University of Cambridge

RAM Development Group

Description of the Resource Allocation Model
Introduction and history
1. The Council, responding to concerns in number of quarters, indicated in the
Allocations Report for 2001-02 that they intended to introduce a Resource
Allocation Model (RAM) as a key element in a revised budgetary and planning
process. There had long been concern within the University that the method of
allocating resources to faculties and departments was not transparent.
However, progress in a new RAM had been slow; partly because of the
complexity of introducing a model in Cambridge, and partly because of the
controversies which would arise when the relative under- and over-funding of
parts of the University were highlighted, providing a mechanism for correction.

2. Councils of the Schools were consulted in the Lent Term of 2001 about a
formula-based resource allocation procedure. The proposal was not widely
supported. But because the need for a Resource Allocation Model remained
urgent, the Planning and Resources Committee referred the issue to the
Resource Management Committee. The Resource Management Committee
formed a small Working Group with representation from a range of academic
constituencies to develop the proposals further.

3. There was extensive consultation on the Working Group’s proposals in January

2002 but further development was deferred until after the Planning and
Resources Committee’s Financial Working Party, which had been asked to
consider how the RAM should be developed, reported in February 2003. On
their recommendation the Planning and Resources Committee established the
RAM Development Group to continue development work and with the target of
the RAM being used to inform Allocations for 2004-05.

4. The Group's initial programme of work was to review the build of the Model to
ensure that the treatment of income and expenditure was transparent and
justifiable. This required reviews of the drivers, weightings and supporting data.
It also required a review of the treatment of central costs and how the cost of
University activities and services with significant public roles should be
attributed in the RAM. Earlier work had identified issues which needed detailed
study. The Development Group established a number of specialist sub-groups
to resolve those issues and they were discharged when they had done so,
although other groups have since been reconvened to review detailed elements
of the RAM and the space modelling is now overseen by the Space
Management Advisory Group.

5. The Chairman of the Development Group reported on progress to the Council

on 9 June 2003; the Council asked for a draft Report or Notice summarising the
RAM and a Report was published in the 2003 Joint report of the Council and
the General Board. The Report noted that sufficient agreement had been
reached on the RAM for its use in guiding Allocations for 2004-05.
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6. The Development Group, which reports to the Resource Management

Committee, has continued to meet and the RAM is revised annually under their
supervision. The Group is chaired by the Pro-Vice-Chancellor (Planning and
Resources) and the members include all Heads of Schools and representation
from the non-School institutions. In looking at the RAM in the context of
planning, the Group’s role has widened beyond the mere financial mechanics of
the RAM into setting the context for each planning round

7. Administration of the RAM is within the Planning and Resource Allocation Office
which services the Development Group and drafts proposals for its approval.

8. The RAM is normally updated as soon as possible after announcement of the

HEFCE grants for the subsequent year. A draft is circulated to Schools and
others to be checked, and to the Development Group for endorsement. The
RAM for each year is rolled forward with the latest estimates of income and
expenditure to produce a key document for the annual planning round.

9. Because of the time of the year in which it is produced, the RAM is something
of a hybrid. It incorporates the expenditure forecasts from the immediately
preceding planning round, but includes the income forecasts for the next round.
Comparisons of different representations of the University’s financial position
need to take that into account.

10. The 2005-06 RAM was internally audited in 2006. The report recommended
that the original objectives should be reviewed and there should be a formal
evaluation of the model. It was also recommended that there should be an
updated overarching RAM document, placed on the website. This is the
document.

The RAM and planning

11. The specification for the RAM is that it should:

 Be simple to understand and transparent in its operation;

 Be based on fair and objective criteria;
 Command widespread support in the institutions;
 Meet HEFCE expectations of accountability;
 Deliver the necessary resources to institutions to enable them to operate
effectively and make an appropriate contribution to meeting the University’s
objectives;
 Where appropriate, allow for special factors to be taken into account, subject
to this being achieved in a transparent manner;
 Provide outcomes which are relatively stable from year to year, with any
changes being manageable;
 Provide central services with sufficient resources to enable them to deliver
agreed services at defined levels;
 Not distort behaviour in unacceptable ways.

