Zoom Video Recording
Transcript
Hervé Bruckert:
Okay, so, let's take a look here at the agenda. So, we will start with framing recharge activity. In other words, why do we need to recharge and what are recharge enabling on campus? we will then focus on the recharge center. How do we know if a particular service, or center, is a recharge center or not? We look at functional responsibilities, how to develop recharge rates, and the second part of the training will be fully focused on that. we are discussing billing for recharge goods and services, talking about surpluses and deficits, self-monitoring.
And then moving on to the self-cert, self-certification process. Again, we have a special session next week in training on the self-cert, so, feel free to fill out the form and it'll be added to your calendar shortly probably by Wednesday next week. we will talk about audit, sustainability and green practices. we will most likely skip closing a recharge operation, but, there is information on the two PowerPoints as we will review. And so, feel free to, dive into the PowerPoint in the situation where you need to close the recharge operation. And the two PowerPoints are on the recharge website towards the end of the website so you can always access this.
we are gonna be discussing common issues, item 12, then reference and contact information, and then forms and templates. So, any question before we start? Okay, great. So, in this first slide here, I wanted to just depict the different frameworks that we use, the different clients that we have. They can be like internal, external, we have different external clients as well. So, in the center of the picture here, we are depicting UC Berkeley, and so we have different units providing services to other units on campus. And one way to be paid, so to speak, for the services is through the recharge process.
So, it can be administrative units providing recharge services to academic or research units. It can be interaction between two different research units, so that's all internal to UC Berkeley. And then externally, we have quite a few stakeholders. Of course, we are a research university, so we interact a lot with contracts and grants, which is depicted at the bottoms, we have sponsored projects. Then on the right side, we have all the affiliates and the collaboration that we have with other UC campuses. And so, if you ever needed a list of affiliates, they are listed on the charge website as well.
And then on the left side, we have external clients. And, this area has been an area of focus in the last few years. We are seeing some, increased interaction with external clients, including, recently, some of the, new startups that are hosted on campus. So, as we have like incubators, on campus and we often have startups that are hosted in the incubator and startups often use recharge center to, deliver on their mission. So, these are really at a high level, the framework and how we operate as the recharge.
So, since recharge interact with contracts and grants, it makes sense that the policies around recharge are very similar to the policy and need to align with the policies around contracts and grants. And so, from this perspective, since contracts and grants are charged via two mechanisms, the first for direct expense, and then the second ones through the F&A rate or the ICR rate for indirect expense for recharge is very similar, right? So, when we calculate rates and we establish rates for recharge, the internal rates is using direct expense as a basis for the calculation. And then when we charge external clients, for example, we add overheads and when where contracts and grants is charged based on the recharge service, this grant will take the data related to the recharge service, let's say it is $100 and then they would add the F&A rate and charge the grant for the F&A component as well.
Okay, so, as I go through this presentation, if you have any question, just let me know. If my feedback is not addressing your question, just ask me to reframe it a different way. And also feel free to set up, meeting or just to IM me, I am really here to support you with your efforts with your recharge, and there is no stupid question, right? So, recharge seem to be fairly straightforward, but there is lots of items, and lots of different elements to think about. And so, I would welcome all your questions. Okay, so, we talked about that. So, how do we know if we have a recharge center or not? Sometimes folks are like, oh, we have this situation, should I become like a recharge center, yes or no?
So, a few things to keep in mind. And so, those rules are also In the recharge policy, so there is a two-training material you can always refer to, but the policy is also a very good area to, dive into if you have specific questions. But, feel free to reach out to me as well, of course. So, looking at recharge, so, if we look at the criteria and the definition, the recharge is a unit providing specific goods or services, so they can be goods or services. They need to be provided to a number of campus departments. And it should be done on an ongoing basis.
So, if you are only providing a service to one or two units in campus, it is fairly limited, not through their recharge center, you can have MOUs between your department and the other department. But, if the services are pretty widespread and you are providing them pretty widespread, or yeah, the provision is pretty widespread across the campus and you are providing this service on an ongoing basis versus like on a project-based, then most likely you are a recharge center.
And so, as a recharge center, the unit is allowed to recover its cost and provide users goods and services through a charge to the user, right? So that's the definition. So, you kind of charge more than your cost. So, that was the idea with a recharge is you can only charge that cost. And that's internally, right? Externally, we have different pricing model that we will come back to. And so, talking about pricing to external clients, and which our center may generate revenue from incidental sales, or services, to individuals or off-campus entities, and the service providers should not be readily available from outside sources. So, one of the things we do not want to do is, be perceived as competing with external entities. So, the nature of the service should be very, specialized and the pricing should always be as high as we can to avoid, creating the appearance that we might be competing with external parties.
So, that's on the rules, we just discussed this. The second bullet there: recharge rates to external clients should be fully costed. So, when we say fully costed, it means that they need to include both the direct components of the cost, right? And so, the internal pricing is actually based on the direct cost. And then when we charge external clients, we should be adding the override component, right? So, if the direct cost internally is, let's say, $100, when we charge external client, we should at a minimum add the overhead rates. for our research, it is 60.5 currently and that should be the minimum charge.
Now, there is no limit on how much you can charge an external client. So, I know some units are having, an overhead rate that's much higher, or like a surcharge that's much higher than the 60.5. it is really up to your discretion. We should be charging as much as we can, really. So, just keep this in mind. Okay, so, among some of the policies the recharge centers should be addressing is the Policy on Sustainable Practices that are helping our university to reach zero waste goals and carbon neutrality. We have a new power plant that's been constructed, so that should really help us overall as a campus. I am really excited about, these projects will significantly reduce our, carbon footprint here. But each center and each operation has means and ways to help with these goals. So, I wanna make sure we participate in these broader efforts.
Okay, so, in this section, we are basically, reviewing the threshold and when should the recharge center self-certify, which is basically submitting the self-certification, to me. We then review it with the recharge committee and get it approved. So, basically we have like a table, I am just gonna go to the table right here. And so, you can see if you are charging C&G, right, you need to self-certify the relevance of your recharge income. So, that's the second column.
Now, if you are not charging C&G, you will see it as having like less risk to a certain extent. And therefore, you only need to self-certify if your recharge income is higher than $500,000. So, in a nutshell, you don't need to self-certify if you don't charge contract & grants and your recharging income is less than $500,000. And we are gonna be updating the recharge policies, and most likely this amount will change, probably bring it up to 750K for the threshold, moving forward. But for now, it is $500,000 and when the new policy will be approved, we will communicate that to you.
Okay, so this little slide just explained how to pool federal funds. So, when you are charging contracts and grants, you might be charging federal funds as well. One of the questions in the self-cert is: what percentage of your recharge is on the federal funds? And so, this just helps you to understand how to run some reports in Cal Answer to bring in the federal fund in tagging so to speak and have a list of all the federal funds. And so, you can easily do like a video cap, of this table. So, we will actually be putting on the recharge website like a link directly to this Cal Answer dashboard so you will be able to just bring it in and have access to the data. So, look forward toward seeing this in the next few weeks here.
