Factor	Current Methodologies	New Methodology
How benefit is measured	At each point during a process as costs are incurred	At the end of a completed activity or unit of service
	Based primarily on the cost of individual inputs	Based on the unit cost of outputs
	At the detailed or micro level	At the summary or macro level
Costs are organized or accumulated	Around line items, cost categories, and other detailed accounts usually tied to the chart of accounts	Around performance and cost centers used to aggregate performance and cost information by primary activities
Staff directly involved in the process of allocating costs	Almost all staff keep time records or case counts, and make other decisions that are used to allocate costs	Accounting staff use existing records and reports to allocate costs with little need for additional information from other staff
Who pays for which costs	Each funding source pays for its share of every item or pool of costs, since benefit is measured as costs are incurred	Benefit is measured at the end of a process and not as costs are incurred, which separates the measurement of benefit from the payment of costs and allows greater flexibility in determining who pays for which costs
Approach to cost management	Identifies and measures the individual components of total costs	Measures the cost of accomplishing program results and the benefits derived from the investment of public funds. Useful for managing the costs of an entire activity or service
Use of the financial plan	To plan and control for line item costs	To plan and control for the unit cost of activities, and to decide who will pay for which costs
Reconciling variances	Allocate or reallocate all cost variances in the current period	Reallocate only material cost variances in the current period and roll forward other adjustments into the next period

 

RESOURCE SHARING AGREEMENT

This methodology contains a six step process for achieving an equitable distribution of costs. The process allows for broader discretion on how participating programs will share responsibility, resources, and costs for their combined activities. The steps are briefly explained below and presented in detail in the following chapters.

The agreements that are reached between the participating agencies to carry out each step in the process must be documented. That document is called the Resource Sharing Agreement (RSA). The RSA establishes the parties' agreement to the performance objectives, their individual share of resources committed to the project, the costs that each will pay for, the measures of benefit to be used to determine the equitable distribution of costs, the periodic review of results and amendments to the plan and, lastly, the method of resolving variances at year-end between planned and actual activity.

The RSA is an agreement on the operating plan for the year. The RSA will usually be renegotiated each year. In addition to documenting the six steps, the RSA includes modification provisions, the period of performance, and the parties' signatures to the agreement. A separate master or umbrella agreement should also be developed that addresses governance and management issues. The Governance Agreement is discussed further in Appendix 2.

The following is an overview of the six step process and the documentation requirements for the RSA. Each of the six steps is discussed in greater detail in the following chapters. A flow chart of the entire six step process is also included at the end of this chapter.

Step One: Identify Program Outputs and Performance/Cost Centers

Since the methodology focuses on achieving planned outputs or results as the means for achieving an equitable distribution of costs, the annual program plan must be a reliable forecast of what will actually occur during the year. This places a large responsibility on the soundness of the plan and on the agreement by all participating agencies to work together to achieve the planned results. The plan will translate the program's general goals into quantifiable and specific outputs to be achieved. The planned outputs, in turn, are organized into groups of comparable activities called performance centers. When costs are also aggregated into the same groupings, the combinations of program and cost objectives are called performance/cost centers.

The RSA must document the performance objectives established for the integrated delivery system. The performance objectives are the planned outputs established by the parties and organized around common activities and services. Once the program outputs are identified, the parties organize costs in pools that correspond to the planned outputs. Costs should be centered around the program outputs to allow for performance and cost tracking. The cost centers and performance outcomes that are documented in the RSA will enable the project to match quantifiable benefits with the costs incurred and determine the cost per unit of service. A full discussion of performance/cost centers can be found in Chapter I.

The parties may develop a planning form similar to a Program Planning Summary which is currently used for some employment and training (E&T) programs. As part of the RSA, the document would detail within each performance/cost center the quantity of outputs being planned for each fund source. The client flow and service flow plans should also be outlined in this step. Expectations for referrals from one program to another, as well as referrals to outside agencies, should be clearly delineated in the RSA.

