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FINANCIAL MANAGEMENT & AUDITS
 | Getting familiar with the relevant policies and legislations is essential for successful financial management of the projects. Besides the national regulations, the EC rules are also important to avoid financial mismanagement. In this section of the FP7 Window you can find a brief introduction to the EC financial rules concerning FP7. |
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The budget is an important part of the proposal, as it sets the standard for how much the European Commission (EC) will contribute. There are no general guidelines on how detailed the budget should be during the proposal preparation stage.
The total budget of a particular FP7 Indirect Action project must include all possible expenditures and costs: personnel/staff, travel, investment costs, running costs, etc. There are different needs and requirements in every single project, however in each case it is true that from the EC point of view a project budget is built-up from two types of costs: eligible and non-eligible costs. You can find the detailed budget structure below:
Eligible costs
The Guide to Financial Issues relating to FP7 Indirect Actions defines the following eligibility criteria for project costs:
- Actual
- Economic and necessary for the implementation of the project
- Incurred by the beneficiary (Coordinator or partner)
- Determined in accordance with the usual accounting principles of the beneficiary
- Incurred during the duration of the project
- Based on real expenditure
- Used for the sole purpose of the project
- Recorded in the accounts of the beneficiary
- Indicated in the estimated overall budget annexed to the EC Grant Agreement
- Are excluded of any direct taxes
Non-eligible costs
There are several costs that are not eligible from the EC point of view. These costs cannot be charged to the project’s budget even if they occur in direct connection with the project during the implementation and must be covered by the beneficiary. Some of these are listed here below:
- Identifiable indirect taxes, including VAT, excluding airport taxes
- Duties
- Interest owed
- Provision for future losses or charges
- Exchange losses
- Costs related to return of capital
- Costs declared or incurred or reimbursed in respect of another Community project
- Debt and debt service charges
- Excessive or reckless expenditure
- Any costs which does not meet the conditions established in the contract
Direct and Indirect Cost
Within the Eligible costs category there are two main cost types which may be considered eligible and can be charged to the project: Direct Costs and Indirect (i.e maintenance/running) costs.
I, Direct Costs
Direct costs are all those eligible costs which are linked directly to the project and are identified by the beneficiary in accordance with its accounting principles and its usual internal rules. The following types of direct costs may be considered as eligible:
- Personnel/Staff Costs
- Subcontracting
- Other Costs:
- Travel Costs
- Durable Equipment
- Consumables/Other Costs
- Cost of Certificate(s) of Financial Statements
1, Personnel Costs
The personnel costs must derive from a person actually contracted by the organisation in the form of an employee or an In-house consultant with the following requirements:
- The personnel must be directly hired by the beneficiary in accordance with its national legislation.
- The personnel must work under the sole technical supervision and responsibility of the beneficiary.
- As there is no distinction between cost models, any beneficiary may include in its personnel costs ”permanent employees”, who have permanent working contracts with the beneficiary or ”temporary employees”, who have temporary working contracts with the beneficiary.
- Personnel costs should reflect the total remuneration: salaries plus social security charges (holiday pay, pension contribution, health insurance, etc.) and other statutory costs included in the remuneration.
- Personnel must be remunerated in accordance with the normal practices of the beneficiary. Only the costs of the actual hours worked by the persons directly carrying out work under the project may be charged.
2, Third Parties - Subcontracting Costs
The consortium should be able to carry out the project with common efforts and subcontracting should only be used for minor tasks and not for core activities of the project. Third parties are not beneficiaries in the consortium and they are only involved to perform a specific task paid by one of the beneficiary's budget. There are two main types of third parties in FP7 projects: subcontractors, who charge the price of the services/products they offer to the project, and so called 'third parties linked to the beneficiary' (like grouping, affiliates, JRU, EEIG). In the latter case the linked third party allocates the cost only to the project. The difference between the price and the costs is that the latter does not include the profit. But in both cases the amount and purpose of the third party assistance should be discussed during the Grant Agreement Negotiation and indicated in the proposal/DoW. In any case one has to bear in mind that the core part of the project must not be subcontracted, and the Coordinator's main task must not be subcontracted. The tasks that are subcontracted should be described in the Description of Work, though the subcontractor itself does not have to be identified. Minor tasks may be subcontracted without prior agreement with the EC. Typical jobs contracted out are small tasks such as legal/financial services or translations and even then you will be expected to provide detailed explanation why these services are necessary for the implementation of the project.