Okay, a few other rules and criteria. So, all campus users need to be charged the same rate for the same service, products delivered. So, what this means you cannot charge, your department, let's say, reduced rate, right, and then charge another department on campus another rate. it is basically all your clients need to be charged, internal clients need to be charged, the same rate. So, rates for affiliates can include a surcharge up to the ICR rates to cover any indirect cost. Typically, with affiliates, we have been either charging them at cost, at direct costs, when the transactions are done through the system.
So, when we cross charge like other UCs, for example, it is not treated as a revenue and therefore there is no AFC charge. But when there is a revenue and AFC is charged, then typically the surcharge that's applied to the affiliates in this case it is 10%. And so, the 10% markup will cover your 9% AFC charge that you will see on the revenue if it is traded under revenue. And so, recharge center must only charge their published, authorized rate, right? So, the published and authorized rate and the official rates actually the rates are on the recharge website.
So, as you submit your rates, in January, I think the deadline is January 23rd for this coming cycle. I did another week in January to make it easier to, choose those goals. And if you need additional time, just hire me, let me know when you can submit. I kind of review all the rates, the first week. So, feel free, to ask for an extension. But once the rate has been approved and reviewed by the recharge committee, they'll be posted on the recharge website in June and then I will ask everyone to just, go to the website and just make sure there is no typo. We always make a few changes, but yeah, the rate's on the recharge website as they show it.
The idea is that recharged units operate at breakeven over time. Now, of course, when you build a budget, there is certain assumption you make, including volume, right, and then when actuals are hitting the ledger, volume might be different, expenses might be different, so you might have either a surplus or deficit, right, at the end of the year. And then this 0% deficit can then roll into future years rate calculation. But over time, the idea is that you recover your cost. And we will come back to this, but the surcharge component when you charge external clients, the component involves direct costs or the internal rates, the component involves that, is treated as a separate fund. And then the surcharge can be used, for funding for any other activities. So, it is really unrestricted.
Okay, so, here are like a few items. I am not going to go through all of them, but a few items to consider when evaluating setting up the recharge center. So, why do we want to conduct this recharge activity? Should we be in this kind of business? Do we have the expertise to provide this service? What are the risks and how will we manage them? Do we have the time to manage and monitor the activities. And also asking ourselves, how is the service covered by existing budgets? How will we determine the rate? What structure will we use? Who will be our clients? Will we have the budget for this activity? Or sorry, how will we budget for this activity? Will we break even? How will we cover any unforeseen losses?
So, I am gonna skip this section, but you can see like on the billing side, especially with like external clients, right, having some, solid process around billing, monitoring receivables. Yeah, this is why I've set up, this training with the folks from BFS so we can enhance, this part of the business because it is still fairly new for some of the units and I think we can automate some of the processes, but also limit the risk, right? Because every invoice to external clients should really be entered in BFS so we can pull like the AR reports an availability into what is owed, to the university.
So, if your unit is charging external clients and you are not currently, entering invoices in BFS, this is one area you are focused on this year, feel free to reach out to me. Again, we have some training coming up, but feel free to also, reach out to me so we can solidify this part of the process. So, here are some examples about recharge activities and recharge centers. So, some of them are on the research side, such as the molecular cell biology, the GSL, Genomic Sequencing Labs, and Nanolabs. We need lab as well on campus, in engineering. Then we have some support function as well, chemical waste disposal just as an example, the Electron Microscope facility.
And then on the admin side, we have like mail services, IT and facility services as well. Animal care is also center on the research side. And so, the last bullet there, some of the IT productivity suite and Data Network assessment might, over time, potentially shift to a recharge model. we are trying to like streamline, the number of mechanisms we use to create funding for these units. And then example of non-recharge activities are some customary services within general administrations such as central accounting, HR, budgeting. Some component of HR, might be charged. I think they're currently charging for, I forgot what it is now. I am drawing a blank. They just submitted a recharge. It seems to be covered by the police department. They just moved to human resource.
If you have two departments that share costs of the machine equally, an MOU is sufficient to address this type of transaction. And then the last one, the auxiliary services. These are services delivered to students, faculty, or staff. And so, those are not considered recharge. So, the main, sometimes it is so hard to determine, okay, is this unit like a recharge or are there like an auxiliary, right? And so, one way to think of it is if the service is delivered to like individuals, such as like student or faculty, but faculty as individuals, not faculty as, like a department, but as individuals, staff as individuals, then it is really in auxiliaries, right? So, department of transportation, RSP, are examples of like, auxillaries, right?
And for recharge, we don't really charge any individuals, right? We charge our units that's providing a service and they will be charging, departments or organizations, these are internal or external, right? So, that's if you are a trader. Any question on that or what we covered so far? Okay, so, we will briefly look at the functional responsibilities. We have the roles of the departments to review overall operation of recharge centers in compliance with current recharge policy, review the services on an ongoing basis, there was the budgets, or revenue expenses on an ongoing basis. Review rates as business needs change to assure the unit is balance will remain within tolerance.
So, we look at basically the tolerance as calculated as 1/12 of yearly average expenses. And so, as a recharge unit, you are allowed to operate with a surplus, or a deficit, as long as it is within the tolerance. So, if you, let's say, have a deficit at the end of the year, but it is within the tolerance, you don't need to submit a deficit waiver. You only need to submit a deficit waiver if it is outside of the tolerance. Yeah, I think there is a question: Can you repeat the tolerance levels again? Yeah, so the tolerance is calculated as 1/12th of the yearly expenses. And so, it is also in the self-cert. So, in the self-cert, there was like a tab just to help you like, calculate. So, if you refresh the self-certification, it will give you a sense for the tolerance. So, you can find it there in one of the tabs. And then there is also, in Cal Answer, there is a report in Cal Answer that will also list the tolerance that you can use this report at the end of the year as well. Yeah, thank you. Of course, one of the main elements is to submit the annual budget or the self-certification with your budgeting rates.
So, that's really the role of the department shifting to the division. So, the division oversees and assists through the operation of the recharged units. They also approves the rates. The DFL need to approve, your rates. They will review the services provided by the recharge center periodically, and ensure that the self-certs are issued and submitted. The recharge committee, we have a committee of five members. And so, the committee is acting in an advisory capacity to recharge center and campus department. They also provide guidance on recharge policy, procedure, and amendments, establish and review, they review and approved the establishment of all new recharge centers, but also surplus or deficit reduction plan are approved as well. And then, of course, they approve the yearly self-certification and the associated rates.
So that's really on the recharge committee. And then, I am in the Office of the Vice Chancellor of Finance. And so, certainly my role and the role of my department, we provide general accounting assistance in recharge center. So, feel free to reach out to me. We all do and anticipate will continue to do that, but we are here to, help you throughout the year with any, barrier or, challenges you are faced with regarding recharge centers, we provide the training which we are doing in December.
From time to time, I provide binding mediation when there is dispute between a service center and a customer. it is typically related to, like late invoices being received. And so, especially if an invoice is related to a contract or grants, the grants might be closed, right? So, if you don't bill on time, then the grant might be closed and now the department is being charged for something they can't charge a grant, so they need to absorb it, right? So, just keep in mind to avoid the situation, make sure you bill on a timely basis and you will be fine. I don't like to be, mediator between departments. So, I appreciate your hard work to avoid the situation.
