Finance Department

Full Economic Costing (fEC)



In return for additional funding for research under the 1998 Comprehensive Spending Review against concerns that the income generated by research was insufficient to cover the costs of conducting research, the Government asked the sector for greater transparency over HEI spending. The result was the establishment of the Joint Costing and Pricing Steering Group (JCPSG) who would develop and implement TRAC (Transparent Approach to Costing) into the sector. The result was the annual Transparency Review return, for which each institution calculated the full economic cost of Publicly Funded Teaching, Non Publicly Funded Teaching, Publicly Funded Research, Non Publicly Funded Research and Other activities and reported them annually to HEFCE.  In particular the fEC includes not just the current cost of conducting research, but also the costs of sustaining research within HEI's.

In terms of calculating Full Economic Cost institutions are required to take the total annual costs from their current set of accounts, this is to ensure that all institutional costs are included, and then to add two adjustments to reflect the costs of sustaining the institutions activities into the future.  These are the Infrastructure Adjustment and the Return for Finance and Investment. 

The Infrastructure Adjustment adjusts the historical cost deprecation shown in the accounts up to a measure based on current costs which is a more appropriate indication of the required reinvestment in the institutions estate.  This figure is adjusted for spend on long term maintenance which may enhance the functionality and/or useful life of buildings and is therefore part for the required investment.

The Return for Financing and Investment adjusts for the cost of the capital tied up within the institution and also the need to retain a surplus to re invest in rationalisation, updating and development to ensure the institution remains fit for purpose.       

The subsequent TRAC returns continued to show that Research income was inadequate to cover the full costs of conducting such activity and that investment in the UK research base was also insufficient and therefore would not sustain current levels of research let alone expand.  Institutions operating in a market where they were largely price takers had little scope to increase prices.  As a result the JCPSG issued guidance in March 2004 that extended the Transparency Review approach to apply costing to the individual research projects a way that would calculate the Full Economic Cost (fEC) of each project.

The TRAC returns of institutions seem to hold a great deal of credibility with HEFCE and the Government and are often relied upon for decision making.  Current issues arising from TRAC are the continued concern over the long term sustainability of institutions as virtually all show a deficit on fEC, and the continued deficits on research, indicating that the UK research base may not be sustainable or globally competitive in the long run.  HEFCE are also concerned that institutions have got the split of teaching and research correct, particularly now that data produced on teaching costs is likely to inform funding policy, some institutions show an fEC surplus on publicly funded teaching but review of their TRAC models has shown that this is often because the split of Teaching and Research is not robust.  

During 2006 HEFCE announced that TRAC and fEC was to be applied to teaching costs (TRAC for T).  Later that year JCPSG published guidance for the new TRAC for T return which was to be completed for the first time on 2005/06 data and was returned by 28 February 2007.  This involved institutions calculating the FACTS (Full Average Cost of Teaching a Student) for each HESA cost centre that student load was returned in that institutions annual HESA return.  The methodology involved taking the Publicly Funded Teaching costs form TRAC and excluding the costs of any HEFCE non fundable students.  Then any non subject specific costs are deducted, such as widening participation costs, bursaries, part time and long course premiums etc to leave the "clean" subject related costs.  These costs are then divided by the student load returned to HESA to arrive at the cost per student. 

The data for each institution is collated and an extensive benchmarking process was carried out in consultation with each institution to identify areas for review or improvement.  This is to ensure that the second year data should be robust as this information is to be used by HEFCE to inform the review of the teaching funding model for 2010.  This may directly affect the resource and department receives for its students.

The fEC costing methodology has also been embeded for internal use within the University and it is used to arrive at the full economic cost of the University's faculties and departments, this is compared with income generated to understand the levels of fEC recovery in what is called the "fEC Contribution Model".  This has recently been adopted into the University's planning process and will now influence resource allocation.

The fEC for Research approach has been adapted internally to cost teaching programme proposals.  An fEC methodology, where the indirect and space costs rates for teaching are applied to the staff FTE working on the project in the same way that they would in a research proposal.  This allows a consistent approach for academics to use the costing methodology which most are familiar with.  This is then compared with the impact that adopting a programme will have on the fEC Contribution model.

Note that fEC at a project of programme level behaves differently to how it behaves at a departmental level.  This is due to the treatment of fixed costs, in a project we are assuming that if we take on 1 FTE then we incur an additional chunk of fixed costs (the indirect and space costs rate) whereas at the departmental level we assume that fixed costs remain fixed (broadly true) but that their allocations may change slightly.

Graham Smith

fEC Project Manager