It is very important to note that overhead cannot be charged on subcontracting expenditures. Please also note that the same cost can be classified differently in different projects; an example is the organisation of a conference may be subcontracted in one case and belong to ”Other costs” in another.
3, Other Costs
A category entitled ”Other cost” includes various types of costs:
- Travel costs and subsistence: travel and accommodation costs related to project activities such as the kick-off or other meetings, conferences, etc. It may include tickets, hotel costs, daily allowance (per-diem), taxi and restaurant invoices, etc.
- The depreciation costs of durable equipment can be charged to the project for items for the purpose of the project, but depreciation calculation (based on the beneficiary's own legislation and policy) must be used.
- Consumables needed to carry out the project are eligible costs. These can be related to brochures, leaflets, and stationary or translations, organisation of conferences, etc.
II, Indirect costs
Indirect costs are all those eligible costs are not directly attributed to the project, but which can be identified and justified by the accounting system of the beneficiary as being incurred in direct relationship with the eligible direct costs. Indirect costs, also called overheads, refer to maintenance/running costs of the organisation. These cost are calculated as a percentage of the direct costs and will never have to be justified by invoices. The percentage will depend on the organisation and its accounting system. In case the beneficiary can document properly the indirect costs of each project, the costs will be reimbursed fully while in other case the amount will be calculated based on a predefined flat rate.
There are four different methods to calculate and charge indirect costs to the project:
- Actual indirect costs
- Simplified method
- 20% flat rate
- 60% transitional flat rate
1, Actual indirect costs - Those beneficiaries who have a sophisticated financial/analytical accounting system that can identify and group the indirect costs in accordance with the eligibility criteria (e.g. exclude non-eligible costs) can choose to report their real/actual indirect costs.
2, Simplified Method - A beneficiary may use a simplified method of calculation of its full indirect eligible costs at the level of its legal entity if it is in accordance with its usual accounting and management principles and practices. Use of such a method is only acceptable where the lack of analytical accounting or the legal requirement to use a form of cash-based accounting prevents detailed cost allocation. The simplified approach must be based on actual costs derived from the financial accounts of the period in question.
3, 20% flat rate - Any Beneficiary, which are unable to identify with certainty their real indirect costs for the project, may apply for a flat rate of 20% of its total direct eligible costs.
4, 60% transitional flat rate - Those non-profit public bodies, secondary and higher education establishments, and research organisations and SMEs, which are unable to identify with certainty their real indirect costs for the project, may apply for a flat rate of 60% of the total direct eligible.
5, Special case of Coordination and Support Actions - Please note that when applying to the CSA funding scheme only 7% reimbursement rate for indirect cost contribution is available!
As the European Commission is co-financing the FP7 project, this means that the funding is a financial contribution to the activities and may not cover all costs related to the project, the remaining parts must be the organisations' own share. Funding under FP7 will depend on many factors such as the type of action, the type of entity, where it is based, the type of cost, etc. Beneficiaries of FP7 grants must follow certain rules and the activities must be implemented as outlined in the Description of Work. The work undertaken and the resources spent must be carefully recorded.
There are three different types of financial contribution available in FP7 actions. The forms of grants are the following:
- Reimbursement of eligible costs
- Lump sum financing
- Flat rate financing including scale of unit costs
The reimbursement of eligible costs is the most common. It is specified already in the call which form will apply for the specific action. International Co-operation countries have the possibility to choose a Lump sum financing option instead of the reimbursement of eligible costs. This option may result in less money but facilitates the administrative work considerably and helps to avoid mistakes in reporting.
The funding is divided into direct and indirect costs. The direct costs have a direct link to the project and the eligible direct costs will be reimbursed with a certain percentage. On the top of the direct costs, the organisation will also receive a contribution to the running costs of the organisation, i.e. the overhead costs (indirect costs).
Funding rate per activity
Organisation can receive EC contribution to cover their expenditures according to the following rates by activity types:
- R&D activities 75-50% (depending on the type of beneficiary)
- Demonstration activities: 50%
- Frontier research ("ERC"): 100%
- Other activities including, e.g. management: 100%
- Coordination and support activities: 100%
- Training and career development of researchers actions: 100%
Special case of lump-sum funding
As mentioned earlier, EU funding can also be paid in the special form of lump sum, which can be used for the whole project or a part thereof. The main advantage of using lump sum is that it does not require the justification of costs.