12. . The 2003 Joint Report noted as follows:

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The Development Group wish to emphasise that the RAM is a Resource Allocation
Model not the future Resource Allocation Method. In a mixed economy like a modern
university it cannot be expected that every activity and every component of every activity
will balance financially. Cross subsidy is normal, but it is important to establish the cost
and the source of funding to meet the cost.

The RAM is a tool which identifies imbalances at School level between Chest income
and Chest expenditure. The data on which it is based enables Schools to study the
balances of income and expenditure at the level of individual departments and faculties.

In addition to the mechanism for focusing on means to correct the continuing deficit there
are two other benefits. First, there will be a delegation of financial responsibility to
Schools. Much financial decision-making will be at the point where the impact is felt and
where incentives operate. Second, the RAM will lead to a more transparent approach to
the budgeting of central activities and institutions.

13. The Planning Guidance for the 2009 Round includes the following:

The RAM remains the best indication of the full economic cost of operation of
Schools and institutions in Chest terms, but only for the year to which it relates.
The difficulty is that the ‘bottom line’ is much more sensitive to changes in
HEFCE funding methods than to efforts to increase income or control
expenditure. It is difficult, therefore, to introduce RAM-based incentives that
directly affect Allocations.

There is no formula link between Allocations and the RAM, and considerable
further work would be needed for use in this way. It has been used in a non-
formula way to justify differential Allocations for some Schools, most recently for
an additional 1% above the baseline for the Schools of Physical Science and of
Technology

The calculation of mainstream QR for 2009-10 using the new quality profile
following the 2008 RAE is a case in point. The University has not won a
significantly larger share of funding but there has been a considerable
redistribution across UOAs and, in RAM terms, across departments and Schools.
Success in ratings has not always been translated into a funding increase, and so
merely reflecting the funding outcome would not be equitable.

In the absence of some other source of Chest funding it would not be possible to
deliver significant additions to Allocations based on the RAE funding outcome
without at the same time reducing Allocations elsewhere. This would introduce a
degree of instability contrary to the purpose of the planning round at a time when
income to support Allocations is under severe pressure. However, the incentive
to optimise returns to the REF would be weakened if positive outcomes were
never reflected in Allocations; the position beyond 2010-11 will be kept under
review, but for the reasons set out above it is unlikely that the changes in QR
could be reflected in full.

14. Further details about the RAM’s context in the 2009 Planning Round can be
found in the full Planning Guidance at:

http://www.admin.cam.ac.uk/cam-only/offices/planning/strategic/round/
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Main features of the RAM

15. The main features of the RAM can be seen in the summary. The four main
operations are shown sequentially from top to bottom: (1) attribution of income;
(2) reporting of total direct costs; (3) attribution of indirect costs; (4) calculation
of the balance of income over expenditure with any “moderating” adjustments.
Only Chest income is attributed in the RAM, and only expenditure met from the
Chest is reported (although non-Chest income is used in drivers) so that the
outcome is the annual forecast “Chest out-turn”.

16. The summary is divided vertically. On the left side are the six Schools; the
middle includes all the central academic, support and service functions whose
total net cost is the total indirect cost attribution to the Schools. Columns on the
right contain some Chest income and expenditure that is not attributed in the
RAM, and the spreadsheet adjustments which avoid double counting.

17. The outcome for Schools is the balance of income over direct and indirect
costs, followed by a moderated outcome if moderation is applied below the line.

18. Behind the summary is a large number of working sheets on which the year’s
data are held and where the various operations of the RAM are conducted.

19. So far as possible, income is attributed as earned and expenditure is allocated

as incurred, while maintaining a balance between fairness, accuracy and
simplicity. The Development Group over the years has explored a number of
options which take the RAM closer to its specification.

20. For the RAM for year X, the key inputs are:

 HEFCE and TDA (formerly TTA) grant announced for year X;

 Estimates of income and expenditure collected annually in the planning round
for year X and as included in the Allocations Report for year X;
 Assigned space as at 1 February in year X-1;
 Student numbers in year X-1, plus approved planned additions for year X;
 Accounts data for year X-2.