Yeah, so, one of the things that I do is, so, basically the process on a yearly basis is twofold. In the first part of January, February, I look at all the rates. I just do like a high level, review. If I see anything significant, I might reach out to you. If not, I basically will publish the rate in January or February for all the DFLs to use for their budgets, right? So, these are the approved budgeted rates. And then we go through the process. We meet typically like March, April, review the detail, we might tweak your rates a little bit if we both agree that we should. And then the final rates are approved for using the ledger at the beginning of the year, right? So, it is like a two-step process. Okay, I think we have seen the chart. So, let me take a look. Or the tolerance limits. So, how to develop. Now, we are gonna focus a little bit on how to develop a recharge rate, and we will come back to this in the second part of the training as well. But just higher levels do this. So, here are some of the key steps to develop a rate. So, the first thing, and that's critical, right, is to really identify the line of business. So, what I mean by this is, to sit down with the director of the facility or, the service that will be provided and really understanding, from a business perspective, how this operation will function.
Because, by asking questions, by really having a good understanding about how the business will be run and the services that will be offered, this will enable you to then identify all the costs, which is the second element, right? So, identifying all the costs for the different line of business will be critical. Then once all the costs have been identified, then typically these costs need to be allocated to like subcomponents, of the recharge, right? So, you might have a recharge facility with three different let's say equipment, right?
And so, you can capture all the costs for the facility and then you would say, okay, now I need to allocate them to each of the piece of equipment because we are gonna have the rate, per hour for the use of the equipment, right? So, that's the allocation part. And the different methodology can be used there to allocate. we will come back to that. The key thing is to also estimate like revenue. And to do this, you would need volume, right? So, understanding the level of volume will be critical in identifying the rates. And so, it is not unusual when you have a new facility that are just opening up. We have two new facilities that are currently being evaluated. we are actually three.
And so, sometimes it is hard to know what volume will be, right? And so, once you set up your entity, the first six months, you really want to monitor, on a monthly basis other recharge center functions and you might need to submit after, six months like a change in the manner of pricing just because volume might be much higher or much lower than, you anticipate and that will have a big influence on the rate. So, yeah, looking at historical volume too is very important because, a reduction in volume in 10% will drive, the cost to be much higher, right?
So, there is a cost component you must focus on, but then, the volume are key as well. And then once you have the cost, once you have the volume, then you can develop your rate and you can self-cert the client. So, in a nutshell, the rate is just a basic formula. You just take the estimated costs of the goods or service and then divide by the volume or the number of service units to be provided. So, the only other component that we include is allowable surplus and deficit from prior year, right? So, if you remember one of the slides, one of the first slides was identifying that you need to, recharge centers and break even over time, right?
So, of course, we might have a surplus or deficit every year, right? But you can actually take, you should actually take, the surplus and the deficit and roll it, so to speak, into the rate calculation for the following year. So, on the self-cert, you will see there is a line item for like prior year of surplus and deficit. And in the last few years, many units have amortized this deficit. Most of the time like, units have had challenges during the last few years because, the business was impacted, they had like lower volume, etc. And so, we allow for this deficit to be advertised over, two, three-year period if needed just to avoid, I mean, large swings in recharge rates.
And so, regarding rate development, identical goods and services must carry identical prices for any and all campus customers, so we mentioned that before. And, again, the official rates are the rates of the recharge websites, which is listed in go-to here. So, looking at the cost pool development. So, again, recharge are really grounded in direct costs because we are charging contract and grants, right? So, it is only the direct costs that are captured and so the cost must be allowable, the costs need to be reasonable. The cost must be treated consistently. So, if you included, if certain costs, for example, were included in the F&A, components, then we should include them as well on the direct side, right, because then we would be like double charging, so to speak, when we charge grants.
So, we want to make sure that we don't switch between, direct and indirect. The only time we can really do that is when we have a new F&A proposal. And so, in this case, we can say, okay, well, those costs used to be on the F&A side, but, moving forward make more sense to treat them as direct because, X Y Z reason, right? And so, then we can, shift them from one pool to the other, but cannot do this, between F&A proposals. And so, the second largest bullet there is the costs are reasonably allocable.
And so, again, this is from the allocation methodologies that is used to allocate costs that are in the pool to the different, service level or different equipment, right? So, we want to make sure that there is a good business logic and some matrix, some allocation matrix, that, makes sense from a business perspective that we can, defend it when we get audited. So, here are some examples of allowable costs: salary, wages, fringe benefits, supplying services, cost of lease, non-capital equipment, cost of leased facilities. And then we have equipment depreciation. So, if you buy an equipment, let's say for a million dollars, you won't include the cost as, $1 million in your proposal, because we need to follow, the Gap rule.
And so, Gap is telling you it is indicating that, if you have an asset that is a useful life and the total value of the assets should be allocated over the useful life and then the only depreciation should have included rates so that for this bullets it indicates. And then the useful life, for equipment, they're all published by UCOP and we have a link on our recharge website so you can find, equipment that are similar to one unit that's acquired was received and then use this as a basis for the determination of the useful life.
And then, again, we mentioned that operating surplus and deficit, should be included as well. So, that's on the allowable cost. On the unallowable costs, so UCRP, the supplemental interest, right? So there were two things: there is UCRP, which is part of CBR. This component is allowed, but the UCRP is supplemental interest. That's a separate item on the ledger, and there is a separate accounts and Gael as well as those two elements should not be, they need to be excluded from the rate setting. So, the way we achieve this in the self-certification is since those two components cannot be charged on the federal funds, what we do, we include them as a cost, in the top section of the self-certification. But then we need to carve them out, and we do this via a subsidy so the net is zero.
So, we want to see the in and out, so to speak, and the reason for that is that when we charge external clients, the basis for the rate for external clients is the unsubsidized rate. So, one of the things you can do, units can do, is they can subsidize recharge rates, right? So, if you have certain costs, but you have discretionary funds you can use to pay for this cost, what you would do, you would show the total cost of the service, we all want to see the total cost, and then we want to see the subsidy as an offset, right? We don't want to net them from the beginning, we want to see both, all the costs, and then we want to see all the subsidies, and then the net. And again, this is because when we charge external clients, we are going to be using the unsubsidized rates as a starting point, not the subsidized rate, right?
So, the subsidized rate is used to charge internally. And then if you have a subsidy, you need to carve it out, then, apply that as a surcharge. So, we will come back to this, I've got a few slides on that. But yeah, UCRP interest in Gael should be subsidized if you are planning to charge federal funds. So, again, this is one of the questions in the self-cert, are you charging federal funds, yes or no? Now, if you are not, you can just include them, you don't need to subsidize them.
Okay, I am gonna skip, the other one, but it is only one. Is there anything else here that you want to impress? I don't think so. But yeah, we can adjust some other unallowable cost. Okay, so switching to equipment depreciation. So, capital equipment with useful life greater than 1 year and with greater value of $5,000 should be depreciated on a straight line basis. So, that's the current policy. I think this threshold's gonna be changing to $10,000, but not in the immediate future. But, keep an eye on any communication regarding that, and I will probably chime in as well when this changes. Again, the useful life on the UCOP website.