For Networks of Excellence, a special lump sum is proposed based on both the number of researchers ”integrated” in the project and its duration. The amount of the lump sum is 23 500 euro per year per researcher. Periodic payments of portions of the lump sum are paid according to the attainment of indicators showing progressive implementation of the Joint Programme of Activities (JPA). Also each organisation based in an ICPC country has the possibility to choose lump sum funding.
For a legal entity established in an ICPC, if the lump sum option is chosen, the contribution in a project is based on the amounts in Table 2 multiplied by the total number of person-years for the project requested by the ICPC legal entity. The maximum EC contribution is calculated by applying the upper funding limits in the above table to the resulting amount. This amount is all-inclusive, covering support towards both the direct and indirect costs. The EC funding as a general rule is transferred on the basis of the accepted expenditures, but part of the money is transferred in advance to ensure a positive cash flow during the implementation. The remaining part will be transferred after acceptance of the reports and deliverables.
In FP7 every project is eligible to receive advance payment (pre-financing). The calculation of pre-financing depends on the duration of the project and the total amount of pre-financing. The beneficiaries are eligible to receive further installments based on the yearly financial reports. After its evaluation the Commission transfers the next installment to the beneficiary.
The cumulative amount of the received EC contribution before the acceptance of the final report(s) cannot exceed 90% (minus the Guarantee Fund* (5%), so 85% in practice) of the total EC contribution. This limit is called the Ceiling.
The official guide can be found at: cordis.europa.eu/fp7/find-doc_en.html
* The Guarantee Fund
The new FP7 Guarantee Mechanism serves to cover the risk of financial losses. In FP7 the financial responsibility of each participant is limited to its own debt. To ensure proper financial operation of FP7 the Commission establishes and operates a Guarantee Fund to assess risk of default and to cover financial loss. 5% of the grant will be withheld by the Commission from each participant as a contribution to the Guarantee Fund. It will be taken from the first advance payment (pre-financing). The 5% Guarantee Fund will be reimbursed (minus interest) with final payment after the successful implementation of the project and the justification of the incurred costs. Participants in certain types of funding schemes (training, frontier research, actions for benefit of specific groups except SMEs) are exempt from the above. Preparing and submitting financial reports is one of the most important tasks in the project. The Financial Report is one of the most essential parts of the Periodic Report, which provide a short justification of the major costs incurred and resources deployed by each beneficiary, linking the activities implemented by each beneficiary and explaining their necessity.
Financial reports in FP7 contain:
- FORM C of each beneficiary and of the Third party linked to the beneficiary, if there is any:
- Explanation of major cost items
- Certificate on the financial statements (when requested)
Financial reports have to be submitted via a correct Form C, which are attached to the Grant Agreement and also downloadable from the Cordis website. The approval of the periodic reports, including the financial parts is the precondition for the transfer of the next instalment or the final/balance payment.
Receipts
A general rule is that no profit is allowed during the project duration. It means that part of the grant will be deducted or must be repaid if significant income is generated. It is however possible to have receipts for the project. The receipt and the interest generated must be reported.
Financial Certificates
Since no invoice should be attached to the yearly financial report, the EU needs an official document stating that the completed forms are authentic; a Certificate on Financial Statements. In FP7 there are three different types of certificates:
- Certificate on Financial Statements (CFS) = formerly known as Audit Certificate
- Certificate on the Methodology (CoM)
- Certificate on Average Personnel Costs (CoAPC)
1, Certificate on Financial Statements (CFS)
It is mandatory to submit a Certificate on Financial Statements with the financial report when the requested accumulated funding of the given beneficiary in the given project reaches 375 000 euro. The CFS has to cover all reported costs, not just the EC contribution. In case of short projects (equal to or less than 24 months), the CFS needs to be submitted only at the end of the project, if the requested EC contribution per beneficiary reaches the threshold. No CFS has to be submitted if the total EC funding per beneficiary does NOT reach 375 000 euro.
Only auditors can issue a Certificate on Financial Statements, the work can be done by the company's auditor, or in case of universities or a bigger company, a competent public officer may perform the work. e in that the reported costs in the cost statement forms are real.