Income
21. Chest income allocated in the RAM is as follows:

 HEFCE block grant funding: for Teaching, for Research (mainly QR), the
support of PGR students, and Special Funding, except some ear-marked
funding for expenditure from non-Chest accounts and which does not
therefore appear in the RAM.
 TDA funding for initial teacher training
 Composition fees
 Contributions to Chest costs (“Chest share of overheads”) deducted from
research income, specific endowments, trading and other non-Chest income
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 General income, including the unrestricted income generated by non-specific

endowment.
 “Appropriations in Aid”, being income brought into the Chest from restricted
income.

22. HEFCE and TDA income is as announced; all other income is estimated.

Attribution of Income: Top-slicing

23. Top-slicing from pooled income enables direct attribution to support particular
expenditure. Top-sliced sums from HEFCE grant include funding for particular
purposes (e.g. Copyright Library grant), sums formerly ear-marked but now
rolled up in block grant (minority subjects), sums in respect of approved
payments to certain external institutions, and new sums such as the funding for
the support of high cost and vulnerable science subjects. PPD funding
(Practitioner Professional Development – for teachers, the successor to INSET)
is allocated intact to the School of Humanities and Social Sciences.

24. An amount is top-sliced from general income to support the historic and
outward functions of the University Library, the museums, galleries and Botanic
Garden. The effect is to confine the attribution to Schools of library and
museum costs to those which are directly in support of Schools’ teaching and
research.

25. Pooled Chest income from non-Chest sources (representing contributions to

central Chest costs) is returned to institutions without adjustment, to offset
against the attribution of central Chest costs as indirect costs.

26. There is a deduction for strategic purposes. Some income held back in this
way has been used to moderate the outcome of the RAM for Schools in deficit.
Moderation in this way has now been phased out.

Attribution of income: HEFCE funding for Teaching

(a) HEFCE formula, and changes in student numbers

27. HEFCE funding for Teaching (T) is attributed broadly in proportion to home/EU
UG weighted student load. HEFCE T funding is supplemented in the RAM by
the balance of general and endowment income after top-slicing. The additional
funding maintains the UG unit of resource after deduction of the College Fee.

28. HEFCE T is not incremental (for a description of the funding method for
teaching see http://www.hefce.ac.uk/pubs/hefce/2007/07_20/). There is no
additional funding for each additional student unless bids for additional funded
numbers are approved, as for the Graduate-entry Course in Medicine. Funding
is not withheld for a reduction in numbers – unless the reduction is substantial
and breaches the limit defined by the contract range.

29. Although the HEFCE funding method could be adapted to the RAM, the
approach is to attribute HEFCE funding for teaching in proportion to weighted
Home/EU UG student load. Changes in student load do not of themselves
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change HEFCE income, but they will change the shares of funding and the rate
of funding per FTE. If increases are located in one School, they are in effect
paid for by a reduction in other Schools’ funding.

30. When considering plans for increases in student numbers the PRC may agree
to the increase on condition that only the additional fee income will be attributed
(see Composition Fees below) and there will be no increased share of funding
for teaching.

(b) Weightings and other factors

31. Student load is reported to HEFCE by level, mode and Price Group. The
University’s subject-to-Cost centre attribution is kept under review; the
Development Group (or their Chairman) approves changes.

32. HEFCE applies average weightings to the student load in each of the four
Groups, but the actual weightings for individual subjects and departments will
differ, more or less. Early models of the RAM used weightings which attempted
to reflect differential costs in the University. This broke a link between the way
in which income was calculated and how that income was attributed. It was not
possible to identify internal weightings that commanded general support. The
approach was discontinued, but the results of the Transparent Approach to the
Costing of Teaching (TRAC-T) may provide an opportunity for review in due
course.

33. The RAM embeds HEFCE weightings. In HEFCE’s funding method for teaching
the fee-inclusive base price has the same value as the assumed fee, so that net
T funding after deduction of the fee is zero and the courses are funded by fee
income only. PGT students in other Price Groups are weighted and some T
funding is attributed.

34. In the first RAMs the College Fee transfer was topsliced and the residual
funding available for attribution led to rates that were less than the prices
derived from HEFCE grant, but the reduction was unevenly spread. Adjustment
was made to equalise the reductions and the funding was supplemented with
some general income, but with the ending of the College Fee top-slice and the
increased availability of general income as moderation has reduced (see
below), the attributed rates of resource have risen and the adjustment has been
discontinued.

