Staff Web

StaffWeb: UG | UW | WLU Libraries: UG | UW | WLU Campus: UG | UW | WLU (Choose TUG group) Administration Annex Info.Ser.Res.& Systems TRELLIS T D R ---------------- Access/User Services E-Journals G P Acquisitions Sci Selectors ---------------- ERL Cataloguing Journal Indexes MIS Web

Home Documents

Documents Contacts Search

Tri-University Group of Libraries

Re: Cost Sharing Project

Table of Contents:

Introduction

Significant Recommendations

Conclusion

The recommendations presented are designed to be utilized by TUG for all projects.  The recommendations, in particular the cost sharing models, are adaptable to current and future projects contemplated by TUG.  The cost sharing models have been designed to be simple, fair, and appropriate for all TUG projects and to allow for the models to be robust yet flexible.

The recommendations set forth are based upon business acumen, accounting policies, best practices, and sound judgment given the current state of the Universities and TUG.

review the existing TUG agreements in detail;

review with each university's appropriate personnel the activities being performed (to accomplish the projects);

analyze the already suggested cost sharing models;

prepare financial projections including a cash flow model as necessary;

performed relevant ratio analysis as necessary;

review selected reports, documentation, and correspondence provided by the Universities' personnel or outside parties;

compare the proposed cost sharing models to industry recognized best practices;

conduct discussions with other Universities, in Canada or the United States, or other relevant outside parties who may provide additional insight and information; and

derive and prepare other appropriate cost sharing model(s) as necessary.

This engagement was limited to the procedures summarized on this page.  We did not audit, review, or attempt to verify the accuracy or completeness of your accounting records in any manner other than by performing the procedures listed.

This report is for the sole use of TUG and the Universities to assist in its determination of an appropriate cost sharing arrangement.  This report may not be quoted from or reproduced in any form whatsoever without the written permission of Emst & Young LLP.  We will not assume any responsibility or liability for losses incurred by TUG, the Universities, or by other parties as the result of the circulation, publication, reproduction, or use of this report contrary to the foregoing provisions.

In addition to our research with independent parties, during the course of our work we interviewed and held discussions with the following people from the Universities, in particular, members of various TUG committees:

Ms. Virginia Gillham Mr. Murray Shepherd Mr. Michael Ridley Mr. Mark Haslett Ms. Linda Teather

Ms. Helen Salmon Ms. Heather Martin Ms. Donna Sartori Ms. Vera Fesnak

Mr. Wish Leonard Ms. Sharon Lamont Mr. Doug Horne Ms. Joan Macdonald

Ms. Joanne Oud Ms. Pat Hock Ms. Lorraine Beattie Ms. Debbie Thayer

The following sections detail our significant observations and recommendations as they relate to the Project based on our performance of the specified procedures.  A summary of the categories of our significant recommendations is presented below:

1. Capital Cost Model - those costs incurred by TUG to get a project to the point of being fully functional;

2. Operational Cost Model - from the point of full functionality, those costs incurred by TUG annually during the normal operations of the project; and

3. On-going Significant Capital Costs - from the point of being fullyfunctional, those capital costs incurred for significant acquisitions, additions, renovations, replacements, and upgrades.

1. Capital Cost Model

   There is mutual benefit to all parties for deciding to proceed together on a TUG project such as financial savings, pooling of expertise, and operational synergies.  It is expected that each university would have performed the requisite cost-benefit analysis to determine if it was in the best interest of that particular university to participate in the TUG project.

   However, there is also disproportionate benefit amongst the universities given the disproportional population of total available users (i.e. students, faculty), needs, services, teaching techniques and styles, and programs at each university.

   The following recommendations are for those costs incurred by TUG to get a project to the point of being fully functional.  The term "fully functional" is defined as the point at which the project commences its normal and value-added operation to TUG.

   Recommendations:

   1. 50% of all total actual capital costs incurred by TUG to get a project to the point of being fully functional will be shared equally by each university; and

   2. The remaining 50% of actual capital costs will be divided by each university based on the pro-rata share of Full Time Equivalent (FTE) students at each university using the most current OCUL statistics.

   The following simplistic example on the next page will illustrate these recommendations.

   Example

   Project A is for the purchase of a new storage facility to be utilized by all three universities.  Assume that TUG decides to proceed with Project A that has a capital cost of $3 million (actual costs not budgeted expenditures).  This is the cost to get the Project to the point of being fully functional.

   Cost allocation:	Waterloo $	Guelph $	Laurier $	Total $
   a) 50% of total costs to be shared equally	500,000	500,000	500,000	1,500,000
   b) 50% of costs to be shared based on pro-rata share of FTE,'s (using 1997/98 info from OCUL Statistical report - 47%/35%/18%)	705,000	525,000	270,000	1,500,000
   Total	1,205,000	1,025,000	770,000	3,000,000
   Share of total capital cost	40.17%	34.17%	25.66%	100%
   What if % of FTE's changed in future - share of total cost:
   i) 44/36/20 %	38.67%	34.67%	26.66%	100%
   ii) 50/34/16 %	41.67%	33.67%	24.66%	100%

    

2. Operational Cost Model

   Similar to the capital cost model, there is mutual and certain other benefits to all parties for the operation of a TUG project.  However, for various reasons, there exists the potential for disproportionate usage amongst the universities for a given project.

   It is difficult to predict at the start of a project what the usage will be by each university as this statistic can only be accurately measured during the operation of the project.

   In addition, usage can be assessed using different measures depending on a parties perspective - i.e. Annex - square footage space, number of requests for material in and out of storage, number of deliveries, etc.