Now, there are exceptions regarding the depreciation. So, if an equipment is funded by the federal government, let's say PI gets a grant, right, for like, $10 million and $1 million is for the equipment. Since, the equipment was paid, we don't want to really include it and charge the government again, so to speak, for the depreciation, right? So, in this case, it would not include, depreciation in the rate.
Now, there might be some changes that in the next few years we might deploy. Because, someone could argue and say, okay, well, if we have, if an equipment was paid by the federal government when we charge external clients for the service, why would an external client not pay depreciation, right, for the assets? It might be seen as, a subsidy. So, we might change a little bit some of the rules around that. I need to further think about it, maybe talk to other UCs just to see how they handle that. But, yeah, for now, we just wanna make sure that the equipment depreciation is not included if equipment was paid by the federal government, or if it was the cost sharing on the federal research projects.
Okay, switching to BETS. So, BETS is a system of records for equipment, so it is very important that all the recharge equipment or equipment used by recharge facilities, that all those equipment are recorded in BETS, the system of record. Once a year, we should reconcile your BETS, or equipment record, with your equipment list and ensure that the recharge activity field is also selected for the recharge equipment.
So, in BETS, there is like a field and that's identify if the equipment is for recharge or not. And so, it is very important that, if it is appropriate that you select this field. Because when we calculate our F&A rate, we look at depreciation, but then we need to carve out depreciation related to recharge equipment versus all the other depreciation. So, if you don't select this field then our F&A rate might not be as accurate as we want it to be. So, I appreciate, your diligence in that. There are some BETS error reports that can be created as well. So, look at, any errors that you have, correct the error.
If you need help with that, there is an equipment custodian that can be engaged to help you address what needs to be addressed. And then the last bullet, important bullet as well, there is inventory tags that need to be applied to the equipment as soon as the equipment is received. Yeah, so, that's on the equipment and BETS. Okay, so, we often use a depreciation and depreciation, journals as a way to really set some reserve on the side for the purchase of future equipments. So, it is two processes that are, in essence, different processes, but that are really like tied in the way we address them here.
And so, when we create the depreciation journal, basically, what this journal will do, it will hit the recharge fund with like a debit. And then transfer, the fund from the recharge fund to a reserve fund. So it is two different funds, and so over time, the idea is you accumulate, some funds in the reserve. And when the equipment, let's say after ten years, depreciation, the equipment is, retired, then you have some funds in the reserve fund that you can use for the purchase of the new equipment. So, you will see, sometimes we refer to these process as depreciation, sometimes we refer to it, as a setup of like reserve from current funds to, reserve funds. They are, synonymous in a way.
And so, equipment reserve funds should be used to purchase replacement equipment maybe for the recharge operation. There can be exceptions. From time to time, there is folks, or groups, who want to use some of these reserve for, let's say, like an enhancement of the equipment. So, they can make a request to the recharge committee for approval, if that's the case. So, looking at the recharge funds, so, we have generic funds that we try to use as often as we can. So, there is two generic funds: one is a generic recharge other source, and then one is generic recharge with education activity.
So, depending on the activities that the recharge center provide, you either use one or the other. This is again to generate funds. And then talking about subsidies a little more here. So, the subsidies fund a portion of the recharge unit is total cost, which results in like lower recharge rates. And so, the subsidy will reduce the price for all campus users. And then non-campus customers I mentioned before must be charged unsubsidized rates, plus at a minimum the surcharge based on the current ICL. So, we will come back to this.
And so, the surcharge. The surcharges there is a component above the internal rates. So, again, for external clients, the minimum surcharge is the F&A rate, but you can charge more. And again, the entire surcharge right now is kept in the department. There might be some changes around that. There might be a little fee that business contract might be charging moving forward on those external client's contract. Because, currently, you charge AFC, so that's a component that the center, collects. But moving forward, business contract might take a little commission, so to speak, for as they are part of the work so, it is currently being reviewed by management and I will let you know if there is change and when it changes.
So, coming back to the surcharge, from time to time, we have units who take advantage. Maybe that's not the right word. Yeah, let's just use take advantage of the exception that their policy grants. And so, in the recharge policies, there is an exception that enable units to not charge the full ICR rates at a minimum. And typically, the instances when this occurs are instances where the service is provided to another university or a nonprofit. And so, the unit can make a request charge, let's say, 40% overhead versus, the 60.5%. We typically allow that on an exceptional, basis, but we want to ensure that we never charge an external client a rate lower than we would charge the federal government.
So, that's, one thing to keep in mind. And then when we engage with external clients, we need two things, from a policy perspective and also from just a good, business practice perspective. We need to make sure we have a contract in place, right? So, business contract. Business contracts are developed in partnership with the service provider and the business contract office with a contract administrator, who they help, write the contract with the pricing, et cetera, engage with external party and secure signoff from both party. So, lots of terms and conditions are included. And so it mitigate many of the risk. And so, it is critical that, the contract be in place before we engage with external clients.
And the other thing from a policy perspective is that we need to focus that's, all invoices should be entered in the BFS, module. And so we have some, upcoming training on that next week, Friday as well. Okay, I am gonna skip the first elements. Talked about this already. And so, the surcharge fund, right, against the components, above the internal recharge rates. This surcharge component is recorded under a separate fund. And those funds are retained by the department. Can be used at the unit is discretion.
So, you can use them to subsidize the recharge. Many units use them, they keep those funds on the side, so to speak, and then when there is a new equipment that they need to acquire, they can tap into some of those funds. Or the last few years when we were faced with like deficits due to like lower volume, they would use some of those funds to offset their operation or funding their operation. And then the last bullet here is related to the administrative forecasting. I don't like the name because it seemed to indicate that all the costs are captured. But AFC is a minimal tax. it is really a tax in my mind that, covers some of the administrative costs from daily to, engaging with external clients, right?
And so, you are going to be charged when we charge external clients, that's gonna be treated as revenue on your ledger, so, it is a revenue account. it is not gonna be a recharge income. A recharge income is used with internal clients. And then since it is revenue, the AFC assessment will hit your ledger as well. So, you are gonna see an assessment of like 9% in your ledger. Okay, so, when booking external revenue, I know it is a little more complex than you probably want it to be, but since there are two components, there is a revenue based on the unsubsidized recharge rate, right, and then there is a surcharge. And so, these two components need to be booked separately in your ledger, because one hits the recharge fund and the other one hits the surcharge fund.
So, looking at the revenue side, right, the accounts could be like 48xxx, and then again the external revenue component will be on the recharge fund, and then the surcharge will be on the specific surcharge fund, the 66350. So, this is if it is other activities. And then if it is education, educational activities, then the revenue is booked under the 46 series, still the recharge fund for the main component, and then the surcharge fund is all different for the education activities, the 60050.
All right, so, here's the summary. I am not gonna go through the entire table, but this is just a summary here of rates and how different components should or should not be included into rates. So, we will just focus on a few different areas. So, looking at the components, we are gonna be discussing subsidies. Should they be included, yes or no? Surcharge, how do we address them? And then there is AFC, should we be including the calculation, yes or no? And then we have the different groups of clients up on top, right? So, the internal clients who used to be in 1st or 2nd column, then we have the external private corporation, we have the affiliates, excluding the other UCs, and we have the other UCs and then other university and nonprofits.