35. The rates of funding in each Price Group from the latest RAM are published
each year with the Planning Guidance.

(c) Effect of HEFCE formula changes

36. The RAM attribution of teaching funding is therefore sensitive to the HEFCE
formula, in particular the organisation of activity into Price Groups and their
relative weightings. These are under review by HEFCE but no change is
expected until 2009-10 at the earliest. The amount of funding attributed on the
T formula, and the link to the HEFCE method, means that minor changes by
HEFCE can have a significant effect.
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37. In 2008-09 HEFCE cancelled a number of premiums in the funding method for
teaching and established Targeted Allocations in their place, some of which are
now under review. The targeted allocations are rolled up with teaching funding
in the RAM.

Attribution of income: composition fees

38. The Composition Fee income attributed in the RAM is the fee income received
by the Chest; it does not include some part-time fee income (e.g M.St) which
supports non-Chest expenditure. A few fees are subject to special
arrangements and are top-sliced and attributed direct.

39. Total fee income is estimated annually using the latest approved fees and
estimated student load, and then scaled back slightly to reflect wastage and
unpaid fees. The balance of the composition fees are then attributed on the
same student load (for the previous year) that is used to attribute T funding, but
grouped into fee bands not Price Groups.

40. If additional planned numbers are included to support an attribution of

anticipated additional income in the next year, and an additional Allocation,
achievement of those additional numbers will be measured at the end of the
year. A lack of success may lead to the removal of those extra numbers and a
reduction in future Allocations.

41. The Development Group has considered the effect of rolling up composition
fees with Teaching Funding to produce a notional 'teaching resource' for
allocation by total student load, but the results were not satisfactory and it was
thought that incentives to increase fee income where there was freedom to set
fees would be weakened. The modelling was undertaken before the
introduction of the new higher undergraduate fee, and before other changes
within the RAM, and could be reviewed, however, HEFCE has not yet reflected
the higher fee in standard resource and it would be a departure from HEFCE
methodology to do so in internal modelling.

Attribution of income: HEFCE funding for research - QR

42. There are three variables in the HEFCE QR formula: quality ratings, volume
and the funding allocated by HEFCE to each Unit of Assessment (UOA) for
distribution to institutions. For the method by which HEFCE allocates pots of
funding to UOAs at sector level before dividing the pots by institution, see the
HEFCE literature on their website.

43. Volume and rating are known for each UOA and each institution. The quality
rating is fixed between RAEs; the major element of volume – Category A staff
submitted in the RAE – is similarly fixed. A small annual addition is made by
including the number of research fellows collected annually in the Research
Activity Survey (RAS).

44. The formula is easy to reproduce, but some work is required to disaggregate
the QR allocated to each UOA to department, to produce the School totals.
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45. R funding in proportion to income from charities and PGR student load is no
longer quality weighted, but income and Home/EU load continue to be collected
annually in the Research Activity Survey. Funding is allocated for the
supervision of postgraduate students and for the support of charity funded
research. A stream of R funding is allocated in proportion to income from
industry reported in the previous year’s HESA finance return. All R funding is
attributed within the RAM on HEFCE’s formulae, exactly “as earned”.

46. The funding method after the forthcoming Research Excellence Framework –
the successor to the RAE - is uncertain. For planning purposes it is assumed
that the real terms value of HEFCE R will be maintained, although the
calculation which supports it will be different. In the absence of any better
method, projections are based on the current funding formula.

Attribution of income: general and endowment income

(1) Top-slicing of attributable sums, and for the public/historic role of libraries,
museums and galleries etc

47. Chest (indirect) costs are incurred by any University activity, not just that funded
through the Chest (for example, research grant and contract work incurs utility
costs). There are therefore mechanisms for non-Chest activity to generate
income for the Chest. The contribution to indirect costs within research grant
and contract income is one example (and is important enough to be shown
separately in the RAM, see below) but a contribution is also calculated in
proportion to expenditure from other non-Chest accounts, including Trust funds
where that is permitted. That income is included with general income, but can
be identified and attributed to Schools “as earned”.

