Costing and Pricing is an iterative process between the Principal Investigator and the Faculty Research and Innovation Office to ensure that projects are correctly costed and priced to ensure that Faculties are aware of any contribution they may have to make, and that costs adhere to the University’s Full Economic Costing principles. It is assumed that, at this point, the principal investigator knows what research they intend to do, how long it will take and the resources required to carry out the project.
Principles of Full Economic Cost
Full Economic Costing (FEC) is a government-directed standard costing methodology used across the UK Higher Education sector for the production of consistent and transparent research project costs. The underlying principle of FEC is to establish the true cost of research, and for this to inform the amount requested from funders (the price). The price may be below, equal or above the FEC.
Understanding the true cost of a research project is critical to securing the correct level of funding in support to a project’s research objectives. Whilst a certain level of estimation is expected for some costs (consumables, travel etc.), others costs (e.g. staff, equipment) must be carefully costed to ensure sufficient funding is secured.
Cost categories - budget template
Under FEC, there are three categories of costs:
1. Directly Incurred (DI) costs are costs which will not be incurred unless the grant actually goes ahead. They are charged to the grant as they are incurred and can include both staff and non-staff elements. Directly Incurred Costs include:
• Salaries of staff charged to grants via the payroll system that are dedicated to the grant e.g. research assistants, technicians, or the PI on certain fellowships
• New equipment
• Travel and subsistence
2. Directly Allocated (DA) costs are services used by a grant that are also shared by other activities and grants. These costs will need to be paid for by the university even if the grant does not go ahead. For example, the academic will typically allocate 5% or 10% of their time to a research grant but if the grant were not to go ahead this portion of their salary would need to be paid by another cost centre.
The amounts charged to the grant will be on the basis of the estimates in the successful grant application. Directly Allocated Costs may include:
• Salaries of Principal Investigators and Co-investigators
• Salaries of pool technicians
• Established Research Facilities or equipment
• Estate costs – the cost of premises plus the infrastructure adjustment (an estimate of the amount required to invest in the institution’s infrastructure). Three estates rates are applied to grants based on the location of the activity; High cost laboratory, Standard laboratory and Classroom
3. Indirect costs are an estimate of the institutional support costs that research grants require.
Indirect Costs include:
• A proportion of the Faculty costs to support research e.g. Faculty Offices
• A proportion of the central service costs e.g. Library, Information Systems Services, Research Support Unit. They are institutional rates, calculated centrally and estimated on grants on the basis of £ per academic fte. They are charged to grants on the basis of the estimates in grant application/awards. Support costs of research are either included in the estates rate or the indirect cost rate. The costs are reconciled to the annual transparency review return.
Overheads and FEC recovery
Overheads (i.e. Indirect Costs and Estates Costs under fEC) do not represent any form of ‘profit’ but are solely the amounts necessary to recover the actual cost of undertaking the research work in question.
Recoverable costs is the cost of resources that the University must pay for even if the research project did not go ahead, and that we can potentially recover from the grant. Recoverable costs are fEC values of all DA casts. Net recovery is the amount the University is actually recovering once all costs are taken into consideration. Negative recovery values can and will occur where the total cost to the University if the research is greater than the total of the DA costs. Typically this will occur with any Charity grant where the funder requires the University to pay a share of the DI costs as charities do not normally contribute to DA costs.
Pricing - what will funders pay?
The major pricing strategies applied at the University of Leeds are:
• Cost-based: based on the Full Economic Cost (fEC) of goods or service.
• Market-based: prices that are set by looking at the market to be served without a strong relationship to the costs. Competitive pressures will force the price down and quality, reputation and a distinctive product will help to lever the price up; therefore the margin of surplus will be variable, but is usually expected to be positive.
• Premium-based: pricing is purely commercial pricing where there are few or no side-benefits to the activity. It is based on the perceived value to the customer and is always expected to give a surplus over fEC. It is usually associated with positioning the product or service as being of higher quality or limited availability in the marketplace. For both market and premium-based pricing, the fEC of each activity should always be known and the price considered relative to it. Pricing at below fEC should only be on an exceptional basis and the nonfinancial benefits should be fully understood.
The University applies its Pricing Strategy as follows:
|Research Councils||Cost-based (80% of fEC)|
|Charities||Cost-based (100% of Direct costs)
No contribution to Estates, Indirect and Infrastructure costs or Investigator costs which are Directly Allocated.
|EU||Cost-based (generally 75% of direct costs plus 60% of this in addition to cover indirect costs.) There are exceptions to this, for further information please contact the EU Team.|
|Industry||Market or premium-based (as appropriate). See Lambert agreements*|
|UK Government (non-competitive contracts)||Cost-based (100% of fEC in line with Treasury guidance)|
|UK Government (competitive contracts, LINK, KTN and TSB Technology Programme projects)||Cost-based (80% of fEC)|
|NHS||Cost-based (80% of fEC in line with Treasury guidance)|
The Lambert Review, sponsored by the DTI in 2003, produced five collaborative research contracts for Universities to adopt when negotiating terms and conditions with sponsors. The Lambert agreements particularly focus on the ownership of results.