So, let's just take as a subsidy, right? So, the idea is like, okay, can I have a subsidy for each of those client groups? So, for the first one, and for internal clients, can we have a subsidy? You can subsidize internal rates, right? Now, can you subsidize external private corporation? No. For affiliates, you can have a subsidy. For other UC campus, you can have a subsidy as well, and then other university and nonprofits, you cannot have subsidies. And so, for surcharge, there is no surcharge, right? Because the surcharge is a components above the internal rates. So, when you charge internally, there is no surcharge.
Now, for private corporation, yes, you need a surcharge. And the minimum surcharge is the ICR rate, right? So, with the ICR rate in this instance, currently it is 60.5%. So, if you do like, cost was on direct pricing, you mentioned pricing, was $100 you would charge us $60, 60.5 on top of it, at a minimum, right? So, this is why it is a minimum here. For affiliates, it is the same. You can have a surcharge, but you cannot charge more than ICR, right? I am not recommending you charge ICR. Typically, we charge 10% just to cover the 9% AFCs, historically what we have done. Same for our other campus.
And then, for other university and nonprofits, it is, yes, you charge a surcharge, but there is a minimum at the ICR rate as well. And so, with AFC, I just look at the last column. Will AFC be charged to the recharge units? So, if it is internal to UCB, there is no AFC, right? there is no revenue, it is recharging income accounts, not the revenue account. So, recharged income is a contract expense. So, it is captured on P&L as an expense, but instead of being, like a debit, it is kind of listed at credit, so that's why it is called a contract expense.
And so, for external private corporation, yes, you would be charged AFC. For affiliates, output might be. It all depends on how you transact with them. If it is transacted as revenue, then you will be charged AFC. If it is just like an inner campus type of like transaction or with like LBNL, there might be ways to structure it so it is not treated as revenues, and you would not be charged, so. And then for other university nonprofits basically you would be charged. So, here I am just gonna focus on the 2nd bullet. So, the standard process is once a year, you recalculate your rate, right, you submit them. But from time to time, you might need to submit a rate change during the year, especially if it is a new center, or there is a significant volume change, or pricing change.
But we typically, only recommend submitting in your rate changes, if there is like a significant, deficit or significant like, surplus that would be triggered if you didn't make a request for a new year rate change, right? So, we are discouraging in your rate changes, unless there is, a very specific condition. And, feel free to reach out to me if you wanted to discuss, your particular situation, but don't go through the process and then submit, if we haven't, like, discussed this upfront.
Okay, so, shifting to billing for recharge goods and services. So, there is timely billing that's required. The policy briefly, talked about that. That's for almost like internal and external. And then, there is also opportunities when you engage with external clients to collect some deposits, funds. Deposit could be a portion of the total value. So, it all depends on the term of the contract you are gonna negotiate with your external clients, right? But I leave it up to you and to, business contract to work on this. Yeah, the last bullet, I am just going to reinforce that. So, recharge unit must use a university AR system to record receivables lead to revenue and engagement with the external clients.
I think this helps too when there is transition, right? We should always be able to see, okay, who owe us what service back, right? If we don't enter these invoices in the new BFS AR system and if we just have, this was outstanding invoices like listed on an Excel, and there is like a change, in management or anything, we might not really know who owe us what. So, best practice is to use BFS and the AR, module. I know not all of you currently use it, but, the main focus, or one of the main focus for this coming year is for all of us to, pivot to this. And this is why we have this training also coming up.
And I will be here to help you with that. So, if you feel like there is challenge in this area and you need help, just reach out to me and we will put you in contact with the right people and make sure that you are able to like, deliver on this requirements from a policy perspective. And so, here we just list that uncollectible recharge and allowable cost, right? So, if you are not able to like collect, some revenues that's zero to you, you cannot really treat it as an expense and charge through your rates, for this uncollected dollar amount.
Okay, in terms of invoices, regarding like format and content, you want some basic data, the chartstrings that should be charged, description of the goods, services provided, date of the service, amount charged. And then in terms of like, record retention, as we know, as you might know, we get audited, right? So every year we get audited, and there is one or two recharge centers that are audited. And so, we want to make sure that we have kept adequate like, record or like rates, billing, et cetera. And so, for the different components, it seem to be a common denominator, which is like a five-year, period during which we want to keep, the various documents.
So, as your rates get approved, any particular, billing that you generate, any self-certification that you generate, ensure that they are like, in folders that you have at least, five-years' worth of, data that you can use them if an audit, is taking place. Okay, looking at surplus and deficits, again, the recharge operations must break-even over time and be within the recharge tolerance. We have defined tolerance already. And so, to ensure that you stay within your tolerance, you want to monitor your operation from a revenue-expense perspective. And then from time to time, you might be in a large surplus or deficit position.
So, if it is within the year and it is due to timing, I wouldn't be too worried, right? I think the key question is, okay, looking at my operation and forecasting, the other months to the end of the year, where will I land, right? Will I be within tolerance? Will I have a significant deficit or not? And so, really, the perspective is, at the end of the year. So, this is when the deficit waiver process, takes place. And so, if you are going to be outside of tolerance, you need to submit a deficit waiver, but only at the end of the year. During the year, and typically, fine with having units outside of tolerance as long as they come back within tolerance by the end of the year.
And so, as part of the deficit waiver process, you will be asked to like list the waiver amounts, but also identify a plan on how you are going to come back within tolerance, right? So that's part of maybe your request. I review this request and then I provide guidance and my recommendation to the finance committee, regarding the request, so they should be approved or changed, maybe the amount should be reduced, et cetera. But yeah, the last few years, all the recharge based deficit waiver have been approved and there is less and less. We used to have zero deficit waiver many years ago and, I think, it is probably going to take us two to three years to be back in this position, at least for most units.
there is two large units for which, or for whom, it might take longer. But, yeah, my hope is that for the next year, we can come back to a stage where, all the units are within tolerance again. On the surplus side, I am going to skip. I am not too worried about, significant surplus. Typically, they usually come back within, within tolerance by the end of the year. Okay, and then shifting to like self-monitoring. So, the unit to monitor this recharge activity on a monthly basis, right? So, when the ledger closed, you can use, the templates that recharge self-certification just to get a sense of where you are landing, meet with, the facility directors or manager, just share the financial, with them. Either, on a monthly basis or on a quarterly basis depending on position, the financial position, of the unit.
And then there is the file, the self-cert file, also has a tab on the forecast. we will come back to this during, the training next week, but there is like a forecasting tool that we have deployed as well. And so, as a unit, you can use Cal Answer reports, you can run, your own smartview reports to better understand, different components of your operation. So, on the self-certification, again, that's the process that you use to submit your self-certification form. Those are typically due in January. I haven't changed the process from year to year. So, you can expect, next year to be similar to the process. This year, the only thing I changed, I try to, add a little bit of time for you to build your rates.
So, again, this year, it should be around the 23rd for the deadline. And that's the deadline to submit, your rates to me. You might need to submit your rate to your DFL at an earlier time, so just keep this in mind. So, if you establish a new recharge center, you should self-certify if you are adding services, right? So, in-year you might have a new service, right? So, like a PI gets a grant and you have a new equipment and you have a new service, you want to get it certified during the year, right? I am not going to push back on that. But, yeah, you can also, change your self-certification when you change your costing methodology, right?
