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Setting Up a Rate-based Unit

Rate-based units, aka recharge units, charge for products or services that directly support the research or academic mission of the university and recover costs through charges to internal and external users. Thoughtful planning and execution must go into every detail of the rate-based unit, as lack thereof may cause it to run into budgetary and compliance issues shortly after startup.

Operational Considerations

  • Does it relate to the mission of UC Merced?
  • Does a demonstrated need across campus exist?
  • Is it a viable business decision and will revenue offset expenses?
  • Will products or services be provided on a regular and sustainable basis?
  • Are simpler allocation methodologies available?
  • Does the activity offer unique services that no other campus entity is providing? 
  • Is the proposed service attempting to allocate only administrative costs?

Business Plan

  • Document the services to be provided and the institutional need
  • Detail the billing and costing procedures to be used by the rate-based unit
  • Describe the plan for a compliant operation of the rate-based unit
  • Document the resources required to establish the rate-based unit
  • Identify the customer base and mix

Rate and Proposal Development

  • Rates must be developed to recover the full cost of providing products or services
  • Costs must be allocated as closely as possible to the benefit derived
  • All costs must be consistently treated, allocable, allowable and reasonable
  • Projected use of volumes should be based on previous experience adjusted for expected growth or decline and should be identifiable and measurable
  • Surpluses and deficits should be taken into consideration when performing the rate calculations

The campus has implemented a recharge revenue materiality threshold policy for proposed rate-based units and existing rate-based units.   

Further details of the rate-based unit process can be found in the UC Merced Recharge Handbook.

Operational Considerations

Establishment of rate-based units

Once the revenue materiality threshold has been met, the establishment of new rate-based units must be reviewed by the Costing & Policy Office and approved by the Recharge Committee and the Associate Vice Chancellor for Financial Planning & Analysis. All proposed activities must relate to the mission of UC Merced and a demonstrated need must exist across campus. Incidental or one-off requests are not sufficient for the establishment of a rate-based unit.

Note: The Costing & Policy Office conducts a review of the proposed rate-based unit to make sure all criteria are met, to verify rates being charged to campus/external customers, and to ensure the proposed rate elements/practices align and comply with institutional and federal policies. Quarterly reviews are conducted and disseminated to the rate-based unit to identify potential budget shortfalls or surpluses. As the proposed center must develop and maintain a strong system of internal controls and best practices, the services provided by the Costing & Policy Office have been designed to complement these controls and practices.

Budgetary Considerations

Per UCOP BFB A-47, rate-based units require a separate budget from their parent department. This means that a rate-based unit is responsible for maintaining operations that are at or near break-even at the end of each fiscal year, to not accrue significant shortfalls or surpluses. Further, to ensure proper costing, all direct costs associated with providing services must be charged to the designated rate-based unit CCoA. This means that all staff effort, supplies/consumables, equipment service contracts, etc., must be charged to the appropriate CCOA.

Business Plan

Customer Base and Mix

The primary customer of the rate-based unit should be internal to the university, with only incidental use by external customers (if applicable). A separate rate must be calculated for external customers, as institutional indirect costs or non-university differential are to be included in the rate. This allows for the recovery of allowable facility and administrative support costs associated with the center’s activities.

Note: Services provided to other UC campuses are subject to the internal user rate. Per APM-020, “University laboratories, bureaus and facilities are not to be used for tests, studies or investigations of a purely commercial character … except when it is shown conclusively that satisfactory facilities for such services do not exist elsewhere.” Further, such services should fall within the university’s mission of research and instruction and should not compete with any commercial sources.

Billing Procedures

All users of the rate-based unit must be billed at the approved rates on a timely basis, usually within 30 days after the service has been performed. Usage logs are expected to be maintained for calculation and backup purposes and must be presented in the event of an audit.

General Accounting uses an online recharge system to process the financial journal to charge campus customers. It is expected that the designated individual responsible for entering these transactions use the appropriate coding as prescribed by General Accounting. Any deviations may result in a delay in the financial journal posting in the financial system.

Rate and Proposal Development

Billing Rate Principles

Billing rates should be designed to recover the direct operating costs of providing the services on an annual basis. No costs other than the costs incurred in providing the services should be included in the billing rates. The costs should exclude unallowable costs per Institutional and Federal Guidelines.

Billing rates should be computed annually for the start of each fiscal year and the rates should be based on a reasonable estimate of the direct operating costs. These estimates can be derived by using historical or projected costs in providing the service and must use reasonable billing units. While billing rates must be computed annually, this does not necessarily mean that the actual rates will change.

Rate Consistency

Rates can be set based on hours, units, clock time, or any other metric that is the closest approximation for utilization of resources to produce the product or service. Rates must be non-discriminatory, and all users of the center must be billed for services.

Non-discriminatory means all internal users must be charged the same rate(s) for the same level of services or products purchased.

Break-even Expectations

The break-even period is a reasonable period over which cumulative revenue for a service or product equals cumulative expenses. Rate-based unit billing rates should be calculated to recover the aggregate cost of a service or product over a defined period, which is usually one year. Some rate-based units require a long breakeven period due to startup costs or volume fluctuations.

If this is anticipated, please indicate this in your business plan. Any deviations from the one-year break-even period require Recharge Committee approval.

Required Information for Proposal Development

To appropriately build a rate and ensure a complete proposal submission, you should have the following information ready:

  • Service(s) and/or product(s) to be provided by the rate-based unit (this should align with the business plan)
  • Space information – for proper space functionalization
  • Customer/user mix – to identify what types of rates will need to be established
  • Personnel who will be contributing to the rate-based unit
  • Supplies, materials and consumables that will be required to provide the proposed service(s) and/or product(s)
  • Potential equipment that will have to be acquired to provide the proposed service(s) and/or product(s)
  • Equipment tag IDs of those existing pieces of equipment that will be used in the rate-based unit
  • Equipment service contract costs, including the applicable service period
  • Allocations that reflect the resources and costs necessary to produce/provide the product(s) and/or service(s). It is critical that sufficient backup is included with your rate-based unit proposal submission. A proposal with missing information or documentation may be subject to delay.
  • Projected utilization figures based on previous experience adjusted for expected growth and decline
  • Financial records to support sustainable revenue
  • Comparable rates for the service(s) and/or product(s) from other UC campuses
  • Market prices from external competitors if service(s) and/or product(s) will be provided to external users

This list is not inclusive and a rate-based unit proposal may require additional information. If you have any questions, please contact the Cost Policy office.

Next Steps

Once the applicable required information has been gathered, you may begin preparing the rate-based unit proposal. A recharge budget call during the second quarter and the proposal submission package containing all the required checklists, schedules and budget documents will be provided.

Upon completion of the rate-based unit proposal, please complete and sign the rate-based unit Checklist, which is located in the proposal submission package.

Unallowable Costs

Certain costs that may not be included in the rate development. This is prescribed per UCOP Business & Finance Bulletin A-56 and OMB Circular 2 CFR 200 (Uniform Guidance).

Below, please find a list of unallowable costs that cannot be included with a recharge proposal. Note: This list is a summary of common unallowable costs and is not inclusive. Please refer to 2 CFR 200.420-475 for further information.

  • Acquisition Cost of Capital Equipment
  • Alcoholic Beverages
  • Entertainment Expenses
  • Advertising and Public Relations Expenses
  • Contributions & Donations
  • Gifts
  • Fund Raising
  • Unallowable/Unrelated Travel
  • Depreciation on Federally Purchased Equipment
  • Fines & Penalties
  • General, Automobile, and Employment Practices Liability (GAEL) Insurance