Cost Recovery Framework
July 2010

EXECUTIVE SUMMARY

In 2004 the Treasury Board Secretariat (TBS) conducted a Review of Legal Services, which examined, inter alia, the sustainability of funding and the management of legal services in the Government of Canada. Its findings supported reliance on a hybrid model to fund the provision of legal services, which allows the Department to receive A-Base funding with the remaining portion of its costs being recovered from client departments and agencies that use legal services.

In October 2006, the Treasury Board Secretariat (TBS) approved the establishment of a Net Voting Authority, in the amount of $178 million (i.e. excluding Employee Benefit Plan contributions), to the Department of Justice for the provision of legal services. The Department of Justice developed a single cost recovery model with various cost categories. These costs are used to establish uniform charge-out rates for the counsel and paralegals who provide legal services. The model is based on the full cost of delivering services, and the charge-out rates are to be applied consistently for all types of legal services including advisory, litigation, and legislative/regulatory drafting. Disbursements paid by the Department of Justice on behalf of client departments are recovered through a separate disbursement recovery process. In an effort to streamline this process, as of April 1, 2008, disbursements below $200 are recovered by incorporating these disbursement costs into the charge-out rates.

Revenues from cost recovery are significant, exceeding $200 million annually for the first time in 2008-09 and accounting for more than a third of the departmental operating budget. Moreover, the cost recovery process involves most departmental organizations, including management, legal practitioners, and financial and administrative staff. The full impact of the move to a Net Voting Authority regime and standardized legal services rates on the Department and its external stakeholders is still being realized.

This audit focused on reviewing and assessing the adequacy and appropriateness of the existing management control framework for cost recovery and the single cost recovery model for charging client departments. In our opinion, the management framework is insufficiently robust to support cost recovery.

Roles and Responsibilities

Two main departmental offices are involved in managing the cost recovery process: the Finance Branch, which is responsible for implementing the financial aspects of cost recovery; and the Law Practice Management Directorate (LPMD), which is responsible for the business side of law practice. (It should be noted that effective July 2009 the Chief Financial Officer (CFO) Branch was established. Recommendations in this report are therefore addressed to the CFO.)

Both of the above offices are integrally involved in cost recovery management. Continued collaboration is therefore required to identify and implement continuous improvements in the cost recovery process.

Integrated Planning

We found that there is a need for an integrated plan that sets out a strategy for the management of cost recovery. The plan should address gaps and identify enhancements, including measurable objectives; resource requirements; clear accountabilities, roles, and responsibilities; policies, procedures, and documented processes; and timelines for action. At a minimum, the plan would address the issues of resources at all levels of the Department, work instruments, process design, professional development, and communications.

Human Resources

When Net Voting Authority was originally introduced in April 2007, the Department was given little time and no incremental resources to implement it. It was also introduced at a time when the Finance Branch was experiencing high staff turnover and financial expertise was uneven across portfolios.

At the time of the audit, financial management advisors (FMAs), who are professional financial officers reporting under the CFO, could be found in only two portfolios: Public Safety, Defence and Immigration; and Aboriginal Affairs. We were told that, at the time of the audit, the resource situation in Finance was improving and a plan was under way to have FMAs employed in the portfolios and in the three specialized legal areas (i.e. the Litigation Branch, the Legislative Services Branch, and the Public Law Sector). In our opinion, it is essential to proceed with this plan to ensure portfolio and sector management are provided with the requisite financial support to meet their accountabilities.

Policies, Procedures, and Guidelines

At the time of the audit, the Department was preparing to enter its third year of cost recovery under Net Voting Authority. While some formal procedures were in place, portfolios were using numerous distinct methods to obtain client approval for recovering legal service costs. These processes were often complex and varied significantly by client department. Legal sections in the regions were using different approaches for managing and monitoring recoverable costs apart from those related to the processing of interdepartmental settlements (IS). Portfolios have developed and, in some cases, documented their own procedures for billing, which have been distributed to the DLSUs and regions. Furthermore, we found that Finance had not provided any best practices, lessons learned, or benchmarks on cost recovery. More documented financial policies, procedures, and guidelines to direct activities relating to cost recovery are required.