The University has recommended a pricing policy for each Lambert agreement summarised in the table below
|Lambert Variant||Summary of Terms||Pricing Policy|
|Lambert 1 (follows the existing University owns results standard agreement)||University owns results and grants the Funder a non-exclusive licence to use in a specific field of interest/ geographical area.||80% or greater of fEC|
|Lambert 4 (follows the existing Leeds Sponsor owns results standard agreement)||Funder owns results (with royalty return to the University if commercially viable) but University can still use for further academic R&T, on proviso that such R&T doesn’t jeopardise commercial exploits.||100% or greater of fEC|
|Lambert 2 (variation to Lambert 1)||As Lambert 1 but Funder also has an option to acquire an exclusive licence to (specific field /geographic areas of) the results.||Greater than 80% of fEC|
|Lambert 3 (variation to Lambert 1)||As Lambert 1 but Funder also has option to take an assignment of rights in (specific field/geographic areas of) the results.||Greater than 80% fEC|
|Lambert 5 (variation to Lambert 4)||Funder owns results but university has no given right to use or publish – this is straight contract research and is on a par with consultancy terms.||Greater than 100% of fEC|
Any contract which fails to comply with the University’s pricing policy will require approval from the Research Dean or nominee, and must be signed by the Director of Research Support or the Pro-Vice Chancellor for Research.
VAT is a tax on supplies of goods and services. VAT is applicable to some, but not all transactions in research. The decision on whether VAT applies to the research activity affects both the “sales” (the research income we receive, output VAT) and the purchases (the costs and expenses we incur in order to fulfil the research, input VAT). It is essential that these instances are correctly identified to ensure that our research is correctly costed.
There are four main VAT rates to be used (charged) when you are making a supply:
– Standard rate 20%
– Reduced rate 5% (for example sometimes used on fuel bills)
– Zero rate 0% (for example used on books and some foodstuffs)
– Exempt – no VAT (for example on land sales)
In the case of standard, reduced and zero rated supplies, VAT can be recovered from HMRC on expenditure incurred in the process of making the supply.
In the case of exempt supplies VAT on expenditure incurred in the process of making the supply cannot be recovered.
VAT is known as a consumer tax or a transaction tax as there must be two sides to the transaction in order for VAT to apply. There must be:
• a “supply”
• a “consideration” (payment).
• there must be a direct link between the supply and the consideration,
If there is no supply then the project is outside the scope of VAT. This means that no VAT can be claimed back from HMRC and any VAT on expenditure/purchases is a cost to the project. Generally, publicly funded research does not involve a supply and so is outside the scope of VAT referred to as non-business. Conversely privately funded research will often involve the sponsor obtaining a material benefit and hence will involve a supply.
Situations where the funding will be outside the scope of VAT include:
– research which is funded for the ‘general public good’ and there is no direct benefit for the funding body
– Research which is funded for the general public good and is either not expected to generate any intellectual property (IP), or if it does then any reports or findings will be freely available to others
– Where there is a ‘collaborative’ agreement between different research institutions
– Where the funding flows through one named party – and they act purely as a conduit passing on the funds to others involved in the research project – the funding remains outside the scope of VAT
One way of identifying whether there is a supply is to look at what happens to the Intellectual Property (IP):
– If the IP resulting from a research contract is retained by the University or goes into the public domain then there is no supply and the funding is a grant outside the scope of VAT
– If the funding body obtains exclusivity over or shares IP rights then that is a supply and the
VAT status is determined using the place of supply rules. When dealing with private funders it is also worth considering that they probably wouldn’t be funding the research unless they were getting ‘something’ (a supply) out of it.
Grants from Government departments sometimes require a share of the IP to be passed to the funding body but HMRC still currently consider this to be outside the scope of VAT. Grants often specify that the University should exploit any resultant IP. This does not affect the VAT status of the grant.
The University of Leeds VAT registration number is 613451470.
Any contact with HMRC should be done through the Tax Office.
Costing and pricing of the EU grants e.g. Horizon2020 can be more complex due to the way that overheads are calculated and the need to use the official EU exchange rate which should be obtained from your Faculty Research and Innovation Office.
For further information specifically relating to EU costings and pre-award support please visit the EU Funding section.
KRISTAL, the University’s research financial management system, will allow the Principal Investigator to develop different funding scenarios around the basic grant idea so that they can determine which the most financially viable project is.
For authorisation to access KRISTAL contact your Faculty Research and Innovation Office.