So, if you are changing how you allocate certain costs, that can drive changes in your rates as well. Okay, and then moving on here to the processes from an overall perspective, we start with the top left, then you need to complete the self-certification forms, subject to the division. Hopefully, the division approves the self-cert comes to me, I review it. If I am fine with it, I escalate it to the recharge committees. They approve it. Then we repost the rates on the website. And it is pretty fast. In-year process is pretty fast. Within a week or two, we can turn this around typically, so.
Okay, I talked about that, and then we update the website. And then it is your responsibility to notify your customer of rate changes if there is some. But from an audit perspective, again, every year, you get audited, so it is a question of time, we both get audited. And so, I am sure, you build your rate correctly, you have backup, always have your backup, available as well. Talked about sustainability and practices. And so, from time to time, the unit might be faced with, a dilemma. For example, it could be a new equipment that might cost a little more, but, its carbon footprint is much less than other equipment, right? So, it could be your car, it could be, any power tool that either could be using, gasoline, for example, gas versus like an electric one, right?
So, currently an electric truck, might cost a little more than, a regular truck. But, I think, one of the reasons is because we don't really include the cost of pollution, in the price of like, a gasoline, power truck right now. So, the economic model we use is not really, balanced the way it should be. And so, I think making, investments in equipments that help us achieve our goal here is very important. And then I am seeing, more and more of that, taking place. So, definitely one lens we want to keep in mind with recharge and, if the cost is a little higher versus another purchase, but we are doing the right thing from a carbon footprint perspective, I think that's the right decision to make.
So, here again is, a few elements that we just mentioned, gas-powered equipment, vehicles, tools. Okay, we said we are gonna skip closing the recharge operation, but if you ever needed to close one, you can go back to the section or reach out to me. Common issues. Many of the issues we see are around the equipment reserve, sometimes folks are like, oh, I kind of depreciate my equipment, my rate can be too high, right? And so, I think, having an understanding or someone might be, oh, when we are going to need a new equipment, we are probably gonna make a request, for a grant or something. The new equipment will be processed for grant.
So, there is, situations are a little bit on the gray area. So, feel free to reach out to me when the situations are surfacing and we can provide guidance. Surcharge income is often not recorded. The last one is often recorded on the wrong fund, right? So, keep in mind that there are two components on the revenue. There is, the first component related to the internal rates, and then there is a surcharge, and the accounting is different. So, just make sure when you create your journal that you address that.
And I have a sheet that I started to report on like a smartview sheet I developed so I can see who is printing it and who is not. So, we might reach out to you as we further, dive and focus on the revenue side and ensuring that, we follow, the guidance more precisely moving forward. Okay, so just to summarize, we have just references listed there. So, I encourage you to go to the recharge website, we have lots of good information there. And as well, feel free to reach out to me. So, the best way to reach me is a second email if you want like a quick feedback, right? So, email me at hbruckert@berkeley.
Or you can IM me too. I am very responsive on IM if you need something quick. If it is more like a submission, for rate, et cetera then use the recharge certification. But yeah, so just to new ones, when to use what. Okay, and the forms and templates, they're on the recharge website and you have the training. Yeah, so here on the agenda, we are gonna be identifying the line of business, cross pool development, focusing more on news, depreciation, inventory, and subsidy, determine equitable mean of distribution. This is the allocation of the cost to the different, services, so to speak.
Creation of the rates, how do we review and test the rates, what are the rates for non-campus customers, and then the summary of two components that are similar. So, starting with the overview. we are gonna have to restart with this slide, right? And so, again, internally, in the center of the boxes are internal recharge rates that are used. So that's one set of recharge. And then on the right side for affiliates, we can charge ICR, but it is capped, right? So, the surcharge can be up to the ICR rate, but not higher. And then, for affiliates and other UCs, you might be assessing your AFC rates, you might not. It depends if it is treated as a revenue or not.
And then coming back on the left side with the external clients, again, here's a surcharge. You need to be at a minimum, the ICR rate, right? And one thing we should keep in mind is the ICR rate is negotiated. So, when we say, overhead cost is like 60.5%, our true costs are higher. But with the federal government, we negotiate and then we stand on a negotiated rate versus a calculated rate, but the calculated rate is higher. And so, this is one of the reasons why we have the minimum. And then, starting a few years ago, we have asked units to list and you will see it in your self-certification, there is one of the column all the way to the right that asks you to list your external pricing. So, you list your internal pricing, you list your external pricing. And we are also asking you to identify a market rate if you are charging external clients.
So, I know this can be difficult, but, hopefully by every year, you have a better ability to determine, okay, what would be the market rate for my service. And by listing the market rate, we can then identify, okay, is there an opportunity, for us to charge more, right? So, if your minimum, if the minimum you need to charge per policy is, let's say, 160, right, the 100 plus 60, if it is 160, but if the market rate is 300 then, looking at it, we could say, okay, well, we want to charge 160 the minimum, or should we charge something much closer to the market rate? So, again, we probably wouldn't, shift from 160 to, let's say, 220, in one year, but we can say, hey, in the next three years, let's get much closer to the market rate, right?
So, and we have done this with some of the units with success. So, I encourage you to consider this as well when this opportunity arises. Okay, yeah, so here are just, some summaries, right? Customs are only obligated to pay their fair share of the cost. So, again, the idea is that the rate is based on cost, on direct cost. You kind of charge more, right? The rate kind of disadvantage one customer or another group of customers. So, recently someone called me and said, oh, well, we have some PIs, they say, oh, you can charge me more, other PIs just won't charge one rate, but the others say, hey, we can pay more.
And so, they were asking, can we have two rates, and the feedback was like, no, we cannot have two rates. especially since, this was like, grant-based. And the last one is their rates are always, cost based. So, moving on, like, so rates are prospective, so, what this means is that you are going to build a budget, right? you are going to be evaluating, okay, what will my salary be next year, right? Well, we are using 3%, but OP might change it at the last minute and say it is going to be 3.5% or 2.5%, we don't know. So, as the rates are always kind of wrong, just like any budget is always wrong the moment it is finished, because there is always changes, every day things change, right? But they are prospective and they are billed with estimated expense.
So, for example, you might plan to buy a new equipment. So, you can include this in your rate. Even if the equipment is not there, if you are planning to purchase it, you would include it, right? And so, the second bullet, like great structures that work best are simple and aligned with the nature of the service offered. So, what this means is that, simplicity often helps to, spend less time on a particular process and often easier to like justify any type of like, allocation that you do or yeah, any calculation that you do. You try to align it with the business side or have like a good, business rationale for allocating something in a particular way, right, using business metrics or using some metrics that you can defend.
So, identifying the line of business is critical. Determine the goods or the service, what will they be. How the service or good will be requested and provided, who will be the customers. So, here are a few examples. I am not going to go through all of them, but if you have like a machine shop, for example, and the shop makes like satellite parts and also perform unique fabrication, what are some of the questions you might ask? So, do you provide the same satellite parts over and over, right? So, is there like a repeat or is there some components that are repeating itself. But then also some customized components, right? So, this will help you identify how you structure your rate, because there is different ways to structure rate, right?
