Eliminating chargebacks


Chargebacks are internal charges between MIT units or accounts.  Our team began meeting in May, 2012 and successfully eliminated many inefficient internal chargebacks.  MIT processes approximately $200 million in chargebacks a year, and many are costly to administer, so it was important to consider their value on a case-by-case basis. Our team evaluated existing chargebacks, keeping only those that drove cost savings and good business practices.

By eliminating many inefficient chargebacks, we had a measurable impact on the overall efficiency of the Institute’s operations. 

Though the full team no longer meets on a regular basis, our work continues through the Institute’s annual budgeting processes.  This report highlights the biggest internal chargebacks eliminated to date, provides a set of criteria to use in future chargeback evaluations, and provides procedures we must follow to remain compliant with federal cost accounting standards when we eliminate future chargebacks.

Chargebacks eliminated

The first chargeback eliminated was one that was very familiar to MIT administrators—the telephone and network service center (TNSC) proxy charge that units paid to IS&T for network and telephone services. Processing this chargeback engaged hundreds of people at the Institute annually. As a result of the work of our team, the TNSC chargeback was eliminated in FY14, freeing up MIT administrators to work on more value-added activities.

The second chargeback eliminated was the Construction and Engineering project management fee charged to DLCs for Committee for Renovation and Space Planning (CRSP) projects.  By eliminating this chargeback to DLCs, we eliminated the need for DLC administrators to quantify and validate the charges, again freeing them up to work on more value-added activities.

  1. After the TNSC proxy billing and CRSP management fees were eliminated, several departments eliminated unneeded internal billing processes during the FY15 budget review process. IS&T eliminated several, including TSM backup service fees, charges for various academic software packages and chargebacks for hardware and software repairs.[1]  By eliminating the backup service chargeback, we will encourage more people to use the service.  DLCs with limited resources may not have performed these computer backups in the past simply because of the cost.  Other academic software packages that IS&T eliminated billing for include MatLab, SPSS, Mathmatica, and ABACUS. 

Co-location charges (also known as rack charges) are charges that, until recently, DLCs paid either to IS&T (for servers located in W91) or to the Laboratory for Nuclear Science's Bates Linear Accelerator Center (for servers located in Middleton, Massachusetts).  When the Massachusetts Green nHigh Performance Computer Center (MGHPCC) was established in fiscal 2013, the Institute decided not to charge DLCs for rack charges, providing they agreed to move their servers out to Holyoke.  The MGHPCC building itself is designed for Leadership in Energy and Environmental Design (LEED) certification. It has energy-efficient power distribution, advanced cooling techniques that minimize electricity use, and state-of-the-art power utilization effectiveness (PUE).  By moving servers from Cambridge to Holyoke, the Institute will save money and reduce our carbon footprint.  The MGHPCC is targeting a PUE of less than 1.3. A recent report cites typical data center PUEs at 1.9. This means that our facility can expect to use 25 percent less energy than other data centers.  During the FY15 budget cycle, the Institute also decided to stop charging for co-location services at the Bates facility and we plan to eliminate the on-campus rack charges in fiscal 2016.

The Department of Facilities also reduced some chargebacks during the fiscal 2015 budget cycle.  Their eliminations were done as part of the recycling program, and will lead to more environmentally sound practices on campus.  The recycling program no longer charges for the pick-up of “ewaste” (monitors, printers, CPUs, keyboards, etc.).  These are large volume activities, so the environmental impact will not be insignificant.  Facilities will also no longer charge for the delivery and pick-up of 96 gallon recycling totes for office and area cleanouts.   This will provide significant savings to DLCs and promote a cleaner and safer campus environment.

Criteria for evaluation of chargebacks

Our team has developed a set of criteria to assess the effectiveness and viability of chargebacks including aspects such as their relative benefit in inspiring efficient business habits, the value they generate through promoted cost savings, the effort expended by all parties to assess and administer them, and other key factors. Each chargeback should be evaluated by measuring the cost and effort to administer it against the business practices and behavior it inspires—for example, does paying for a service directly make a unit’s staff more mindful in their use of that resource?

The committee created the following considerations to assist in evaluating chargebacks.

  1. How will the community react if a chargeback is established or eliminated?
  2. Does the chargeback drive documentable efficiency?  Are there cost savings associated with establishment/elimination of the mechanism?
  3. What behavior is likely to result if not implemented?  Is the cost of non-implementation worse than the cost of implementing it?
  4. Is it repetitive/unvarying year to year?
  5. Are there cost recovery issues (F&A, EB) that make establishing or eliminating the chargeback less than ideal?
  6. Is there a financial reporting/business model implication (like charging Housing for utilities)?
  7. If units eliminate chargebacks, how will they be made whole going forward (replacing lost income with GIB allocation[2])?
  8. Will implementation require great effort for little effect (many transactions for few dollars) or will the supporting process be efficient for the dollar value involved?

Remaining compliant with federal cost accounting standards

Cost Accounting Standards (CAS) are U.S. Federal laws that certain contractors and subcontractors must follow when they enter into government contracts.  CAS required MIT to submit a Cost Accounting Disclosure Statement (DS2), which we did in October of 1995, and it was approved by the Office of Naval Research (ONR) in March 1996. MIT has revised its DS2 fourteen times since then.  Each of these revisions involved cost impact studies, formal submission to the Government, extensive audit by DCAA (as much as three years for a single change), re-write, and negotiation with ONR.  If the elimination of an internal chargeback results in a cost accounting change then MIT must get ONR to approve the change.  It’s important to note that not every internal chargeback elimination necessarily involves a cost accounting change, so involving the Office of Cost Analysis up front to make that determination is imperative.

The team

Although the full team no longer meets on a regular basis, the work we began continues during the normal budget process.  If you are aware of inefficient chargebacks that still exist at MIT, please let a member of our team know.  As we continue to remove inefficient business processes at the Institute, we hope that administrators will be able to concentrate their efforts on more value added activities. 

John DiFava, Facilities Operations and Security
John Donahue, Office of Cost Analysis, Office of Sponsored Programs
John Donnelly, Office of the Vice President for Finance
John Henriques, Facilities Operations
Allen Marcum, Office of the Vice President for Finance (team lead)
William McCarthy, Environment, Health & Safety
Allen Wallace, Information Services & Technology
Pam Weldon, Lincoln Laboratory


Allen Marcum
(617) 324-7207

[1] TSM backup services are in the process of being replaced by Crashplan.  There will be no internal billing for that backup service either. 

[2] IS&T received general Institute budget (GIB) allocations to replace their lost revenue.  For the TNSC proxy elimination, DLCs who were no longer charged for these services had their GIB allocations reduced (or “scooped”) to help fund the allocation that IS&T received.