Foundational practices for H2020 financial management

Newcomers to Horizon 2020 project management often wonder where to start in the financial administration of their project. When the deadline to the first cost reporting gets close, they invest considerable time locating invoices, contracts and notes, calculating costs and filling in the compulsory reports. If they don’t have a clear overview of the paperwork required, they hope the EU auditor does not knock on their door to check the accuracy of their records.

These five foundational practices will help you get everything right from the start and save time.

1. Record all your expenses, even your time

The EU reimburses part of your costs and may ask you for documentation to ensure your reporting and claims are accurate. “Lack of supporting documents” is one of the main errors that EU auditors find when they go through the books of EU project participants. Article 6 of your Grant Agreement does state, however, that costs need to be “actually incurred, identifiable and verifiable” in order to be eligible for EU funding. When project participants cannot show evidence for the costs they have claimed to the EU, they must pay this part back, even though the costs have actually incurred.

Documentation of time spent on project tasks is a very common weakness in many participating organizations. Missing or unreliable time records is one of the most frequent errors, auditors find. Imagine you have spent 2 years working on the project – and find out during an audit, that the auditor deems your time recording system to be unreliable. It is very unlikely that the EU auditor will accept all these costs even though the project work has been done successfully.

Article 18 of the Annotated Grant Agreement describes the minimum requirements for time recordings. Amongst others, they must be signed by both the person working for the EU project and the supervisor. Also, auditors will check whether the time recordings match records of annual leave, sick leave or other forms of absence. Therefore, it is advisable that you double-check your records every month. Auditors may also ask for any written procedures to ensure that the number of hours cannot be changed after the signatures. A simple data sheet is thus not necessarily enough as a time recording system.

Another important feature for reliable time recording is that it includes a reference to the action tasks or work packages, the person has worked on. This brings us to the next foundational practice.

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2. Purposefully link your expenses to the project activities

The EU only reimburses the costs of project-related activities. As it is stated in article 6 of the Grant Agreement, the costs “must be incurred in connection with the action as described in Annex 1 and be necessary for its implementation” in order to be eligible for EU funding. During project reporting, you will be asked how you distributed your time and expenses between the work packages of your project.

Periodic project reporting consists of a Financial Statement and a Technical Report. The Financial Statement only requires a few aggregated figures from you. In addition to that, however, you need to specify the “use of resources”, where you write down the number of person months per work package or briefly describe major cost items and their connection to the work packages. By noting this down clearly from the moment you register the expenses in your accounts, you have the information at hand when you need it. Also, there must be coherence between the Technical Part and the Financial Part. Therefore, make sure you can easily extract the link between costs and project activities from your accounts when you need them.

3. Always counter quote

You must be able to document that you have followed good housekeeping principles when spending EU taxpayers’ money. Make it a habit to search the market before you purchase any goods or services – and to keep documentation for all that you did.

Article 6 of the Grant Agreement asks you to comply with the principle of sound financial management, in particular, regarding economy and efficiency. This does not necessarily mean that you ought to go for the lowest price when purchasing goods or services for the project. You can also decide on the best value for money relating to the qualitative criteria relevant to your EU project work. Either way, you must be able to provide documentation for your choice, because the EU auditor will want to make sure that you did not have any so-called “excessive expenditures”. In practice, most legal entities have internal policies in place as well as public procurement rules to follow. Also, common sense indicates that there will be some minimum threshold for counter quoting, even though the Grant Agreement does not provide a clear specification. My recommendation, particularly for private legal entities would be to use caution and to seek alternative quotations.

4. Find your freedom in your budget

It is likely your real expenses will deviate from what has been budgeted. The Grant Agreement allows for some flexibility. Just explain the reason for the deviations during project reporting. However, if the deviations are caused by significant changes in the project implementation, you will have to involve your EU Project Officer and get their approval.

Compared to many national funding schemes, Horizon 2020 project implementation is surprisingly flexible. Article 4 of the Grant Agreement allows for budget transfers between project partners, cost categories or forms of costs without involving the Project Officer. It is important, though, that you describe the reason behind these changes in both Financial and Technical Reporting in a clear and transparent manner. Otherwise, your Project Officer or your Financial Officer might ask for additional explanations, which will make the approval process more tedious and time consuming. It is better to get it right from the start.