Step Two: Establish a Funding Plan

The second step is to identify the total resources needed to complete the performance objectives and which of those resources will be provided by each of the partners. The level of funding and/or resources and types of activities that each party is providing must be detailed in a funding plan. It is assumed that each fund source has performed an assessment of its own financial capabilities before developing the joint funding plan.

Once an agreement is reached, the parties may develop a form similar to a Budget Information Summary which is currently used for some E&T programs. As part of the RSA, the document would identify for each performance center the funds/resources being provided by each funding source. This step is discussed in Chapter II.

Step Three: Verify Equitable Benefit

The funding plan and planned performance levels must be negotiated among the parties so that the final distribution of program outputs and costs provides equitable benefit to all funding sources.

It is essential that the negotiations between the parties determine how benefit will be measured. Each party is expected to share in the actual benefits received in proportion to the amount of costs it actually pays for. The benefits and the methods used to measure them must be clearly stated, understood and agreed upon by all parties involved. The RSA should document the up-front analysis that demonstrates that the plan will achieve an equitable distribution of costs and benefits. Approaches for verifying that the plan is equitable are described in Chapter III.

Step Four: Track and Report Results

The RSA should describe the method which the parties will employ to track and report actual costs and outputs during the operating period. Expenditures charged to each funding source should be in accordance with the funding plan. The method as summarized in the RSA must be accurately applied to actual shared costs, reported in a timely manner, and adequately documented. The frequency of cost and program reporting should be delineated in the Governance Agreement and will depend on each organization's reporting requirements and other needs. Some common issues related to this step are addressed in Chapter IV.

Step Five: Conduct Interim and Year-End Analyses

The RSA should describe the content and frequency of the interim and year-end analyses. The analysis must allow for a comparison of actual year-to-date performance to the planned performance objectives and compare actual expenditures to the original estimates. How the analysis is performed will be delineated in the RSA. The analysis compares actual program performance with the objectives identified in Step 1. The analysis also evaluates expenditures and compares the actual costs to those planned in Step 2. Step 3 of the RSA documents that equitable benefit was planned. Step 5 verifies whether the plan was accomplished and, accordingly, whether equitable benefit was received based on actual results.

The method, frequency, and responsibility for performing the analysis should be delineated in the RSA. The analysis should be performed no less than quarterly but often enough to take corrective action and resolve any significant and material variances before year-end. Performing the analysis is discussed in Chapter V.

Step Six: Adjust for Variances at Year-End

The RSA should specify the level at which variances between actual and planned performance and/or costs are acceptable. The RSA must describe how variances will be determined and what steps will be employed to correct variances, both significant and insignificant, and material and immaterial. The RSA should also include an agreement on how variances will be adjusted at year-end and who is responsible for determining the full cost of the joint activities.

Additional Elements of the Resource Sharing Agreement

In addition to the six steps, the parties also need to reach agreement on several other issues that are part of the annual operating plan.

Modification Provisions

The RSA should specify under what circumstances it may be modified as well as the modification procedures that should be followed. The parties may want to modify the RSA if the interim analysis indicates significant changes in the level of services expected for each activity, changes in economic situations, poor performance by a service provider, changes in funding sources or funding levels, or any other factor that will materially affect the plan.

Period of Performance

The RSA should specify the period of performance. Generally, the RSA is negotiated for a twelve month period.

Signatures

The RSA should include signature blocks for all parties to sign attesting that they agree to the parameters and stipulations in the RSA and certifying that the RSA has been developed in accordance with all applicable requirements and the methodology presented in this TAG.

It often happens that agencies have long-established cost allocation systems already in place before program design and delivery systems are developed. This can result in bending what would have been the optimum design for program delivery to fit the requirements of the established cost allocation system. The cost allocation methodology presented in this TAG, however, is structured to first allow the program delivery system to be designed to achieve the best results, and then provide the flexibility to develop cost allocation approaches that complement rather than dictate the program delivery system.