Training

In the early stages of cost recovery, management meetings, conference calls, conferences, and seminars routinely took place and national templates were distributed to the business managers to assist them in planning and tracking their recoverable costs. While Finance continues its consultations with departmental staff, we were told that the national templates were not used by staff for their day-to-day work. Instead, groups developed their own sets of procedures and templates to collect and track information on recoverable costs. More extensive training on the use of the national templates would have been beneficial.

In our view, more extensive training is required for departmental staff involved in day-to-day cost recovery activities.

Monitoring

Both Finance and the portfolios have a role to play in monitoring revenue targets. Portfolios are responsible for ensuring payment from their clients, but lack standardized processes to support their position. This situation should improve with the implementation of the new standardized legal services agreements with client departments set for April 2009.

Finance monitors the financial position of the Department primarily through the Financial Situation Report (FSR). However, the revenue/cost recovery component of the FSR is relatively new and forecasts from the portfolios in the regions have not been accurate. An FSR Working Group has been formed to further develop this reporting tool to allow management to obtain clear and more timely information on expected revenues. In our opinion, an effective monitoring program would allow Finance to identify problem areas and take early and remedial action to address issues.

It is important for Finance to track those accounts receivable related to hourly-based cost recoveries at an earlier stage than is currently the practice. A methodology is needed to capture and identify receivables at the time the Statement of Account from iCase is issued. This would allow for more effective monitoring and enable early detection of problems requiring remedial action.

Compliance with the National Timekeeping Protocol

Legal practitioners (counsel and paralegals) and computer specialists (CSs) need to adhere to the requirements of the National Timekeeping Protocol in recording their time. Section 3.1 of the NTP states: “to help ensure data integrity, time should be recorded on a daily basis or as soon as practically possible thereafter”. Some practitioners throughout the Department enter their time into iCase at the end of the month or later. The Department must ensure that timekeepers enter their time into iCase regularly, preferably daily.

Single Model to Charge Departments and Agencies

The costing model for legal services is based on a sound and reasonable methodology that is consistent with TB requirements.

Simplification of Invoice Processing Procedures

Justice staff in the regions and DLSUs expend significant time and effort in attempting to identify the area of a client department that has incurred the legal service and is responsible for payment. This issue accounts for some of the difficulties in obtaining the client department approvals for payment.

The introduction of standardized legal services agreements in fiscal year 2009-10 represents a positive move toward improving and standardizing management of interdepartmental arrangements including the invoicing process. Client departments are expected to provide Justice with a single set of financial (FIS) codes or, at most, one set per organizational unit led by an Assistant Deputy Minister or equivalent. During 2008-09, Justice invoiced against 475 different cost centres within the 154 client departments it serves.

In our opinion, a more simplified invoicing process that allows for more timely processing of cost recoverable transactions by client departments is required.

Disbursements

The current process of recovering disbursements is administratively cumbersome. The Cost Recovery Section of Finance estimated that the Department is not recovering for all disbursements to which it is entitled. The Department took steps to simplify the process in 2008-09 by including an hourly charge of $0.40 in the rates to cover disbursement transactions below $200. (A recent analysis suggests that the $0.40 increase is insufficient to fully cover disbursements below $200.) This initiative notwithstanding, the management of disbursements still poses a problem for Finance. A review of the rates charged for disbursements and an analysis of the various options for recovering disbursements are required.

Monthly Billing

The Department’s present quarterly billing process presents serious cash flow issues for management. Approximately 60% of cost-recovered revenues flow into the Department during the last three months of the fiscal year. This can create constraints on spending and reduce flexibility to expend earlier in the year.

More frequent billing would not only have a positive impact on the cash flow of the Department, but it would also enable administrators to identify billing errors more quickly. Year-end invoicing would also be simplified and billing errors would be more readily identified.

The management responses to the recommendations contained in this report were provided by the Chief Financial Officer, Chief Financial Officer Branch and the Assistant Deputy Minister, Management Sector.