So, if you take, an example we are all familiar with is if you take like a gym, right, you go to the gym in the morning, stay healthy. And the gym might have, different gyms have different pricing structure. So, some of them might be like, hey, give us $10,000 and you can come to the gym for the next few years, anytime you want. others it is like you pay by the minute, you come in, you pay by the minute. Then you have the hybrid model where, you pay for a fee to join, but then it is, x dollars right? So, you can see it is the same service provided, but the pricing is very different. And so, what you want to think about is the upside and downsides, the risk and rewards of different pricing mechanisms.
And sometimes it is pretty straightforward. Like, okay, pricing should just be using, component A. But at time for a similar service, there is various models. And some of the model have more risk, more upside, right? So, you want to look at those different models and think about them, determine what works best. And you can migrate them from year to year, right? So, here's another example, an analytical facility and a number of different machines perform a variety of analysis. So, here, some of the questions would be who is performing the analysis, right?
Sometimes, some of the facility offers a service as a self-service. Meaning, a person externally or even internally would come, get trained on the equipment, and then operate the equipment. They would bring, the goods that need to be machined, or treated, or the samples, right? Other facilities, they are fully staffed, right? So, the customer just come in, provides the sample, or the data that need to be treated. And to use the service center, provides the service and provide the final deliverable back to the clients, right? So, it all depends.
Also thinking about the process like in detail, right? So, if you have equipments, how does the equipment function? Or is there a significant component of the process. Before being able to produce, is there like calibration that's required for the equipment? Afterwards, is there any closing, processes as well? So, you really want to understand the different component of the process, or the service, how it is delivered to ensure that we account for all the different components, when we will even calculate the cost.
So, if it is computer support, the unit employs a number of programmers, and desktop support specialists. here's some of the question is: what type of computer support is provided? Does the unit maintain desktop to the standard? Does the unit provide ad hoc computer programming? Does the unit maintain servers to a standard? Things like that. Okay, I am gonna skip this one. So, focusing on the cost pool development. So, again, the idea is that the rate is basically the cost divided by, volume in a way or the estimated number of service or goods produced. And then keeping in mind that surplus and deficit from prior year will also be included in the estimated cost. So, that's one of the components.
So, for each line of business, the idea is to identify the total costs of providing new service regardless of how those costs are currently funded. So, what this means is that, some of the costs might be like, subsidized, right, or might be funded differently, but the idea at the beginning is to identify all the costs. And not net, or miss, or not include, costs that have been offset, right? So, if you have some costs that you are planning to subsidize, still include your cost in your initial pool, but also show the subsidy as a separate line item that's, from the beginning.
So, you want to look at, the people, the material that's needed to perform the work. you will get depreciation, what are the equipment that can be needed? From an infrastructure perspective, What is gonna be needed? Is there any, personnel or support personnel that can be needed as well. So, you might also have offsets, right? So, we talked about the subsidy as an offset, but the offset can be, rebate, right? So, if you purchase some goods, for example, and you perform some task, on these products, there might be volume discounts that you might receive at the end of the year, right, from the supplier. So, you want to account for those even if on a, weekly basis, you might not see them, when you do your budget, you want to account for those offsets.
So, the offsets, here in this case would be the credits, right, in the same way as that subsidy would be treated as a credit or an offset to expense. So, in terms of costs, here are some high-level elements to keep in mind. So, the costs need to be reasonable, they need to be allocable. So, what we mean by allocable is, we need to be able to define the allocation methodology we used when allocating costs from the cost pool, to the different services. The costs need to be identifiable, and then allowable from a policy perspective and from a contract and grant perspective as well.
So, that's on there. And then with shared costs, again, that brings the notion of having a pool of costs that need to be allocated. And so, having business drivers to allocate the costs is critical. So, some example, if you have a facility, right, and you are renting the facility, let's say, you could use square footage. If you have, three pieces of equipment, but they use different square footage in the facility, you could use the total facility cost and then say, okay, equipment A used 10% of the square footage, equipment B, 25% and then the equipment C is the balance.
Then you would use this percentage of square footage as an allocation for the facility costs, right, in the event that the facility is like rented and it is a cost that hit your P&L. So, that's just an example here. Okay, so, pivoting to depreciation, inventory, and subsidy, already talked a lot about some of these. So, I might be skipping a few slides here. We talked about appreciation already and the fact that, you can set up reserve on the site for, the acquisition of future equipment and the replacement of equipments. We already mentioned that, there are exceptions if the equipment were purchased by, federal funds. Or if it was that could cost share on some federal projects.
So, with the assets once they are acquired, we want to ensure that we list the key elements related to the assets. And so, you will see in the self-certification, there is a tab on depreciation. So, the idea is to list all the assets, the depreciation schedule, and that enables you to then have for each year, a total depreciation component that you include in your rates. And so, in this particular sheet, would be the property numbers, the purchase dates, the value, if there is any salvage value at the end of the useful life of the equipment, what is the useful life. Again, we can use the UCOP tables.
And then you can calculate the periodic charge meaning the yearly depreciation. And so, basically, you would have this by equipment, but also rolled up. Yeah, this just identifies, the current threshold of $5,000 for the equipment. So, here are a few situational case samples related to equipment depreciation. So, if an asset used in the recharge operation had never been depreciated, let's say there is a useful life of five years and their equipment is currently three years old. So, the question becomes, can I claim three years of depreciation this year and then a year each moving forward for the next two years, right, as a true up?
And so, we will deficit that result from the depreciation, like a depreciation true up that can be allowed or not. So, the feedback here is yes. So, if you have certain activities that should have hit your ledger, but they didn't, you can true it up, right? Of course, you wanted to avoid the situation, but from time to time they might surface and then you want a course correct, so to speak and true it up so we can forward you in the right setting.
Here is another example of assets that I have included in recharge rate even though now obsolete. there is two more years left of its useful life. Do I keep including the asset on my depreciation schedule until it is fully depreciated? The answer is no. So, from an accounting perspective, if an asset is obsolete and you still have some useful life, from an accounting perspective, you need to record the asset as a loss. So, the amount that's not depreciated yet would be treated as a loss. But this loss can be included in future U.S. rates, right? So, that's the last components.
So, any deficit the loss creates in the operation fund can be included in future rates. Okay, just skip this. Focusing on inventory. There are not too many units with inventory, but inventory is defined as product for resale or the raw material used in the production of goods. So, typically, it is like storerooms have inventory, right? Other operations might have inventory as well, but it is typically the store and work inventory. So, finished or partially finished product can also be considered as inventory. And so, with inventory, one of the key things you want to do is to do a physical count, right?
At the end of the year, you want to ensure that what you have in inventory in terms of quantity is matching What is in your system. And so, if there is a disconnect, right, in your system, you might have 100 pieces, where if your regular, if your true inventory is 80, that means 20 pieces have like, not been accounted for correctly, so you need to adjust and align the actual inventory with what you have in your system and record the variance, as a loss this particular case. So, yeah, inventory accounting can be a little tricky. If you are faced with a particular situation, feel free to reach out to me.
