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Service Activities Resource Page

Service Centers


Criteria to Establish

Within the University of Illinois System, departments and researchers use a variety of products and/or services to perform their activities or projects. Sometimes these products or services are not readily available from external sources, or cannot be obtained conveniently and efficiently. Therefore, the institution may need to establish service centers to provide these products and services. When these products or services are provided within the U of I System these units function as non-profit businesses, also called service centers.

These service centers (classified under 3E fund type code) are differentiated from other self-supporting activities such as auxiliaries (3J and 3M fund types) which primarily serve students, faculty, and staff, and departmental activity accounts (3Q fund type) that are established for services provided primarily to non-system users.

Many times the 3E service centers service both “internal” and “external” customers, although external customers are not the primary function of the service center.

Internal users of service centers are those users whose ultimate source of funds is within the University of Illinois System, or whose funds flow through the system (i.e., sponsored programs). These include academic, research, administrative, and auxiliary areas which purchase services to support their work at the U of I System. External users are organizations or individuals whose ultimate source of funds is outside of the U of I System. External users include students and any members of faculty or staff acting in a personal capacity, and the general public.

Examples of service centers are: machine shops, microscopy facilities, visualization laboratory, carpool, chemical analysis lab, sediment analysis lab, research resource lab, animal research lab, toxicology research lab, etc.

3E Service Centers are established to:

  • Provide a good/service (or) groups of goods/services on a recurring basis.
  • Provide goods/services primarily to internal customers within the University of Illinois System.
  • Recover the costs of providing the good/service through charges or fees to users.
  • Add value such as assigned staff and supplies necessary to provide the good/service.

3E Service Centers are NOT established:

  • To generate a profit.
  • To compete with the general public.
  • To provide service to the general public as its primary function.
  • To build a surplus intended for any purpose or discretionary purpose, other than paying for the costs incurred to provide the service or good.
  • When the self-supporting revenue or expenses are less than $3,000 each year.

Policies, Procedures and Compliance

Reasons why proper rate calculations are important

Many storerooms and service facilities have been established at the University of Illinois System to provide services and supplies to departments, including sponsored programs (federal, state, private, and other governmental) administered by the system. Many of these sponsored programs are federally funded; as a result, the U of I System must comply with Federal costing principles for service centers. In addition, as a major state-supported research university, state regulations related to service activities must be followed.

The University of Illinois System maintains Business and Financial Policies and Procedures applicable to Service Centers in 22 Self-Supporting/Revenue Generating Activities - Service and Storeroom Activities which incorporate both Federal (Title 2 CFR Part 200, also called Uniform Guidance) and State regulations. These policies outline methods service center managers should use when identifying costs, setting rates, and charging users.

While these policies apply to Storeroom and Service Center funds tracked in 3E Fund Types – “Service and Storeroom Activities”, it also applies to any service center within any fund type which charges any rate to University of Illinois System sponsored project funds.

Consequences when policies aren't followed

Federal agencies, such as the Inspector General’s, audit plans include reviews of service center funds and rates, and recent federal audits for our University of Illinois System have resulted in findings and returns of dollars to sponsors.

For our system there have been findings related to the NSF OIG audit which resulted in unsubstantiated service center rates. While the charges were related to the scope of the awards in which they were charged, due to lack of support for service center billing rates the costs were disallowed and moved to non-federal funds.

In addition, improper costing carries heavy federal audit penalties and impacts the good faith this U of I System has with our federal partners.

Other examples of findings of improper costing treatment identified by offices of Inspector General (i.e., HHS and NSF) are provided below:

  • Lack of schedule of rates or cost basis.
  • Lack of documentation related to allocation methodology.
  • Inappropriate inclusion of unallowable costs (e.g., promotional items used for outreach efforts).
  • University of Illinois computed the rates by averaging the rates that other Universities charged.
  • University of Illinois did not perform biennial reviews for the service center and adjust rates based on actual costs.
  • Surplus and deficit fund balances were not properly accounted for and were not included in service rate calculations.
  • Telecommunication center did not charge based on actual usage of the services provided.
  • Used surplus funds from one service center for unrelated purposes (e.g., renovating academic offices).
  • University of Illinois used inequitable billing practices by charging inconsistent billing rates to users of computer services.
  • University of Illinois did not bill all users for services provided by service centers.
  • University of Illinois billed at rates below cost to remain competitive in obtaining sponsored agreements.