   During our discussions, there was expression from each university that usage needs to be captured into a cost sharing formula in a fair and appropriate manner.

   From the point of full functionality, the following recommendations on the next page are for those costs incurred by TUG annually during the normal operations of the project.

   Recommendations:

   1. 30% of all total actual annual operational costs will be shared equally by each university.
   2. The remaining 70% of total actual annual operational costs will be divided as follows:
      1. TUG to designate a maximum of two (2) key usage measures at the start of the project;

      2. Each usage measure designated in a), will be assessed equal weighting as a percentage of the remaining 70% of total actual annual operational costs - for example:
         • 1 measure (100% of weighting or 70% of total actual annual operational costs), or
         • 2 measures (50% of weighting or 35% each of total actual annual operational costs); and

      3. Each university will be charged for its pro-rata usage within each of the measures designated in 2a).

   3. The usage measures chosen in 2a) will have to tracked and thus an appropriate system will have to be developed for each project.

   4. In the first year of operation, the allocation of annual operational costs of the project will be based on the actual results of the usage measures after the first four (4) months of operations.  After the first twelve (12) months, a retroactive adjustment will occur to re-calculate each university's operational cost allocation using the actual usage measure(s) results for the first year.

   5. For Year 2 and subsequent of the project, the allocation of total annual operational costs to each university will be based on the results of the prior year.

   6. Every two years, TUG will assess if the key measure(s) chosen are still appropriate or if they need to be revised.

   The following simplistic example will illustrate these recommendations.

   Assume that Project A incurs $1 million of operating costs in its first year.  TUG decided that Project A would have two key usage measures:

   1. % of available and utilized square footage space occupied; and
   2. # of requests to move reference material in and out of storage.

   The following are the results, for the two key usage measures above after the first twelve months of operation of the project:

   	Waterloo	Guelph	Laurier	Total
   1)  Square footage occupied	500 ft sq	300 ft sq	200 ft sq	1,000 ft
   2) #of requests	300	1,200	500	2,000
   Cost allocation	Waterloo $	Guelph $	Laurier $	Total
   a)    30% of total costs to be shared equally	100,000	100,000	100,000	300,000
   b)    70% of costs to be shared based on pro-rata share within each of the two usage measures:
   i) Measure # 1 - Square Footage 35% of total annual costs or 35% X $1,000,000	(500/1000) 175,000	(300/1000) 105,000	(200/1000) 70,000	(1000/1000) 350,000
   ii) Measure # 2 - Requests 35% of total annual costs or 35% X $1,000,000	(300/2000) 52,500	(1200/2000) 210,000	(500/2000) 87,500	(2000/2000) 350,000
   	327,500	415,000	257,500	1,000,000
   Share of total operating costs	32.75%	41.50%	25.75%	100%

    

3. Ongoing Significant Capital Costs

   During the operations of the Project, significant capital costs will be incurred that are outside of the normal expenditures of operations.  The following definition will assist TUG in differing between capital costs and operating costs and accordingly the cost allocation to each university.

   Capital Cost is the amount of consideration given up to acquire, construct, develop, or better a significant capital asset and includes all costs directly attributable to the acquisition, construction, development or betterment of the capital asset including installing it at the location and in the condition necessary for its intended use.

   Capital costs for TUG are for significant purchases in dollar value for assets such as property, equipment, licences, patents, and software.  Capital costs typically include significant acquisitions, additions, renovations, replacements, and upgrades.

   In the event of disagreement on the definifion of a significant capital cost during the operations of a project, TUG should contact an independent party to facilitate or to make the final decision.

   The cost sharing for significant capital costs incurred during the operations of the project will be allocated on the same basis as the Capital Cost Model defined and exemplified on pages five and six of this report.

   Recommendations:

   1. 50% of all significant capital costs incurred by TUG during the operations of a project will be shared equally by each university; and

   2. The remaining 50% of actual capital costs will be divided by each university based on the pro-rata share of Full Time Equivalent (FTE) students at each university using the most current OCUL statistics.

   Please note that minor asset acquisitions, that are included in the nortnal operational budget for the year, will be treated as an operating cost and allocated to each university using the Operational Cost Model as defined and exemplified on pages seven to nine of this report.

1. Each TUG project is to have its own annual budget, separate of other TUG projects, prepared with criteria established for determining which costs will be included and allocated back to all universities.  This will include those costs for goods and services that mutually benefit all universities and it will benchmark the minimum percentage of an FTE that will be included in the budget (i.e. 3/10 of an FTE).

2. TUG should solicit the services of a facilitator when applying the cost sharing models and when determining/approving budgets to ensure a smooth, efficient, and timely process.

3. All budgets are to be approved by TUG and monitored accordingly.  The Project Manager should submit monthly reports and make quarterly presentations to TUG updating the University and Chief Librarians on financial, operational, business, and other matters.

4. In the future, if the current TUG organization decides to add a member, then TUG will need to perform the requisite cost sharing analysis.  This analysis may result in a negotiated arrangement instead of a formula-driven one.

   For example, TUG may decide that the new member will pay an annual flat fee which includes the recovery of capital costs as compared to sharing the capital and operating costs amongst the four institutions by using the recommended cost sharing models in this report.

   Irrespective of which cost sharing arrangement is chosen for the new member, it is imperative to view each situation independently as each will be different and factors may exist that may significantly influence the direction of that decision in the future.

We very much appreciated the opportunity to act on this engagement.  We encourage you to evaluate the services you have received from us and to provide us with your comments.

If you should have any questions about our report or if you wish to speak to us about other matters please feel free to contact us.

Yours very truly,

ERNST & YOUNG LLP