Universities have been warned that they are putting the future funding of the sector at risk if they underestimate the full costs of teaching.

Institutions provide the Higher Education Funding Council for England with data returns on the costs of teaching and research through a process called Transparent Approach to Costing, or Trac.

Data on teaching costs submitted this year are currently being analysed by Hefce and will be used to inform a fundamental review of the subject cost bands it uses to allocate teaching funding to universities.

But in a letter sent last week to vice-chancellors, Steve Smith, head of the Trac Strategy Group and vice-chancellor of the University of Exeter, says that there is evidence of a "lack of rigour" when it comes to reporting how staff divide their time between teaching and research, with indications that some institutions are underestimating the costs of teaching and overestimating the costs of research.

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The letter highlights the practice as a matter for serious concern because the sector and funding bodies need reliable data to inform major policy reviews, including next year's review of student tuition fees.

"There is a potential risk to the whole sector if the credibility and robustness of data do not meet the future requirements of funding bodies," Professor Smith writes.

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"If we undermine Trac without a better alternative, we may simply lose funding."

A group led by Geoffrey Crossick, warden of Goldsmiths, University of London, is examining the level of resourcing for teaching that will be required in future to maintain the quality and international competitiveness of UK higher education.

Professor Smith told Times Higher Education: "If the data are robust, we should be able to say to the Government that the cost of sustainable teaching is x, currently income is y, and this is the gap that needs to be filled."

He said that the issue is "extraordinarily important" because it is about the underlying cost basis of the higher education system.

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"Government is going to rely on these data, both to inform any review of the appropriate level of funding for teaching and to find the appropriate balance between research council and funding council income," he said.

A Hefce newsletter on Trac explains: "A notable concern is that some staff are charging professional activity as research when it has no external sponsor, is not part of a scheduled project and has no outputs ...

"Many institutions have a strong culture to encourage research activity and it is understandable that this can lead to some staff overemphasising their time on research."

Meanwhile, the University and College Union is due to debate concerns about the rigour of Trac and its potential outcome at its annual conference later this month.

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A motion from the union's Manchester Metropolitan University branch argues that Trac will lead to a "continued reduction in unit resources for teaching".

Stewart Smyth, a senior lecturer in Manchester Metropolitan's Business School, said: "This is profound decision-making based on spurious data. Different institutions use different methods. This kind of data collection would make Enron blush."

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rebecca.attwood@tsleducation.com.