This methodology emphasizes front-end planning and agreement among all of the partners on how services will be delivered. Consequently, the process first involves developing a plan of program services. The plan of service reflects the basic arrangement between the parties on the types and levels of services and activities to be provided. The plan would generally be developed in the following manner.

OUTPUT AND INPUT MEASURES OF BENEFIT RECEIVED
PERFORMANCE CENTERS	OUTPUT MEASURES OF BENEFIT	INPUT MEASURES
Intake, Eligibility Determination, Needs Assessment, Referral to Other Services	Number of new enrollments	Staff time spent by program; Number of eligible or total applicants
Universal Services	Share of direct benefits received or direct costs incurred in the other performance centers	Staff time spent by program
Job Development, Job Placement, Job Search, Job Readiness, LMI, Employability Skills, OJT Development	Number placed into jobs; Number served in the activity	Staff time spent by program
Case Management, Counseling, Comprehensive Assessment	Number of current program enrollees; Number served in the activity; Number of program completers	Staff time spent by program
Supportive Services	Number of current program enrollees; Number served in the activity; Number of program completers	Individually tracked by participant and directly charged to the fund source
Occupational training, Basic skills training, Other tuition and training	Number served in the activity; Number completing training	Individually tracked by participant and directly charged to the fund source
Administrative support, Overhead, Indirect costs	Number of current program enrollees; Number of participant days in system; Share of direct benefits received or direct costs incurred in the other performance centers	Staff time spent by program or by activity such as payroll and accounting

 

Once the performance centers, related outputs, and levels of service have been identified and agreed to, the parties should create a document similar to a Program Planning Summary (PPS) that is currently used for some employment and training programs. The document outlines each major performance center by units of performance for each funding source. The PPS should be included in the RSA.

CASE STUDY

A case study will be used beginning here with Step 1 and continuing through Step 6 in the remaining chapters of the TAG. The example is intended to apply each step of the methodology to a practical set of circumstances.

TABLE 1 EXPECTED LEVEL OF OUTPUTS (Annual Data)
ACTIVITY	JOBS	JTPA	ES	TOTAL
Intake	2,400	3,500	5,200	11,100
Case Management	2,400	3,500	0	5,900
Supportive Services	2,400	240	0	2,640
Job Placement	350	1,925	2,100	4,375

 

The partners have completed Step 1 by making decisions and reaching agreements that are summarized in Table 1. Specifically, they have:

Once the performance centers have been identified and service levels established, the next step is to determine the resources that will be needed to achieve the objectives and which fund source will provide each of the needed resources. Each participating agency commits resources to the joint effort and decides up-front how to budget for its share of total costs. It is assumed that each fund source performed an assessment of its financial capabilities before developing the funding plan. It is also assumed that each organization is responsible for ensuring that the costs it pays for are allowable costs to the fund source.

This chapter presents alternative approaches that may be used for paying the costs of activities and services to be provided within each performance/cost center. Which specific costs are paid by each partner are negotiable among the partners, provided that each partner pays its equitable share of total costs as measured on a bottom-line basis. Methods used to determine each partner's fair share of the total costs are presented in Step 3 in the next chapter. Even though Steps 1, 2 and 3 are presented in separate chapters, the three steps are inter-dependent and performed together.

WHO PAYS FOR WHICH COSTS

If an equitable distribution of costs is achieved using a bottom-line measure of benefit, it is possible to employ a wider variety of methods to determine the types and amounts of specific items of cost that will be paid by each fund source or partner. When benefit is equitably shared on a bottom-line or overall basis, it is not necessary to calculate the proportionate share of each item of cost that "belongs" to each fund source. This provides greater flexibility for fund sources or partners to determine who will pay for which costs.

The rationale is similar to that for cost pooling, which is recognized as a valid method for aggregating costs for later distribution. When a cost is not directly charged to a single fund source, it is pooled with other costs and together these combined costs are subsequently distributed back to fund sources using a basis for allocation that does not directly measure how each individual item of cost should be shared. It is acceptable, under existing standards, to achieve an equitable distribution of costs for the pool of costs as a whole without having to allocate each individual item of cost, recognizing that it would require disproportionate effort to achieve any greater degree of precision. Likewise, after achieving an equitable distribution of costs on a bottom-line basis, it is feasible to apply a variety of methods to determine who will pay for each individual item of cost.

