## Tuesday, May 11, 2010

### What do fancy research tools really cost at a university?

Over the years, I've become convinced that there are lies, damned lies, and cost accounting.  What I mean by this is that "true costs" for various items in a business or at a university (a type of nonprofit business, after all) are sometimes allocated in whatever way is necessary to bolster a particular argument at hand.  If those making an argument want something to look like a bargain, no problem, there's a way to do the accounting for that.  If those making an argument want to make something look so expensive that it's economically unattractive, no problem, there's a way to do that, too.  I remember as a postdoc when the part of Lucent Technologies that dealt with real estate argued (apparently successfully) that they should get rid of the simple general stockroom because somehow having the square footage allocated to that use was losing money.  So they shut down the stockroom, and had a couple of hundred PhD scientists and engineers spending their (expensive) time ordering 4-40 screws from McMaster Carr online or over the phone instead of just walking upstairs and grabbing some.

Let's take an electron microscope as a test case.  Suppose a university or company buys an SEM for $350,000 (for the sake of round numbers). How much should they charge, fairly, for its use? Let's assume that this is a shared tool and not just sitting in one person's lab. This microscope and associated hardware take up something like 100 ft2 of floor space. The microscope also needs electricity (say 1 kW) and cooling water. Now, a university is unlikely to charge a department or faculty member "rent" on the floorspace, but a large company may decide to "tax" a business unit for space at some rate. The electricity and cooling water are likely part of a university's or business's "overhead". Overhead charges are assessed when it's difficult to trace a particular designated responsible source for certain kinds of costs-of-doing-business. For example, the overhead rate at my institution is 52.5%. That means that for every$1 of direct research cost (say a grad student's salary), the university charges my research account (and therefore the funding agency) $1.525. That "extra"$0.525 goes to cover the university's costs in, e.g., keeping the lights on in my lab, the air handlers running for my fume hoods, and the road paved outside my building.

If the university or business wants to maintain the electron microscope, they probably want to buy an annual service contract for, say, $25K. Now, in the absence of a staff person to run the system, you might think that a reasonable user fee would then be$25K divided by the number of hours the system is used (say 2000 hours per year).  Not so fast - you have to charge overhead.  Moreover, the university or business may decide to depreciate the SEM.  That means that they may have an interest in replacing the SEM eventually, so they are allowed to tack on a depreciation cost, too.  For our example, a typical depreciation schedule would be seven years, so in addition to the actual maintenance cost, they would tack on, in this case, $50K per year. There are major federal rules about depreciation. For example, you can't buy something with a federal grant (e.g., a NSF "Instrumentation for Materials Research" grant) and then also depreciate it - that would be like double-billing the government, and that's not allowed. If the university or business does have some fraction of a staff person responsible for the instrument, it may be fair (depending on the discussion) to consider a fraction of that person's salary (plus fringe benefits [e.g. health insurance] plus overhead) as a cost to be recovered as well. So, the next time you are paying$30/hour for access to an electron microscope, and you're wondering where on earth that figure came from, now you have at least some idea.   You can also see how administrations can sometimes argue that they "lose money" on research - they cannot always recover the costs that they put into things (e.g., the actual overhead income may not cover the utility costs), and sometimes they choose not to  (e.g., by not charging rent for space).  This is all stuff about which I was blissfully ignorant back in my student days.

Schlupp said...

As for the "loosing money on research" line, it gets even more complicated by the fact that universities are not-for-profit organizations whose purposes are to teach and to do research. (Tuition fees notwithstanding, they also "loose money" - or claim to do so - on teaching, so that's fairly similar.)

The argument usually goes like this: Universities have income from other sources than tuition and grants, this income gets spent on stuff that ultimately leads to research and teaching, so they *are* loosing money doing it. Which is right to some extent. However, while "loosing money", they are fulfilling their mission without which they would not have these other sources of income. Private donors would presumably be more reluctant to donate money if they were not convinced that it goes to some of the goals they associate with a university. And at state schools, the states most definitely pay for teaching (and a bit of research).

Anonymous said...

The reverse problem is equally challenging: imagine you have say \$500k in unrestricted funds available to you (as is commonly the case with junior faculty like me), how do you budget it in a way that you get the most out of it? Especially without knowing what money you will be able to raise over the next year.

Uncle Al said...

The obvious optimization is to outsource all infrastructure and capital equipment to Mumbai, then confiscate frequent flier miles as overhead. Improve DCF/ROI by exclusively recruiting native grad students, ending visa (vocanic ash, (other interdisciplinary) challenges.

The final step (Step 3 - profit!) is leveraged buyout by IIT with golden parachutes for every North American administrator. That removes the tenure problem, too, through reorganization. Make 'em all assistant profs so they work for a living.

Steve said...

Actually, as long as we are talking about bookkeeping...

I think universities have long viewed large expensive research projects as attractive because they generate enough overhead to do things like fix the buildings libraries etc. And because scientists are the ones with these large projects this seems to be why science departments have been growing compared to the humanities.

However, a well known institution (not mine) recently did the books a bit more carefully, and it turns out that this is not the case... because...

Many of the researchers with big budget projects end up moving from university to university and demand huge startup funds with each move. The overhead from the grants often does not even cover the startup by the time the researcher moves on again..

Once the administrators catch on to the fact that scientists are in fact not profitable, I wonder what happens then...

Tobias said...

I know I shouldn't bite on Al, but here goes my rant.
Increasing ROI by only recruiting "native" grad students?
Apart from the fact that even a Tier one, private research university doesn't get enough suitable applicants to do just this, much less BFE state, the notion that "native" graduate students are more effective is nothing but insulting - the U.S. have gained greatly by attracting scholars from abroad.
But maybe Al is right, people like Fermi, Bethe or Einstein should have stayed in Europe. MIT got a really raw deal when attracting this Ketterle fellow, and UCSB surely wishes their money back from Herbert Kroemer.

Anonymous said...

Maybe I misread, but since all the facilities are hypothetically in Mumbai, I'm pretty sure Al was talking about hiring native _Indian_ grad students. in India.

Also, I'm pretty sure (hoping?) it was tongue-in-cheek. The aggressive anti-anti-anti-American response is logically sound, but contextually a bit awkward.

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