Subsidy, we talked about subsidy already. So, I think I am gonna skip that now. One of the thing we have been focusing on and, identifying the last few years is, we want to bring awareness to subsidy and want to ensure that your leaders are aware of the subsidy. Because the subsidy reduce rate, right? So, and if we provide a service on contracts and grants or federal funds, if we have the subsidy built in, it means we are not going to recoup all of our costs, right? So, every year we have an opportunity to, identify our subsidies, share them with management and leadership, and asking them, hey, do you want to maintain all the subsidy or not?
And so, in the last few years, many of the units have, reduced their subsidy. Again, this is at the discretion of the unit, right? I am not here to tell you what subsidy we should use or not, but I am just saying that it is good every year to reevaluate subsidy and determine What is the appropriate level, if any, is. So, the equitable means of distribution, and this is the allocation of cost to be from the pool. So, we want to think about cost drivers, right? So, depending on the different components, if it is, time-related, if it is goods produced, if it is, machine time, there is different components that we can use.
So, I am not gonna go through the detail here, but, for example, with time, there is, different component that could be included, right? You could look at having a rate for regular time, having a rate for like overtime. So, there is different nuances you can introduce. Same for machine hours or machine times. Yeah, so here are some other pricing considerations. So again, these are enabling you to determine what is the best pricing structure and what are some of the nuances that you can include, right? So, for example, some of the units, they have like pricing based on volume.
So, they say, okay, if you are using this equipment, less than 10 hours for the year, you will be charged X. If you are using more than 100 hours, you will be charged a different rates, right? So, you can have rate based on volume discounts, time of day. For some rates, if someone needs something very quickly versus if they can wait for, a week for the product, so the service to be delivered might be different rates. So, you can structure the rate as long as you allocate all the cost, you can determine how this cost allocation will be driven towards, various services, right? So, we can keep it very simple, just one rate, so we can, you can have two or three different rates as part of your allocation.
Okay, so, we will come back to creating rates in this section. We still have a few minutes, we should be able to wrap it up here in the next 8 minutes. So, you can round rates, but, make sure it is reasonable when you are wrong, but you can definitely round your rates. You can package and bundle rates, so if you have, 4 or 5 different rates. I remember like, IT was like telecom. I think they had, regular lines and they'd like voicemail, they'd like, international, so they had 3 or 4 different rates. And then we say, okay, let's just simplify, let's just create one rate, it is all bundled in and, move forward.
So, always look at ways to like simplify and have less rates. if you can, right, I am not saying you can always do that, but it is helpful to have less rates. it is also less confusing for, for things. And then once the rates, have been calculated, you wanna control the work or validate that what you have done, makes sense, right? So, anytime we do something at the end, which before we afford it, we should always stop and say, okay, well, how do I make sure that what I did is correct, right? And sometimes there was errors, right? it is, it is still me, that's fine, we all do errors. But I think it is good to like stop and kind of poke at it, right, and pressure test it.
So, how do we do this? So, you want to examine the ratio of direct cost to an infrastructure cost. You want to compare your current rate with the previous rate, right? Oh, I am seeing like 10% increase. Oh, that seems high when my salary is increasing by 3%. What is driving the other 7, right? So, drill down. Oh, it is volume change, my volume is being reduced by 7%, so I can see now why it is 10%, right? So just, poke at it from different angles and make sure it makes sense. And sometimes it doesn't and catching something that maybe wasn't set up correctly, or typo, or something.
And then it is always good if you are like second bullet, right? How do the rate compare to rates of other units with similar services? So, sometimes you have the luxury, so to speak, to be able to compare by rates. How does the other UCs charge for genomic sequencing lab? Oh, they charge 120, I am at 125. Okay, that's directionally, correct or aligned, right? And then always ask how was a subsidy handled, have they been approved as well? And then, the last bullet, thinking about the market rates, right, for external clients. So, again, it is in the self-cert, make sure you list them to the best of your knowledge. I don't expect, folks to like spend a lot of time looking at market rate, but it is also good to know what the market rate is for the service that you are going to offer.
So, we should know that it is part of best practices here. And then to test the rates, you can also kind of back into the number I call it. Or, so what I mean by this is you would take a rate, right, multiply the rate by your volume, and you can do this in the spreadsheets. And then you will receive a total, right? So that, in essence, will be your recharge income. Let's assume there is no external revenue, right? You would see your recharge income, then you compare it to your cost, and it should be the same, right? Because when you build your rates, you should absorb all your costs, through your rate. So, that's one way to look at it.
Again, rates for non-campus customers. I think we talked about, ICR and the minimum for externals. So, startups, we have quite a few startups on campus and you are gonna have, more as new building hosting startup will be built in the next few years, some of the, Barker building and, initiative will enable us to have more startups. So, the startups that are on campus are treated as external clients. So just, keep this in mind. Okay, we talked about the fact that the rate need to be charged consistently across campus. This we've seen already. Basically, the allocation of different components, or how to treat different components across clients.
And so, yeah, in summary, to build your rates, you want to spend lots of time developing the rates and really understanding on the business side how it works. So, discuss if you are supporting the buildout of rates. Discuss it, with the director, or the manager of the facilities, or the group that will be delivering the service. And then share the financial with them as well, right, so they can see, okay, well, here's the cost of this, here's the cost of that. During those interactions, they might suddenly realize, oh, wow, we also have those costs. I never thought about it. it is not included, let's include it, right? So, engage them in the discussion.
I call it putting a little bit of finance blood in like non-finance and, business, folks. So, it is always good that they have some awareness of how the finance function. Yeah, so, here I think the focus is really on the second bullet, like small changes in the denominator. The denominator is the volume, right? So, it could be like productive hours, number of jobs, number of customers, number of units produced. A small change in the denominator, well, we often need to be changing the rates, right? So, if your volume goes up 10%, your rate should go down, quite a lot, assuming everything else is flat, right?
So, volume increase always helps to keep rates, flat. However, if you have volume decrease, that's quite impactful as well because you are going to see increase in rates, right? And increase in rate might trigger even lower volume, right? So, you really want to be, sensitive to this and look at the overall trend for your businesses, right? Some businesses are growing in the next ten years, other businesses will train to be less usage.
So, look at the trends over time and then ask yourself, okay, if I am managing a recharge activity where volume will be decreasing, how can I plan for that? And how can I avoid, the rate from increasing consistently, at a pretty high pace, right? Might be an opportunity to reduce costs, over time or maybe not replaced, certain equipment, right, or people when they retire, maybe they're not replaced, right, since there is less and less volume over time.
So, things to consider, again, includes, surpluses and deficits from previous period, includes the depreciation. And yeah, again, in terms of like reference and contact information, the recharge website, there is various documents, there is the policies, there is different bulletin related to the recharge and pricing. I also encourage you to learn as much as you can about contracts and grants especially seeing if your recharge center charged contracts and grants. I took many classes, they have great classes. There was like a class for like RAs. it is a really good class and it just will help you to better understand contracts and grants.
So, I encourage you to do this. there is, the billing policy and procedure, there is the F&A rates, and then some of the, AFC policies, et cetera. So, lots of reference on the recharge website. Again, my information here. And we will wrap up with this.