Is TRAC the right approach to track costing?

The TRAC return deadline is approaching and an OfS-commissioned review of TRAC has recently been published. Andrew Connolly considers what it all means

Andrew Connolly is Chief Financial Officer at the University of Exeter.

Two years ago, Wonkhe published why costing really matters and how to make it better. This argued the case for the need for managers to embrace activity-based costing, known as Transparent Approach to Costing (TRAC) in the sector.

It can help to better manage financial margins on all our activities, inform resource allocation, and improve financial sustainability. But it also highlighted shortcomings with the current nationalised approach to costing activity in higher education.

Costs and benefits

Last November, the Office for Students (OfS) published the outcome of its review of TRAC in a 166-page, KPMG authored report. The headlines are broadly – the burden of TRAC is considered proportionate to its benefits; improve communication of the purpose and benefits of TRAC to academics; we need to solve how we cost teaching; tweak some processes here and there and continue as you are.

This is a missed opportunity. Here are some reasons why.

  • “Funders and institutions both need to do more to increase the understanding of why TRAC is collected and how it is used”

As the report notes, the original mandate and use of TRAC has become outdated. Yet we each go through extensive annual TRAC cycles and submit our returns. The report asks regulators and funders to define their need for costing information. It’s not obvious to me they do need it or use it, other than for calculating annual full economic costing (fEC) research rates.

But if, as the report states, the majority of providers view the primary purpose of TRAC as calculating fEC rates, then it’s clear the cost-benefit ratio does not stack up.

To run a huge annual TRAC industry to calculate an annual inflation rate (for the indirect costs of research) is disproportionate. Not only that, those fEC rates are hideously lagged because they are based on last year’s financial statements, applied to new research applications no sooner than seven months (but more commonly 12 months) after last year end, and won’t flow through into new awards and funding for a following six to 36 months.

We spend a lot of time calculating future funding based on ancient history, with TRAC giving that an air of timely precision and spurious accuracy. There has to be a better way of calculating inflation for the indirect costs of research projects.

Understanding the process

  • “Institutions should be reminded of the importance of ensuring good and regular communication with academic staff to ensure there is a sufficient understanding of TRAC”

We’ve been doing TRAC for 22 years, so something’s obviously not worked and I don’t think it’s the lack of communications skills from senior leaders. The language barriers of TRAC and its confusion of cost and price are to blame.

This is why our often robust financial health when contrasted to our dire TRAC financial position confuses the audience. TRAC treats margin as a cost and wraps that into “full economic cost” which isn’t a cost but a price.

Pretty much everyone intuitively understands the concept of cost, price, and the need for a margin. But TRAC’s conflation of these means we spend fruitless time discussing the data, not the signal. More importantly, we alienate the audience from the powerful insights that activity costing such as TRAC has to offer.

TRAC for Teaching

  • TRAC(T) does not meet the needs of institutions

While the report concludes that costing teaching through TRAC does not meet the needs of providers, it says that funders do use this data. Putting aside the fact that the Augar review did not use TRAC(T) data, instead commissioning KPMG to develop an alternative costing model, TRAC will never succeed in costing teaching outputs (or products).

Firstly, and unlike research, there’s no consensus on what it is we should be costing – is it a module, a year, a programme?

Secondly, our teaching outputs have become increasingly diversified with the development of blended and online delivery, degree apprenticeships, newly emerging micro-credentials, or offering individual modules to students through the promised development of a new student lifelong loan entitlement. A nationalised costing system will not cope with the complexity to the bespoke offerings of individual providers.

TRAC(T) is a retrospective costing tool methodology based on simple mathematical product of total cost divided by total units. So if your law degree intake doubled this year as a result of last year’s A level system, then magically your costs have halved according to TRAC(T) – quite how policy makers find that data useful is beyond me.

  • Costing is important

Costing isn’t only important, it is essential. There’s no other way of managing financial sustainability in a university. But from my point of view, a nationalised costing system such as TRAC, largely designed to face the now forgotten and undefined needs of the regulators, that’s so retrospective and so rule-bound by the need for financial accounting reconciliation, is not the one we need.

The language of TRAC has created a barrier to understanding it. Even where it works, conceptually at least – in calculating fEC rates for research projects – I would question its cost-benefit ratio.

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