depreciation is allowable on Specialized Service Facilities, but otherwise Service/Recharge Centers cannot recover depreciation in their rates, nor charge capital equipment on the Service/Recharge Center account.
  4. Unallowable expenses included in rates
  5. Lower rates for external customers: Service Centers are encouraged to charge external customers up to whatever the market can bear, ideally covering the indirect (F&A) and ASC (Administrative Service Charge) costs.
  6. Varying rates for internal customers: Service Centers must charge approved rates to all internal customers.
  7. Adding a new service without prior approval: Please contact Rate Studies when the service center plans to provide new services.

Compliance Checklist:

  1. Policy 18.10: Service Center Policy
  2. Break-even costs – base rate
  3. Fund balance – within 60-day reserve
  4. Depreciation
  5. No Cross-subsidization
  6. Indiscriminately charging rates between internal customers

Department Responsibilities

  1. Establish and maintain record keeping procedures and systems
  2. Financial records
  3. Statistical records
  4. Effort reporting
  5. Background information
  6. Billing rate methodology
  7. Approved rate study letters
  8. Reconcile accounts

To begin the process, contact Rate Studies at FNSV-RateStudies@arizona.edu.

Refer to the Rate Studies Handbook for additional information.