An agreement on how to plan for the payment of costs would generally take the following course.

TABLE 2 RESOURCES COMMITTED TO ACTIVITIES (Annual Data)
FUNCTION	JOBS	JTPA	ES	TOTAL
Intake Facilities Staff - 6	$70,000	$120,000	$50,000	$50,000 $190,000
Case Management Facilities Staff - 7	$30,000 $175,000	$30,000 $60,000		$60,000 $235,000
Supportive Service Facilities Staff - 4	$30,000 $70,000	$70,000 $60,000		$100,000 $130,000
Job Placement Facilities Staff - 5	$35,000	$10,000 $30,000	$60,000 $144,000	$70,000 $209,000
TOTAL:	$410,000	$380,000	$254,000	$1,044,000

 

The partners have completed Step 2 by making decisions and reaching agreements that are summarized in Table 2. Specifically, they have:

The program performance objectives (Step 1) and the funding plan (Step 2) should be negotiated among the parties so that in Step 3 they can demonstrate that the planned distribution of program services and costs provides equitable benefit to all funding sources. Step 3 requires the parties to demonstrate to the satisfaction of each other, their auditors, and oversight agencies that the share of total funds that each party is committing to the joint effort corresponds to the share of total benefit that each party will receive in return. Step 3 is integral to and an essential part of the planning process and cannot be separated from Steps 1 and 2. It is presented here as a separate step in order to single it out in importance as a critical step in the planning process.

It is important that all parties agree on the critical program performance and cost factors that will be used to measure benefit so that an equitable distribution of costs is obtained. That measurement of benefit consists of comparing the levels of services to be received by each fund source with the costs to be paid by each fund source, by using an appropriate basis to determine what is each party's allocable share of the total planned costs. Prior to finalizing the agreement, therefore, there must be an up-front analysis conducted to demonstrate that there is an equitable distribution of costs/benefits being planned using a bottom-line measure of benefit. If the program and cost plans do not meet this test, those plans must be revised until it can be demonstrated that an equitable distribution of planned costs will be achieved.

This chapter presents an approach for verifying that an equitable distribution of costs is being planned using outputs as the allocation base and measuring benefit on the bottom-line.

VALUING BENEFITS RECEIVED FROM PLANNED OUTPUTS

By establishing performance and cost centers and identifying appropriate outputs to be obtained in each, it is possible to use this output information to determine each fund source's share of the project's total benefits and costs. An output basis for allocating costs employs a bottom-line approach for achieving an equitable distribution of costs. It can be used to determine the costs of the outputs allocable to any one program and the value of the benefits received from those outputs.

Compute the Unit Cost of Planned Outputs

The first step is to compute the unit cost of the outputs planned to be attained in each performance/cost center. The unit cost is determined by dividing the total planned costs for the performance/cost center by the number of planned outputs in order to obtain an average cost per unit of output. If the total costs for an activity are planned to be $200,000 and the planned outputs are 1000, then the unit cost of that activity is planned at $200 ($200,000 / 1000 = $200).

	Planned Unit Cost	Planned Outputs	Value of Outputs
Program A: Intake	$200	700	$140,000
Counseling	$500	700	$350,000
Combined Total	-	-	$490,000
Program B: Intake	$200	300	$60,000
Counseling	$500	300	$150,000
Combined Total	-	-	$210,000

 

The benefits expected to be received from the planned outputs for both the intake and counseling activities are $490,000 for Program A and $210,000 for Program B.

COMPARING PLANNED BENEFITS AND PLANNED COSTS

In order to verify that the program plan and cost plan (from Steps 1 and 2) are reasonable and equitable to all parties, the share of total funds that each party is planning to provide must correspond to the share of total benefits that each party is planning to receive. In Step 2 as presented in Chapter 2, the parties planned which specific costs and the total amount of costs that would be paid by each program. In the computations performed above, the value or benefit of the outputs planned for each party was determined for each performance/cost center and in total. The next step is to determine whether there is equivalence between the planned costs to be paid and the planned benefits to be received by each party.