2, Submission of Certificate on the Methodology (CoM)
For those organisations that run many FP7 projects, there is a possibility to submit, prior to the costs being claimed, a certification on the methodology describing the calculation of personnel and indirect costs. This is absolutely optional and open only for beneficiaries with multi-FP7-participation.
The Certificate on the Methodology (CoM) must be prepared by a certified auditor, based on the Guide downloadable from the Cordis website. Once the CoM is submitted and accepted, the beneficiary may receive certain derogation on CFS submission.
3, Certificate on Average Personnel Costs (CoAPC)
Beneficiaries are able to use average personnel cost instead of actual costs if a Certificate on Average Personnel Costs is submitted and accepted. This certificate might be submitted separately or as a part of the Certificate on Methodology and must be prepared by a certified independent auditor.
The Commission can organise additional reviews and request additional information to the reports, and what is more important they can at any time during the project and up to five years after closure decide to carry out an audit, financial and/or technical.
Some of the direct factors/variables that can lead to an audit:
- Problems with the Coordinator: (not prompt; not clear; company has difficulties; person has difficulties)
- Problems with key partners
- Problems with deliverables: (late; poor quality; do not comply with DoW; non-existent; plagiarism)
- Blind chance
Indirect factors:
- The institution/partner is involved in many projects
- The institution/partner has very large budget(s)
- The institution/partner has noticeable administrative difficulties
- There are severe scientific/technical difficulties
- The institution/partner is selected 'out of the pot'
The following documents will be requested during an audit and must be saved in a well-structured order for five years after project closure:
- Personnel costs: employment contracts (or other independent/legal justification of personnel costs claimed), Ledgers/Accounts, payroll records (salary slips), time sheets, detailed breakdown and justification of the productive hours, denominators used for the calculation of hourly rates, proof of payment
- Overheads: in case the actual overhead model was used: full documentation concerning the calculation of the overhead costs and the back-up documentation thereto, analysis, reconciliation and summary of the final breakdown of overhead costs (by category of expense, charged to the project(s) subject to audit)
- Consumables/equipment/other: invoices, proof of payments, in case of rented equipment - rental contract, records concerning the computer usage, if applicable
- Third party assistance: Sub-contracts, invoices, verification of payments, original deliverables from the subcontractors, evidence of own internal management and supervision procedures to confirm completion of work required to specification needed and reasonableness of costs claimed in connection herewith
- Travel and subsistence: invoices, mission approval forms, report, minutes of the meetings, participants of the meetings, e-mail documentation, etc.
- Bank statements - in case of the Coordinator, bank statements relating to the payments of EC contribution and the distribution to the beneficiaries
- General Ledger/management: salient extract and reconciliations of costs claimed back to underlying accounting records/general ledger to facilitate easy and swift verification of costs claimed and their eligibility
- Auditor certificate: copies of any auditor certification statements issued with a claim for cost reimbursement
A typical audit is lasting for 2-5 days at the premises of the beneficiary involved in the audit. After that, it usually takes another 2-5 months for the auditors to prepare the Draft Audit Report. Before sending it to the EC, the beneficiary can include its comments to the report. The majority of the audits with no further financial consequences (i.e. financial
mismanagement, overcharging, etc.), but some of them will lead to the next stage: Sanctions.
Sanctions
If any irregularities are found committed by a beneficiary (infringement of a provision of Community or national law or any breach of a contractual obligation) during an audit or any project review, four types of sanctions are foreseen:
- Exclude from the Grant Agreement – Exclude the beneficiary from the Grant Agreement
- Exclude from Grant Agreement – Exclude the beneficiary from other Framework Programme Grant Agreements and from agreements under other Community programmes
- Ineligibility – Declare the beneficiary ineligible to participate in future Framework Programme activities, and in programmes under other Community policies
- Liquidated damages - The Community, with the aim of protecting its financial interests, is entitled to claim liquidated damages from a beneficiary who is found to have overstated expenditure and who has consequently received an unjustified financial contribution from the Community
Participating in any project is an excellent experience and can be very beneficial for any organisation, but it is a lot of work and requires huge investments on the side of the beneficiary. In order to succeed, having the proper skills and abilities to help avoid any problems that may arise is essential.
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