Rate calculation requirements for Service Centers

  • Formal rate calculations must be performed at least once every two years.
  • Federal costing policies require that stores and services are to operate on a break-even basis.
  • Rates should be designed to recover not more than the aggregate cost of the services.
    • User rates must be supported by cost calculations based on a year of actual historical expenditures and usage (i.e., normally based on fiscal year end data).
    • Estimated rates are generally used only in the first year of operation.
    • Rates cannot be based on generating a specific amount of revenue.
    • Rates cannot include reserves or contingencies.
  • Rates must be established for each individual service or good, unless the usage basis for a group of related services/goods is exactly the same.
  • Rates should be charged based on actual use of the services.
  • The usage basis for the service or good includes all users of the service or good.
  • Rates should not discriminate against federally-supported activities of the institution (i.e. federal users cannot subsidize non-federal users).
  • Federal costing principles allow a working capital reserve of up to 60 days "cash expenses" for normal operating purposes.
  • Over- or under-recovery of the service activity adjusted fund balance must be incorporated into the rate calculation.
  • Each unit is responsible for the management of its stores and service activities, including the establishment and documentation for each service rate.

Frequency of rate reviews and calculations

  • Formal rate calculations must be performed at least once every two years and rates adjusted accordingly.
    • Best practices indicate rates should be reviewed annually by the department.
    • In addition, between typical rate calculation time frames, if there is a significant change in user base or costs to provide the services, you should re-calculate rates and implement new rates as soon as possible. This should be done to ensure users are being billed fairly for the services/goods they are receiving and to ensure the service center is not incurring an unexpected large surplus or deficit.

Charging established rates to all university users

  • Service center managers must ensure that there is no cross-subsidization between user groups. Combining the results of various services is not acceptable if the mix of users of each service is different; that is, if higher prices charged to one set of users are subsidizing the lower rates charged to a different group of users.
  • Rates should not discriminate against federally-supported activities of the institution (i.e., federal users cannot subsidize non-federal users).
  • All users must be billed.
  • All “internal” users must be charged at the same rate for the same level of service or product purchased.
  • User rates consisting of flat fees are not appropriate and do not comply with costing principles (i.e., flat monthly fee).
  • Users may not be billed until services have been rendered or goods received. In other words, prepayment of services/goods by a customer is not allowed.
  • Where preferential rates or free services are provided to some users (students and certain faculty members) rate calculations must be based on billing at the full cost. In this instance, the customer is charged a portion of the rate and the remainder must be charged to departmental unrestricted funds (e.g., State, ICR, or gift). Also, the portion of the rate funded by other University funds need to be separately identifiable in Banner. A best practice is to utilize a separate program code with an A-21 attribute code of "SNS" (Stores and Services) assigned by your Costing Office in coordination with University Accounting & Financial Reporting. This is necessary to allow for proper treatment in the F&A Rate Calculation.
  • External users may be charged a higher billing rate than internal users to recover F&A costs or other related expenses.

Key elements of proper accounting for Service Centers

  • Only services/goods that are “like and similar” should be combined in a service fund. This aids with the proper calculation of rates and the allocation of over/under recoveries by line of service.
  • Accurate accounting for service center expenses and revenues is critical for tracking of accurate over/under recoveries and proper rate calculations. The following accounting practices assist in ensuring this is accomplished.
    • Service centers should “match” revenue with expenditures so that a true financial picture can be obtained for the fund.
    • When multiple lines of similar services are maintained in one service fund, the department must be able to identify expenditures and revenue by line of service. This is necessary for accurate tracking of net income, over/under recoveries, and compliant rate calculations. A best practice is to utilize separate “activity” or “program” codes.
    • Billings should be issued to users as soon as the service is rendered or the goods delivered, recommended on a monthly basis. However, any self-supporting activity that provides goods or services to a sponsored project must bill the related project fund monthly.
    • The journal voucher or sales invoice is to indicate the service provided, date of service or sale, unit cost, and total dollars charged to the user. A best practice is to utilize the FOATEXT for detail regarding the service or good provided.
    • Revenue should be properly recorded as a credit in a revenue account code, not incorrectly booked under an expense account code. The practice of recording revenue as a negative expense distorts the financial statements and results in unnecessary analysis of the service account/funds to identify these entries and eliminate them from the rate calculation.
    • External revenue must be recorded in account code 307921. The difference in the rate charged to the internal customers and external customers represents the increment of revenue to be recorded in 307921.
    • The department must track usage (base) including at a minimum, the date of the sale or service, unit cost, and total dollars charged to the user. The department should use the measurement which considers the cost benefit of the good or service being provided.
    • Rate calculations and supporting documentation (including detailed base support) must be maintained on-file by the department and made available for review upon request by system administrators, as well as system, state, and federal auditors.
    • The department must have published rates readily available upon request. This can be accomplished by publishing rates on-line, posting a rate sheet, or maintaining a hard copy rate sheet on-site. Auditors expect rates to be readily available and often request rate sheets during audits.


updated: August 23, 2022

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