48. General and endowment income was top-sliced in early models of the RAM to
meet the total Chest expenditure of the Fitzwilliam Museum, the Hamilton Kerr
Institute, Kettle's Yard and the Botanic Garden on the grounds that their activity
levels were not directly related to levels of activity within Schools. The whole
cost of “embedded” or departmental museums was attributed to the host
School, but the Development Group agreed that the whole cost of those
institutions should not in fairness be attributed to Schools.

49. The Development Group's specialist sub-groups were asked to advise on the
RAM treatment of these institutions, the University Library and the West Road
Concert Hall. Broadly, the agreed approach is to identify for each of them the
proportions of their activity that directly support (a) teaching and research in the
University and (b) their public/historic roles. The cost of each proportion is
calculated and the cost of (a) is attributed to the appropriate School or Schools.
The cost of (b) after the deduction of earned income or specific grant funding for
particular roles (e.g. the HEFCE Special Funding for copyright libraries and
AHRB museums funding), is met by top-slice from general income. The
proportions (a) and (b) vary between institution, and they with the costing
method are kept under review. The formula for museums in particular was
reviewed in 2006-07.
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50. The Development Group believes this is a sensible strategic use of general
funds. The contribution by Schools and the cost and value of the “subsidy”
representing the cost of the 'public/historic' element of these institutions are all
transparent. In identifying a total value of the subsidy there is an incentive for
co-operative management across the group of institutions.

51. The remaining income represents free funds for strategic allocation, including
allocation to reserve for future needs. It is not necessary for all of it to be
“spent” annually in the RAM – or in reality through Allocations.

(2) Support of teaching costs and moderation

52. In earlier models of the RAM, in which the College Fee was also a top-slice, all
the general and endowment income remaining after top-slicing was added to
the pot for allocation on the T funding formula. This maintained the unit of
funding but attributing a large sum in this way made the RAM relatively
sensitive to T formula changes and left no funding for strategic purposes.

53. The Development Group reviewed models in which varying proportions of the
remaining general and endowment income was allocated with the teaching pot.
The Development Group eventually decided that 50% after top-slicing should
be allocated with T funding and 50% held back for strategic purposes. See
“moderation”, below.

54. The balance of general and endowment income, after top-slicing for all these
purposes, is added to the funds for distribution on the T formula.

Attribution of income: Chest share of overheads

55. The 'Chest share of overheads' is the proportion of research grant income
brought into the Chest to offset Chest costs incurred in support of research. The
RAM attributes all indirect costs to Schools, and the income which supports
those costs is therefore also attributed to Schools “as earned” to offset them.

56. There is the potential for some confusion because research is now costed on
the standard “fEC” basis; the method includes the cost of capital in the indirect
cost rates. By including fEC indirect costs, there is the potential of the RAM
including income for which there is no matching expenditure. Direct charging of
the special facilities will raise a particular issue of this type if their Chest costs
and income remain in the RAM. Income is not yet sufficient to require new
modelling, but the Development Group is aware of the potential issue.

Attribution of income: Appropriations in Aid

57. “Appropriations in Aid” are another method of supporting Chest costs from non-
Chest income. For example, where an endowment fell short of meeting
(typically) the cost of an endowed post, the whole cost of the post was shown in
Estimates as met by the Chest and the contribution by the endowment as
negative Chest expenditure, thus reducing the total Allocation required. This
confusing approach was dealt with in the RAM by showing the Appropriation in
Aid as income, and identifying separately the expenditure met by it. Direct
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expenditure in the RAM now excludes expenditure met from non-Chest sources
and the lines for Appropriations in Aid are now much diminished.

58. Withdrawals from reserve are included, and income from the Dual Funding
Support Transfer arrangement. The latter is a legacy of the transfer of funding
from HEFCE to the Research Councils. The consequence was that direct
income to the Chest fell and had to be replaced by a share of a higher level of
indirect cost contributions included in research grant and contract income. To
maintain the former level of Chest income, targets were set. That arrangement
is now being phased out as the Chest share of fEC income increases.

Central cost recovery

59. Income shown as “central cost recovery” is not new income to the University but
brings across as “income” the indirect cost “charge” to Schools, reducing the
net cost of each central group to zero. It is a feature of the RAM that all central
costs are charged out. It is not a requirement, but in the absence of other
income there is no other method of meeting un-attributed central costs. The
modelling is not intended to encourage a point of view that whatever the level of
central costs, they will be met.