Bottom-Line Comparison

The comparison can be made on a bottom-line basis by comparing total planned benefits with total planned costs. The following table shows this comparison for the example that is continued from above.

The comparison is a variance expressed as the percentage by which benefits are greater than (+) or less than (-) costs. For Program A the difference between planned benefits and planned costs is -$5000 or -1.0% {($490,000 - $495,000) / $495,000 * 100}. For Program B the difference is $5000 or +2.4% {($210,000 - $205,000) / $205,000 * 100}.

Applying the Materiality Threshold

The comparison between planned benefits and planned costs yields a result that is expressed as a percent variance. In the above example the variance is -1.0% for Program A and +2.4% for Program B. If the variance is less than 5% for each fund source, then the variance is not considered to be material. In this case the plan is validated as reasonable and equitable to all parties. The plan can then be used as the basis for providing services and paying costs.

Revising the Plan

However, if the results of the comparison between planned costs and planned benefits yield a variance that is greater than 5% for any one fund source, that variance is material and the plan must be revised. The plan can be revised by either adjusting the amounts of costs planned to be paid by each fund source and/or adjusting the levels of service that each fund source is planning to receive. Until the plan for each fund source reaches a level of equity that falls within the +/-5% materiality threshold, the plan may not be used as the basis for operating the program and paying costs.

Varying Cost Rates

Different fund sources may pay different amounts for the same or similar services. This is often true for staff salaries and fringe benefits. It is possible, but not necessary, to factor in the effects of varying cost rates by having the fund source with the higher cost rates plan to pay for an additional amount of the total costs above the level that it would otherwise pay for its share of the planned outputs. The additional amount that the fund source would plan to pay is equivalent to the amount of additional costs that its participation brings to the other partners in the project.

RECONCILING THE PLAN TO ACTUAL RESULTS

The funding plan or budget is used to determine which party will pay for specific costs, but it is not used as the basis for determining each party's allocable share of total costs. As discussed throughout this TAG, the application of the allocation base, not the budget, is used to determine whether the actual cost charges result in a fair distribution of costs.

Throughout the project period, costs are being paid by the fund sources in accordance with the funding plan. The actual results and cost of performance achieved are not fully known, however, until the end of the period. Therefore, it is necessary to reconcile cost and performance information throughout the operating period to assure equity to all of the fund sources. This is done by comparing planned and actual performance, planned and actual costs, identifying any variances, and making the necessary adjustments. The process of analyzing performance and adjusting for variances is discussed in detail in Chapters 5 and 6. This process mirrors the approach presented in OMB Circular A-87, Attachment B, Section 11h (May 17, 1995) which authorizes the interim use of budget estimates for time distribution until adjustments can be made for actual results.

CASE STUDY (continued)

The case study that was begun in Step 1 is continued here. In Step 1 the parties identified the performance centers and the levels of activities and services that would be provided to participants in each program (Table 1 in Chapter I). In Step 2 the parties agreed to the funding plan for the multi-funded service center (Table 2 in Chapter II). The purpose of Step 3 is to determine whether this program and cost plan will produce an equitable distribution of costs.

The unit cost of the activities being planned in each performance/cost center is developed by dividing the total planned costs for each performance/cost center by the number of planned outputs for that performance/cost center, as follows.

ACTIVITY	Output Units	Total Costs	Unit Costs
Intake	11,100	$240,000	$21.62
Case Management	5,900	$295,000	$50.00
Supportive Services	2,640	$230,000	$87.12
Job Placements	4,375	$279,000	$63.77

 

Table 3 below presents the allocable share of planned costs by activity that each fund source will benefit from, which is derived by multiplying the number of units of service (number of participants to be served by each fund source from Table 1) by the unit cost for each activity. The last row in the Table provides a bottom-line total of benefits that each program plans to receive from all of the jointly conducted activities.

