Finance Committee

Background and Purpose

1. The origins of the studies underlying what is known as the Cost Measurement System go back to the early '70s when the UN system was trying to establish a reasonable rate for project support costs to be charged by agencies when executing projects on behalf of UNDP.

2. During the early '90s, the entire approach and methodology were reviewed and revised at the request of the UNDP Governing Council in consultation with the five so-called "big" project execution agencies (i.e. FAO, ILO, UNESCO, UNIDO and UNDDSMS formerly UNTCDC). Studies were also done for UNOPS, ITU and WHO. FAO's current methodology is based on the outcome of these negotiations.

3. However, FAO has maintained the work measurement survey and the resulting cost measurement study for a number of reasons, namely:

• it has, until recently, been the source of data for the distribution of staff time between sub-programmes in the financial accounts;
• it provides the basic data for the determination of the cost of administrative and operational support (AOS) and technical support services (TSS) for the relevant services to the Field Programme;
• it provides the cost measurement study results in support of reporting to the Governing Bodies on the extent of Regular Programme support to the Field Programme;
• it allows the recognition of recoverable variable indirect support costs and for comparison of such amounts with the actual reimbursements received;
• it provides a time series of data prepared on a full cost accounting basis for use in internal cost studies, savings exercises and benchmark comparisons.

4. In summary the objective of the Work Measurement Survey and the Cost Measurement System is to maintain, extend and enhance the time series of expenditure data which has been processed to reflect the principles of cost accounting wherein both fixed and variable indirect overheads are distributed over the productive activities of the Organization.

Current Methodology

5. The methodology consists of several major elements as follows:

6. An annual work measurement study conducted at the end of each year in which questionnaires are completed by all staff grades D-1 to G-5 (G-4 in field and regional offices) of technical departments, operational units, Regional Offices and FAO Country offices. In addition, questionnaires are also completed by the staff in certain units providing technical or AOS support such as:

• AUD, the Office of the Inspector-General, in carrying out field project audits;
• LEG, the Office of Legal Counsel, in technical support to projects;
• GIL, the Library and Documentation Systems Division, in support to national systems and the projects supporting their development;
• AFSP, the Procurement Service, in the purchase of project inputs requiring HQ involvement; and
• PBEE, Evaluation Service in providing project evaluation services.

7. Staff use the questionnaire to estimate the percentages of their time spent on:

• Regular Programme activities;
• project technical support services (detailed by type and funding source of service);
• project administrative and operational services (detailed by budget component); and
• services provided to the World Food Programme.

8. The work effort of each individual staff member is weighted based upon the standard cost for his or her post (actual costs of General Service (GS) in FAOR Country offices) and consolidated by unit to produce percentages reflecting the work effort of each organizational unit. These percentages are then applied to the actual staff and non-staff costs incurred for the unit to determine:

• the direct costs each unit incurred for Regular Programme activities; and
• the portion of the unit's costs attributable to AOS and TSS activities.

9. It is noted that the number of staff filling out the questionnaires in the FAO survey has always far exceeded requirements for statistical reliability.

10. A distribution of the costs of administrative departments (AF, PBE) allocates costs of each service to FAO's technical and operational departments based upon the statistical unit or units which most appropriately measure the work effort created by the services. For example, relevant accounting transactions are used for each organizational unit within AFF, usable square metres of space occupied at HQ for the building management service in AFSI, etc.

11. A reallocation of the share of administrative costs allocated to each technical unit in paragraph 9 based upon the percentages computed in the work measurement survey.

12. Once these calculations have been completed the total cost computed for AOS and TSS services is divided by the total field project delivery (Trust Funds, UNDP and TCP) to produce AOS and TSS rates.

13. It should be noted that, as in the UNDP/CCAQ study, certain costs and services are excluded in accordance with agreements reached among the agencies and approved by the UNDP Governing Council including:

• costs of travel, translations, meetings and consultants charged to the regular budgets of technical departments are excluded on the basis that, if such costs were attributable to projects, they would be directly charged to project budgets;
• costs of the Office of the Director-General (ODG), External Relations etc. in SAD and in Liaison Offices and Governance are excluded, though they indirectly provide support to the Field Programme, on the basis that these functions should be financed in their entirety by the Regular Programme.

14. These costs are also usually excluded in rates calculated for private agencies and research institutions. The output therefore consists of the total cost of all activities based on full cost accounting principles. Thus, the cost of supporting the Field Programme is identified including the allocation of fixed costs as required under the methodology.

Results - excluding fixed overhead costs

15. While the above methodology is an appropriate way to measure the full cost of the services provided to projects, it is apparent for several reasons that it is not an appropriate target for cost recovery. The first reason concerns the implications for the Organization's financial structure if it were to adopt a policy of full cost recovery. Such a policy assumes that part of the funding for fixed costs (e.g. the senior management structure) should come from support cost recoveries. However, this could place the Organization's financial viability in jeopardy if the extra-budgetary programmes (on which such recoveries rely) were to decline significantly. Income would decline whereas the fixed costs could not - leaving a deficit to be covered by other sources of funds. For this reason, the consultants who have advised FAO and many other UN organizations on this issue do not recommend the recovery of fixed costs, unless it is unavoidable because an Organization relies entirely on support cost recoveries for its income.

16. Secondly, donors have made it clear that they are not prepared to pay for core staff who should be funded from the Regular Programme and, in fact, such an approach would result in an element of double budgeting. For example, if the post of an ADG is to be included in the regular budget and then also charged as an indirect support cost, it is clear that the amount would be appropriated twice.

17. The methodology for excluding fixed overhead costs eliminates the following elements of the costs to arrive at the AOS indirect project support costs. This methodology is the same as that applied in the UNDP Cost Studies.

18. The fixed costs excluded are as follows:

• all costs related to the ADG Offices [AFD, AGD, ESD, FID, FOD, GID, SDD, TCD] excluding the Management Support Units (MSUs) which are allocated to indirect project support costs using the work measurement questionnaire;
• all fixed overhead costs related to the operation and maintenance of the information technology infrastructure by AFI;
• all costs of the operation of the financial system except the AFF units directly responsible for UNDP and Trust Fund accounting which are treated as indirect project support costs;
• all costs of administering the central personnel function by AFP;
• costs of space, security, communications (except those charged directly to projects), messenger service, central records and procurement for Regular Programme activities administered by AFS - although AFSP costs related to project procurement are treated as indirect project support costs;
• costs of regular budget preparation, control and evaluation by PBE, although costs of project budgetary control and evaluation are treated as indirect project support costs or, in the case of evaluation missions, as direct project costs;
• costs of legal services provided by LEG, excluding technical services to projects which are treated as direct project costs (see TSS below); and
• costs of Internal Audit and External Audit excluding direct services provided to projects.

Conclusion

19. FAO follows procedures used in similar studies conducted for local governments in the USA, universities and international NGOs. The procedures follow accepted principles of international accounting and have been reviewed and accepted by external auditors at UNDP and other UN agencies and for INGOs such as the International Federation of Red Cross and Red Crescent Societies. All costs and delivery figures are reconciled to annual financial statements.

20. The work measurement survey and the cost measurement system provide the Organization with a valuable means by which it can recognise the costs of its activities. This assists in the identification of areas which are expensive vis-�-vis other organizations, in the recognition of the true costs of its activities so that services can be priced accordingly and in generally supporting informed financial management of the Organization.