60. Negative income to the same total value is included in the penultimate column
of the summary to eliminate double counting in row totals.

Expenditure
Direct expenditure
61. Direct expenditure is the expenditure formerly reported in Estimates as salaries
and wages (the cost of the establishment) plus 'other costs', less a share of the
estimated savings on vacancies, with the addition of a share of the special
reserve held for salary settlements etc.

62. Direct expenditure is now estimated annually in each planning round taking
account of all these factors and more. The direct expenditure met from the
Chest, included in the RAM, corresponds to each Schools Allocation of Chest
funding for that year, not the actual expenditure that will be met from it.

63. The cost modelled for each School includes the cost of UAS staff in faculties
and departments. Direct expenditure is divided between General Board and
Council Institutions, as in Allocations.

The attribution of central costs

Attribution of central costs: basic principles

64. Central or “non-School” institutions are grouped into (a) academic institutions
and services, (b) staff and student services, (c) the UAS, and (d) other central
heads, including the administered funds. Some costs to the Chest which are
not to be attributed within indirect costs appear in separate columns.
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65. A wider range of metrics or drivers has been developed to attribute central
costs than is used to attribute income, but the list is kept to a minimum and the
same data are used wherever possible. The most appropriate drivers to be
used are kept under review by the RAM Development Group and by the officer
responsible for forecasting each administered fund.

66. The total attribution of all central costs to Schools is their RAM indirect cost
charge and is the total of all non-School Chest-funded central expenditure in the
four groups (a) to (d), less any directly earned income; the College Fee transfer
is in addition, but is not a central cost.

Attribution of the College fee

67. The value of the College fee transfer, less the value of the HEFCE QR element
that supported that cost, was originally top-sliced from teaching funding. The
value of the transfer meant that the outcome for Schools was significantly
different from a method where the top-sliced funds were made available for
attribution and the College fee transfer directly charged. By masking the effect
of including College-employed staff in the RAE it reduced the incentive to
include them. With the ending of the “lump sum” method of transfer to
Colleges, the return to a per capita approach, and the change to a quality profile
in the 2008 RAE, the change was made to attribute the College Fee transfer in
proportion to Home/EU undergraduate students as a close proxy for the number
of fundable students to whom the Agreement with the Colleges applies.

Attribution of central costs: first and second stages

68. The first stage is the allocation of all central Heads of expenditure, including the
direct costs of central activities, to Schools and to central institutions. The
majority of costs are attributed in this stage.

69. The second stage is to allocate to Schools those costs which were attributed to
the central institutions in Stage 1.

Attribution of central costs: use of drivers

70. The drivers are: Student load; Overseas Student load; Staff Expenditure;
Research Grant & Contract expenditure; Space; total Expenditure; and a
Default which may be set to any of the others. Each cost in stage 1 and stage 2
is attributed in proportion to the most appropriate drivers.

71. Drivers are volume measures. Each institution can be described in terms of its
share of the total of each measure; that share or proportion is used to allocate a
share of a total cost. For example, there is a record of the total student load for
each institution; each institution’s percentage share of the total is calculated.
Student related costs are then attributed in proportion to those shares, so an
institution with 10% of the student load will be attributed 10% of student-related
costs. Where more than one driver is appropriate for a particular cost, it may be
divided and attributed on a combination of drivers.
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72. The drivers and the proportions for the two stages of the attribution are kept
under review by the Development Group. There is a default driver – currently
expenditure - where there is no obvious other measure, but use of the default is
deliberately kept to a minimum.

The drivers

(1) Student load

73. Student load is taken from the annual Student Statistics publication (except
PGR load used for the attribution of Supervision R which is taken from the
Research Activity Survey). Raw data shows the load by level (UG, PGT,
PGR), fee status (home/EU; overseas) and mode (full time; part-time). For use
in the drivers, load is grouped into fee bands; for the attribution of teaching
funding, load is in price groups, and for supervision R, PGR load is grouped for
the relevant rate. Total student FTE is used for the attribution of wholly student-
related costs, such as the Careers Service and for a proportion of the cost of
support services which have a range of functions, such as the Academic
Division. Costs which are incurred on behalf of overseas students only
(contributions to the Trusts) are attributed in proportion to overseas student load
only.