TABLE 3 ALLOCABLE SHARE OF BENEFITS BY ACTIVITY AND FUND SOURCE

 

ACTIVITY	JOBS	JTPA	ES
Intake Participants Unit Cost Planned Benefits	2,400 $21.62 $51,892	3,500 $21.62 $75,676	5,200 $21.62 $112,432
Case Management Participants Unit Cost Planned Benefits	2,400 $50.00 $120,000	3,500 $50.00 $175,000	0 - $0
Supportive Services Participants Unit Cost Planned Benefits	2,400 $87.12 $209,091	240 $87.12 $20,909	0 - $0
Placements Participants Unit Cost Planned Benefits	350 $63.77 $22,320	1,925 $63.77 $122,760	2,100 $63.77 $133,920
Bottom-Line Total of Planned Benefits for All Activities	$403,303	$394,345	$246,352

 

The planned benefits to be received from all activities must next be compared with the amount of costs that each party is planning to pay for the joint effort, in order to determine whether the program performance plan and the funding plan are reasonable and equitable. The bottom-line analysis of the value of benefits to be received from planned program outputs compared with planned costs to be paid is presented in Table 4 that follows.

TABLE 4 COMPARISON OF BENEFITS FROM EXPECTED OUTPUTS AND PLANNED COSTS
FUNCTION	JOBS	JTPA	ES
Benefits from Expected Outputs (Table 3 above)	$403,303	$394,345	$246,352
Planned Costs (Table 2 in Chapter II)	$410,000	$380,000	$254,000
Percent Variance between Planned Benefits and Costs	-1.6%	3.8%	-3.0%

 

Applying the 5% materiality threshold, the variances in Table 4 are immaterial and indicate that all three programs are planning to pay for costs equitable in amount to the benefits planned to be received.

By completing the validation process in Step 3, the parties have been able to verify that the planned program performance levels and total resource commitments are equitable to each fund source. This demonstrates that if the program operates according to plan it will achieve an equitable distribution of costs and benefits. This allows the parties to begin operating the program and charging costs in accordance with the plan. As will be discussed in subsequent chapters, the parties must ensure along the way that the program is actually operating at planned levels and that any significant or material variances from plan are identified and corrected.

After completing the program performance and funding plans as described in Steps 1 and 2 and verifying that the plans are equitable to all parties as described in Step 3, the actual operation of the joint project and the attendant gathering of program and cost information can begin. It is critical to track costs actually incurred and outputs actually obtained in order to ensure that actual results of operations meet planned expectations. Since the plan is being used as the basis for charging costs to individual fund sources during the period, the partners need up-to-date information to continuously verify that the plan does approximate reality and is appropriate to use for charging costs. If substantial deviations from plan occur and they are not promptly corrected, the plan loses its validity as the blueprint for charging costs.

A wide range of administrative functions must be performed during the year in accordance with agreements reached among the parties and documented in the Governance Agreement as discussed in Appendix 2. This chapter is limited to the accounting functions that are performed during the operating period.

ASSIGNING RESPONSIBILITY

All parties must have a clear understanding of who is responsible for conducting the wide range of administrative and accounting functions that must be performed during the operating period. These understandings should be documented in the Governance Agreement, including the essential accounting and MIS functions that are conducted throughout the operating period. At a minimum, the following functions should be clearly assigned:

Most of the steps in the TAG are tasks which program and fiscal managers conduct on a regular basis, such as upfront planning, budgeting, tracking performance, comparing actual and planned results, and correcting for deviations or variations that occur during the year. Planning and budgeting were central to Steps 1-3, while Step 4 focused on accounting for program performance and costs.

Step 5 is also a common analytical task and involves comparing actual and planned performance and costs, identifying problem trends, and taking corrective actions. After-the-fact analysis comparing actual data to planned data should be performed at regular intervals during the operating period and at year-end. If the performance and cost plans are equitable, then the accomplishment of the objectives in the plan demonstrates that equitable benefit has been obtained. Interim and year-end analyses are conducted to determine if planned participant and cost objectives were met and if equitable benefit was thereby received.

