Audit of Costing and Pricing Processes for Revenue Generation

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2 Findings and Recommendations

2.1 Implementation of the Treasury Board Guide to Costing

In March 2008, the Treasury Board of Canada Secretariat developed a Guide to Costing. Following this, the Office of the Comptroller General of Canada provided the Department with a questionnaire through Round VI of the Management Accountability Framework Assessment.10 The Department has a four-year timeline to implement and document the use of the Guide.

In addition, the Office of the Comptroller General of Canada has stated that Treasury Board Submissions and costing tables must be prepared using the Guide and that incomplete submissions may be returned to the Department.

Considering this, the Finance and Corporate Services Branch has made a commitment to implement the Guide by:

All departments must use the Guide’s approach to costing. The Office of the Comptroller General of Canada, through Round VI of the Management Accountability Framework Assessment,11 has requested that the Department report and provide an update on the early adoption and proactive implementation of the Guide. As a result, the Assistant Deputy Minister, Finance and Corporate Services Branch approved the priority-based phased-in approach to implement the guide and provided it to the Office of the Comptroller General of Canada.

The Department has nearly completed the implementation of two areas identified in the plan for fiscal year 2008–2009 (Treasury Board Submission and Memoranda to Cabinet), while the third area (incremental cost model) is scheduled to be completed in 2009–2010, it is expected that the plan will be fully implemented by 2012. Targeted activities for the coming fiscal years include the implementation of a corporate full-cost allocation model in 2009–2010, a reallocation exercise in 2010–2011, and a performance measurement and interdepartmental cost recovery in 2011–2012.

Audit and Evaluation will monitor the phased-in approach as part of the follow-up to the recommendations included in this report.

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2.2 Involvement of Finance and Corporate Services Branch

The Finance and Corporate Services Branch should provide functional direction, guidance, and support to managers on the most appropriate costing methods and practices. The Guide clearly outlines the roles and responsibilities regarding costing. Annex 3 provides a summary of key roles and responsibilities.

The following findings demonstrate that there is no standard costing model in place to support the costing and pricing processes for revenue generation within the Department. Similar findings were identified in two previous audits on similar subjects (see Section 2.5 for status of previous audit recommendations). As indicated below, there have been no significant changes in the framework since then and most of these issues still exist today.

No standard departmental costing model and guidelines

No standard departmental costing model and/or guidelines exist to assist managers to cost their activities and charge their clients. Many managers said that they would like more support and guidance to assist them when making decisions on costing.

Although there is no departmental standard model and/or guideline, the audit team received and found documentation pertaining to costing that was developed over the years by different areas within the Department:

Current models and guidelines are outdated

The analysis of the sample demonstrated that, out of the eleven revenue generating activities, six were based on various costing models such as, the Atmospheric Environment Service model used for smaller contracts. For larger contracts and Memoranda of Understanding (NAV CANADA, Provincial Hydrometric Agreements, etc.) specific models are used.

Based on interviews and the examination of documents, all of the models and guidelines indicated above were developed between the period 1996 and 2001 and have not been reviewed and updated on a regular basis. In fact, one model uses an indirect cost multiplier based on the 1992/93 actual expenditures while another model proposes to use a multiplier based on 1993/94 estimates. In addition, costs related to the Employee Benefit Plan fluctuate from 16% to 20% between models. These models and guidelines also refer managers to old policies and/or to policies that no longer exist. Although some program managers are aware that these models and guidelines are outdated, they continue to use them.

A few years ago, a departmental costing directive was drafted; however, with the implementation of the new Guide, the draft will have to be revisited to update the roles and responsibilities. The Finance and Corporate Services Branch is aware that their own roles and responsibilities need to be reviewed and better defined and that they need to play a more active role in this regard. Resources allocated to these processes in the Finance and Corporate Services Branch are limited.

The Finance and Corporate Services Branch recently developed a departmental costing policy and costing template; however, these documents were developed in the context of Memoranda to Cabinet and Treasury Board Submissions and do not include costing of goods and/or services. Some managers mentioned that they are aware that these documents are now available on the Finance web page and said that they plan to use them as a reference for any upcoming costing exercises.

The use of a standard costing model would help increase the consistency of both how program managers across the Department cost their activities and how the Department charges its clients. This would reduce the risk of over/undercharging and would ensure consistent application of costing and equitable provision for cost recovery services.

Recommendation # 1

The Assistant Deputy Minister, Finance and Corporate Services Branch, should develop and communicate departmental costing guidelines in alignment with the Treasury Board of Canada Secretariat Guide to Costing to ensure consistency and that roles and responsibilities are well defined.

Management Response

The Assistant Deputy Minister, Finance and Corporate Services Branch agrees with the recommendation.

This audit recommendation is being addressed as part of the broader management plan to implement the new TBS Guide to Costing as well as the related 2009 Guide on User Fees (see below). Accordingly and as mentioned in the audit report, Finance and Corporate Branch committed to complete the implementation of the Guide to Costing by:

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2.3 Supporting Documentation for Pricing

Managers should clearly define, justify and document the methodology and rationale used to calculate costs and determine prices. Pricing decisions should be based on a detailed costing analysis. Information obtained from the analysis helps management determine what the appropriate charge should be.

During the audit, managers were asked to provide documentation to support the calculations of their programs’ costs and recovery (i.e., pricing) decisions. Based on documentation received from the managers, the audit team found that, in general, the calculation on costing is documented while decisions on pricing are not.

Of the eleven revenue-generating activities examined, four (based on regulations) had a documented rationale to support the level of recovery decisions. In three instances, a verbal rationale was provided during the interviews with the managers; and for the remaining four, a verbal rationale could not be provided because recent costing exercises had not been conducted or the managers were new to the position and did not know.