(2) Staff Expenditure

74. Staff expenditure is taken from the annual Accounts. Chest staff expenditure is
no longer used in the RAM as a driver because using it failed adequately to
reflect the fact that central costs support all staff, not just those who happen to
be Chest funded. All the cost of the Human Resources Division is attributed on
the staff expenditure driver, but the driver is also used in combination with
others (eg student load) for a range of other activities providing support to both
staff and students, such as the Accommodation Office and the Counselling
Service.

(3) Research Grants & Contracts

75. Research grant and contract income is used in the RAM only for the attribution
of the costs of the Research Services Division.

(4) Space

76. Operational estate assigned space is used to attribute all space-related costs,
but in recognition of the fact that different types of space generate different
costs, all space is assigned to one of five categories. The categories are
weighted differently and space related costs are attributed in proportion to an
institution’s share of total weighted space. The Space Management Advisory
Group keeps the classification of space, the weightings and entries and
removals from the capacity record under review.

77. The mechanism is simple and smoothes variations that would be likely if space
costs (especially maintenance) were attributed exactly as incurred in a
particular year.
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78. However, this averaging does not introduce a sharp incentive to save money,
especially on utilities, of which electricity represents the greatest share and for
which metering is now sufficiently widespread to enable direct cost recovery.

79. Electricity costs have therefore been taken out of the space cost formula and
are attributed in 2007-08 in the same proportion as they were incurred in 2005-
06. For RAM 2009-10, proportion of usage in 2007-08 was used.

80. In cash and Allocation terms, there will be an end of year reconciliation,
comparing actual usage with initial Allocation. Over consumption will result in a
charge to Schools, under usage will see Chest savings returned to Schools and
Institutions.

81. The approach will change the space charge metric derived from the RAM (see
below).

(5) Expenditure

82. The expenditure driver now includes expenditure on research for the same
reason that the staff expenditure driver now includes research staff expenditure:
it would otherwise not reflect Chest costs incurred by research, and using only
Chest expenditure skewed the attribution of costs away from the big research
departments. The expenditure driver is therefore institutional expenditure as a
proportion of total University expenditure (excluding Cambridge Assessment,
the Press and the Trusts).

(6) Default

83. A default driver – which can be any of the above - applies to all activity for
which no other driver is obviously appropriate. At present, expenditure has
been selected as the default driver. Use of the default is kept to a minimum, and
one of the other options (or direct attribution) chosen wherever possible.

Outcome

(a) Schools – and moderation

84. Income less the sum of direct and indirect costs gives the RAM “bottom line” for
each School. Early models of the RAM showed such significant deficits and
surpluses for some Schools that the presentation was not acceptable for two
reasons. While the University was facing increasing deficits, it would be a
considerable risk to allow a School in surplus to increase its spending
significantly without additional income. Those Schools in deficit considered that
it gave a false impression of their value to the University and that the savings
necessary even to approach a RAM balance would lead to a significant
alteration to their mission which had not been addressed.

85. In the early years, RAM outcomes were smoothed by moderation. The
Development Group considered two approaches – permanent moderation and
transitional. There was no support for permanent moderation (eg by
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weightings) because it failed to introduce sufficient incentives and was counter

to other policy decisions.

86. The Development Group instead agreed that a proportion of the general and
endowment funding added to teaching funding should be topsliced. As noted
above, the Development Group reviewed models of varying proportions of the
and eventually decided that 50% should be held back for strategic purposes.

87. The one School in surplus at that time, the Clinical School, was represented as
increasing its expenditure to absorb some of the surplus at a rate that
corresponded to planned new commitments falling on the Chest (“RAM
release”). The excess surplus funding was added to the top sliced moderation
funding and the total sum attributed below the line to Schools in deficit in
proportion to their deficits.

88. Savings targets (“RAM savings”) were then developed in proportion to those
moderated outcomes, capped if still excessive as a proportion of direct
expenditure, and rolled forward to show how the University could return to
surplus in future years when new sources of income were also taken into
account.

89. This new approach to savings targets over a longer horizon was the first
effective use of the RAM in Allocations.

90. Moderation was agreed to be transitional and was modelled as steadily

reducing over five years, the reduction in support being accompanied by
cumulative savings and additional income, and planned increased expenditure
by the Clinical School. The perverse incentive of rewarding larger deficits with
more funding was therefore avoided, and funding was shown to be released to
be added back to teaching funding from where it had in effect been removed.