It is necessary to reconcile cost and performance information throughout the operating period to assure equity to all of the fund sources by year-end. This is done by comparing planned and actual performance, planned and actual costs, identifying any variances, and making the necessary adjustments. The process of analyzing performance and adjusting for variances is discussed in detail in Steps 5 and 6.

The term "year-end" is used here to identify a period in time, the end of the operating or funding period, rather than a length of time. The length of that period could be more or less than a twelve month period, as discussed further below. For most programs, however, the year-end would cover a twelve month period corresponding to the funding year, the fiscal year, or the program year.

INTERIM ANALYSIS

An interim analysis of actual vs. planned results should be performed within each performance/cost center as a standard procedure in assessing performance and identifying appropriate corrective actions.

An interim analysis:

	Program A	Program B	Total Project
a) Planned Enrollments	700	300	1,000
b) Actual Enrollments	660	290	950
c) Percent of plan achieved	94%	97%	95%
d) Funding plan	$140,000	$60,000	$200,000
e) Actual costs paid	$137,000	$57,000	$194,000
f) Percent of plan achieved	98%	95%	97%
g) Planned Unit Cost (d / a)	-	-	$200
h) Actual Unit Cost (e / b)	-	-	$204

 

TABLE 5 INTERIM ANALYSIS OF ACTUAL OUTPUTS AND COSTS TO PLANNED OUTPUTS AND COSTS BY ACTIVITY (2nd Quarter)
PLANNED VS. ACTUAL PARTICIPANTS SERVED					PLANNED VS. ACTUAL COSTS
ACTIVITY	PLAN	ACTUAL	% PLAN	% VAR.	PLAN	ACTUAL	% PLAN	% VAR.
Intake JOBS JTPA ES TOTAL	1,200 1,750 2,600 5,550	1,050 1,625 2,250 4,925	88% 93% 87% 89%	-12% -7% -13% -11%	$ 35,000 $ 60,000 $ 25,000 $120,000	$ 34,500 $ 56,500 $ 24,500 $115,500	99% 94% 98% 96%	-1% -6% -2% -4%
Case Mgmt. JOBS JTPA ES TOTAL	1,200 1,750 0 2,950	1,050 1,625 0 2,675	88% 93% 0% 91%	-12% -7% 0% -9%	$102,500 $ 45,000 $ 0 $147,500	$100,500 $ 43,500 $ 0 $144,000	98% 97% 0% 98%	-2% -3% 0% -2%
Supportive Svcs. JOBS JTPA ES TOTAL	1,200 120 0 1,320	1,050 120 0 1,170	88% 100% 0% 89%	-12% 0% 0% -11%	$ 50,000 $ 65,000 $ 0 $115,000	$ 48,000 $ 63,500 $ 0 $111,500	96% 98% 0% 97%	-4% -2% 0% -3%
Job Placement JOBS JTPA ES TOTAL	175 963 1,050 2,188	155 725 975 1,855	89% 75% 93% 85%	-11% -25% -7% -15%	$ 17,500 $ 20,000 $102,000 $139,500	$ 16,750 $ 19,500 $100,375 $136,625	96% 98% 98% 98%	-4% -2% -2% -2%

 

As depicted in Table 5, the planned vs. actual analyses for participant and cost data for the second quarter indicate a number of variances that must be analyzed, the causes for the variances identified, and the required corrective action determined. The analysis of the results in each performance/cost center is as follows.

Intake: The variances in program performance are within 15% of plan overall and for each fund source. Even though the variances do not exceed the 15% threshold, the partners target the poorer performance in JOBS and ES for improvement. The cost variances are -4% overall and even smaller for JOBS (-1%) and ES (-2%). The cost variance for JTPA, however, is material at -6% and needs to be corrected.