If the budget changes are caused by significant changes in the planned project work, however, you will have to ask for an official amendment. This means that the wording of Annex 1 (your former proposal) and the figures in Annex 2 (your budget) are changed and approved by the EC. For example, if the reason behind your budget changes is that you dropped one of the tasks that were originally described, we are talking about a “significant change”. This will most likely lead to more paperwork, but it is important to do that. You want to make sure that all your project-related costs are eligible for funding, especially if some of the project work has had to be re-focused. Talk to your Project Officer, if in doubt, about what is needed.

During project reporting, always study the work package description in the implementation section of your proposal/ Annex 1 in order to make sure that there is coherence between both Grant Agreement and Periodic Reporting and that you are transparent about any deviations.

5. Categorize your contracts

If you use consultants or involve affiliated entities in your project, you will need to delve a little deeper into the Grant Agreement to ensure that these costs are reported under the correct cost categories and are eligible for EU funding. It might make total sense for you to include them in the project work, but you must ensure that the formalities are in place as well.

Consultancy services can in principle be reported under several cost categories, but only one will be correct in your specific case. It will depend on the contracts, the work to be done as well as organizational relationships. Typical errors are a confusion between internal consultants (category: personnel costs) and external consultants (categories: other direct costs or subcontracting).

Affiliated entities can do project work and their costs are in principle eligible for funding. A very important requirement is, however, that these affiliates are specifically mentioned in the Grant Agreement. If they are not in your case, please talk to your Project Officer about it as soon as possible and get the Grant Agreement changed.

These five practices will give you a head start and save you a lot of time during project reporting. They will ensure that your costs fulfil the eligibility criteria – meaning that an EU auditor will accept that the EU reimburses them. Once you have done this, you should look into the calculation of personnel costs. But that is a different chapter.

This article is written in a cooperation with our valued partner Way2Connect.

Recorded webinar: Avoiding financial mismanagement

This webinar focuses on understanding what are the different levels of control and different levels of audits under EU projects, in particular Horizon 2020. Jeanne Collin, Head of projects at Welcomeurope, shares some expert practices and tips for the contradictory reports, as well as helps to identify all of the supporting documents you need to get ready for those reports and audits.

In the beginning of the webinar mentioned above Jeanne gives a short reminder about the major contractual obligations that European project managers are compel to, namely accounting obligations, the obligation to inform/report, and the obligation to archive and submit to controls. All of these obligations are a part of the Grant Agreement which one is signing as a member of a Consortium with the EC.

First, Jeanne talks about different types of control happening in Horizon 2020. She notes that for each project lifetime there are certain types of control and highlighted three significant phases - everything that happens before the project (the ex-ante type of controls), during the project (the implementation controls), and when the project stops (the ex-post controls). Detailing each of these moments, she provides participants with her expert practices and advice on dealing with all of the certificates, assessments, and audits under Horizon 2020.

Second, Jeanne gives a detailed overview over the supporting documents coming from the CFS and the guidance online. She thoroughly presents the supporting documents for the personnel costs, subcontracting, and other costs (travel, equipment, indirect, etc). She also lists the items eligible invoices must comprise to be eligible, namely legal entity address (corporate name), company registration number, date, place, recipient's contact information, VAT, price, and name of the European project when possible.

In the end of the webinar Jeanne mentions some additional documents, such as proof of payments, reports (financial & scientific), publicity checks, grant agreement & amendments, minutes from meetings, participation sheets, photos, and administrative data from the organization. Also, she strongly advises to organise blank audits before happening, to be sure during the implementation phase that the procedures are followed and at the end of the project that everything is done before closing the project entirely and if necessary to look up the potential solutions.

Horizon 2020 personnel costs calculation and reporting

As you know, personnel costs generally make up the main challenge in the financial management in a Horizon 2020 (H2020) project. It is also often the most common field for potential errors that gives many of us a difficult time. However, Gabriella Lovász, Managing Director of Europa Media, as an expert with years of experience in providing support in management of EU funded projects sorts out this topic in the following webinar.

Project reporting under Horizon 2020

Reporting is an essential activity in the financial management of a Horizon 2020 project, as every project manager needs to not only maintain control and steer project progress but also inform the project sponsor about progression of the work towards its agreed objectives. When reporting in H2020 on the project status, you will have to cover not only scientific and technical advances but also financial aspects like cost consumption and other activities related to commercialization, communication, and project management.

Stay informed about Horizon 2020

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