91. Moderation on this pattern has ended before five years because as the
University’s financial position has improved, more funding is available than is
needed for mere moderation: it turns deficits to surpluses.

92. General and endowment income represents free unrestricted funds and is
therefore strategically valuable. Instead of allocating all the balance not now
needed for moderation back through the RAM, some has been set aside for
strategic purposes and has not been attributed in the 2007-08 and subsequent
RAMs.

(b) non-School institutions

93. The balance for central academic and service function groups in the RAM is
always zero because all expenditure after any direct income is attributed to
Schools. That “taxation” on Schools is returned to the groups as income,
making their income and expenditure automatically balance.

94. The model does not determine the appropriate level of funding for academic
services and other 'non-School' institutions; the Development Group decided
some time ago that attempts to create a 'market' through service level
 15

agreements and complex charge recovery arrangements between

Departments/Schools and individual components of the UAS would be time-
consuming and uneconomical.

95. It is possible to extract from the RAM for each central academic and service
institution a summary of its RAM position: direct expenditure, indirect cost, any
directly attributed income and the balance of costs attributed to each School.
Summaries of this sort must be used with care as they will give an incomplete
financial picture of many institutions. They include Chest income and
expenditure only and exclude the considerable non-Chest income and
expenditure managed by some central activities. The RAM indirect cost
attribution is Stage 1 in the cost cascade, and the rate is therefore slightly lower
than the Stage 1 + Stage 2 totals applicable to Schools. A better
representation of the full cost of an activity uses Stages 1+2 totals.

Indirect cost rates derived from the indirect cost attributions

96. The total costs attributed on each driver divided by the total volume of the driver
provide a table of unit costs in £ per unit 1 . Total costs attributed on each type of
space show space costs per m2 of teaching, laboratory and highly serviced
space. Costs per £ expenditure, per student FTE and per staff expenditure can
also be derived as indirect cost rates.

97. Most current and proposed activity can be described in the terms of a space
requirement, forecast expenditure, forecast pay costs and student numbers.
Application of the indirect cost rates enables the full cost to be estimated. The
modelling is robust enough to have been used successfully in applications for
full costs in bids. The rates have been embedded in costing models, such as
the one designed to cost MPhil courses.

98. The RAM approach differs from the fEC (research grants and contracts)
approach in a number of ways. The RAM includes some costs not in fEC
(College Fees); fEC includes some costs not in the RAM (cost of capital) fEC is
currently designed for research only and loads most indirect costs on a single
driver – Principal Investigator time. It is therefore less adaptable to other
purposes. However, when the two methods can be run side-by-side and
adjustments for differences are made, they do produce comparable results.

99. The latest indirect cost rates per volume element are published as part of the
annual planning guidance on the PRAO website.

Reconciliation

100. The RAM contains mainly forecasts and can be reconciled at the end of the
year to the accounts, although not easily. The reconciliation will show different
outcomes for Schools, but the main purpose is to assess whether plans that
supported the case for additional Allocations have been fulfilled – such as
additional fee income. By looking at the bottom line only, that effect may be

1
Costs attributed in both Stage 1 and Stage 2 must be added to generate the University-level indirect
cost rates.
 16

masked by changes in indirect cost attributions (if re-modelled) which Schools

do not directly manage.

Forecast RAM
101. University financial forecasts have always projected costs and income forward
for five years but at University level only; the forecast RAM disaggregates those
forecasts to School and group level as background to the annual planning
round.

102. The latest full RAM is used as a baseline, but those for future years are stripped
down versions using proportions established in the first year to attribute income
and costs in future years. Those proportions are adjusted by known changes to
volume, so – so far as possible - space data will reflect new buildings and the
student data will reflect planned changes.

Publication of the RAM

103. The RAM is a workbook of a large number of spreadsheets, some of
considerable size. The hard copy of the RAM is usually confined to the
summary sheet; the full annual RAM including departmental data sheets,
summaries of income and the calculation sheets showing the attributions to
Schools, is made available electronically within the University.

PRAO
October 2007

Revised September 2009