If the program is conducted successfully in accordance with plan, and timely corrective actions are taken to address performance and cost problems that arise during the year, then there should be no significant program and material cost variances remaining at the end of the operating period or year. Any minor variances may be rolled forward into the next year. If, however, there are significant program and/or material cost variances remaining at year-end, then adjustments must be made to restore equity to the cost sharing arrangement in the current year.

The program performance and cost plan that was developed at the beginning of the year and was agreed to in the Resource Sharing Agreement can form the basis for determining which variances should be adjusted and how the adjustments will be made. The equity of the program performance and cost plan must be supported by the up-front analysis that was performed in Step 3. If the plan is equitable, the analysis performed in Step 5 comparing actual and planned results provides the initial data to be used in determining whether adjustments are needed. This chapter discusses when and how those adjustments can be made.

ADJUSTING PROGRAM PERFORMANCE VARIANCES

A program performance variance is significant if it exceeds 15% and is insignificant if it is less than 15%. The type of adjustment that must be made for the variance is determined by whether the variance is significant or insignificant.

Insignificant Variances

Program performance is considered to be acceptable if all of the variances between planned and actual results are within +/-15% for the performance/cost center as a whole and for each fund source participating in that performance/cost center. Therefore, if there are no significant variances in program performance anywhere within the performance/cost center, the variances are not required to be adjusted either in the current year or in the next year. The partners may, at their option, roll insignificant variances forward when that procedure is agreed to in the RSA. All variances, however, should be taken into account when planning the next year's activities.

If there is even only one significant variance in the performance/cost center, then the activity has not been totally successful. When one or more variances exist, then all of the variances in that performance/cost center must be treated in the same manner as discussed below for significant variances.

Significant Variances

When one or more variances between actual and planned program performance within a performance/cost center exceed +/-15%, those variances are significant and must be adjusted because the results for that activity, by definition, are not equitable to all parties. Significant variances must be adjusted in the current period. It is obviously not possible to reverse a program performance problem after the year is ended. Consequently, the adjustment must be made by determining the impact that the variance in program performance has on the equitable distribution of costs in the current year.

The impact of a significant performance variance on cost distribution is determined by performing a bottom-line cost analysis as discussed later in this chapter. The procedure determines each fund source's share of the total costs by valuing the number of actual outputs received on an actual unit cost basis, and then comparing the total value of outputs received with the total costs paid by each party. This unit cost approach to valuing outputs was also used in Step 3 to verify equitable benefit in the plan. Following is a brief example of this approach.

Example

Programs A and B operated a joint intake, assessment and job referral center. The performance and funding plan, and actual results achieved at year-end, are presented below.

	Program A	Program B	Total Project
a) Planned Enrollments	700	300	1,000
b) Actual Enrollments	580	290	870
c) Percent of plan achieved (b/a*100)	83%	97%	87%
d) Actual costs paid	$137,000	$57,000	$194,000
e) Actual unit cost (d / b)	-	-	$223
f) Value of outputs received (b * e)	$129,333	$64,667	-
g) Benefits greater (less) than costs paid (f - d)	($7,667)	$7,667	-
h) % Variance (g / d * 100)	-5.6%	+13.5%	-

 

Program A's performance at 83% of plan results in a significant variance of -17% (100% - 83%). Even though the performance for Program B and for the activity as a whole creates variances less than 15%, the poor performance in Program A produces an inequitable distribution of costs. The cost impact of the significant performance variance is determined by comparing the value of actual outputs received (line f) with the amount of costs actually paid (line d) by each fund source. The bottom-line impact on the distribution of costs (line h) is that both Program A (-5.6%) and Program B (+13.5%) have material cost variances that must now be adjusted.

ADJUSTING COST VARIANCES

Whether to make a cost adjustment in the year just ended or in the next period depends primarily on whether the cost variance exceeds the 5% threshold for materiality.

Immaterial Cost Variances

A cost variance is immaterial if it is less than +/-5%. An immaterial cost variance may be rolled forward into the next year, without any further adjustment in the year just ended, provided that the partnership continues into the next year.