Lack of documentation to support decisions on the level of recoveries and prices might place the Department in a position in which it cannot demonstrate transparency, fairness and equitable services to the public and its clients.

Recommendation # 2

The Assistant Deputy Minister, Finance and Corporate Services Branch, should, in collaboration with other Assistant Deputy Ministers, identify appropriate levels of approval when decisions are made to recover less than full cost.

Management Response

The Assistant Deputy Minister, Finance and Corporate Services Branch agrees with the recommendation. EC will clarify the appropriate level of approval required pertaining to pricing decisions.

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2.4 Circumstances of Undercharging

The Guide suggests that costs should be reviewed every two years. However, the frequency of the cost review may vary depending on the type of revenues to be recovered (e.g., the duration of regulatory fees) and considering the costs and benefits of such reviews. Larger contracts and Memoranda of Understanding, representing $45.8M in revenues, are reviewed on a regular basis. Smaller contracts, representing approximately $24M, are not always reviewed on a regular basis.

During the interviews and following documentation, the audit team found two main reasons why the Department may be at risk of undercharging:

  1. The tools made available to managers are outdated. For example, they do not reflect all the categories of costs that must be recovered and they refer to old multipliers (see Section 2.2).
  2. Costs (and prices charged) are not reviewed on a regular basis.

When undercharging, the Department has no choice but to use some of its regular appropriations (A-base funding) to support the program in delivering its products and/or services. This could be perceived as unfair by the general public when the service is provided to a specific group or organization and may weaken programs funded by A-base.

The results of the testing indicate that the Department might be undercharging in the following areas:

If the Department does not review its costs on a regular basis, it may undercharge its clients. This results in the use of its regular appropriations to provide services to them, which may be perceived as unfair to the general public and may weaken programs funded by A-base.

Recommendation #3

Assistant Deputy Ministers involved in costing and pricing exercises should review costing and pricing activities on a regular basis.

Furthermore, the Assistant Deputy Ministers of the Environmental Stewardship Branch, the Meteorological Service of Canada Branch and the Science and Technology Branch should update the cost of the activities included in this audit relevant to their area (Section 2.4 of this report) or document a rationale as to why a costing exercise is not conducted.

Management Response

The Assistant Deputy Minister, Finance and Corporate Services Branch agrees with the recommendation. Treasury Board’s Guide to Establishing the Level of a Cost-Based User Fee or Regulatory Charge recommends a review cycle for fees of three to five years. This requirement will be clearly outlined in the chapter for Costing for Fee Setting within the departmental Costing Directive currently under development.

The Assistant Deputy Ministers, Meteorological Services of Canada Branch, Science and Technology Branch and the Environmental Stewardship Branch agree with the recommendation that costing and pricing of cost-recovered services should be reviewed regularly with respect to the specific activities included in this audit.

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2.5 Status of Recommendations from Previous Audits

Recommendations related to costing purposes have been made during two previous audits: The Meteorological Service of Canada Audit of Weather and Environmental Protection Products Costing - Pricing Practices (November 2004) and the EC’s Commercial Services – Cost Recovery and User Charging (November 1999). Some of the recommendations were still pending during the conduct of this audit. Following a review of these recommendations, and based on information obtained during the course of this audit, it has been determined that most of the recommendations were closed as of March 25, 2009. The following table provides a rationale for each of the recommendations.

Table 4 – Summary of Previous Audit Recommendations

Meteorological Service of Canada Audit of Weather and Environmental Protection Products Costing - Pricing Practices (November 2004)

Recommendations

Status and Rationale
Review product coding and develop standard descriptions of all product groupings; and refine product definition to achieve standard pricing throughout the Department.
Closed - A list of product lines and products exists in the departmental report system (Discoverer). Each product line and product has a description.

To ensure compliance with Treasury Board of Canada Secretariat External Charging Policy 200312:

Communication of updated policies and monitoring of the application of charging and pricing model should be conducted.

A policy should be developed and communicated (External Charging Policy).

Closed - This policy does not exist anymore (Policy has been replaced with the Treasury Board of Canada Secretariat Service Standards for External Fees, in support of the User Fee Act.)

While the scope of the audit did not include a review of external user fees specific to the Meteorological Service of Canada, recommendations included in this report address the same issues at the departmental level.
The Meteorological Service of Canada should consider implementing a costing system to track activity costs per product/service, provided it is cost beneficial.
Closed - The recommendation was to be implemented only if it was considered as cost beneficial.

 

Environment Canada’s Commercial Services – Cost Recovery and User Charging (November 1999)

Recommendations

Status and Rationale

The departmental management framework needs to be developed with Treasury Board of Canada Secretariat to manage commercial services:

Pending - Environment Canada’s Costing Approach for New or Enhanced Departmental Programs and Initiatives was developed, however, it is specific to Treasury Board Submissions and Memoranda to Cabinet.

The costing model is currently being revised and plans are under way to update the core support service model as well. Once the tools are finalized, the guidelines to use them can then be finalized as well.

Furthermore, these recommendations are addressed in this report and are part of the Finance and Corporate Services Branch commitment to the Office of the Comptroller General of Canada to implement the phased-in approach in the context of the Management Accountability Framework Action Plan.


10 Round VI Management Accountability Framework, Organizational initiatives in financial management Questionnaire sent to all Departments

11 Environment Canada Round VI MAF Assessment Feedback to TBS: Effectiveness of Financial Management and Control – AoM 17Annex 12 Revised 17.6 Organizational initiatives in financial management Questionnaire

12 TBS External Charging Policy 2003, superseded by TBS Policy on Service Standards for External Fees, November 29, 2004

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