FP7 News - Issue 1

January 2011

Updated FP7 Financial Guidelines issued

In June 2010 the EC issued their 2nd update of the FP7 Financial Guidelines. In particular further requirements and explanations were included covering average cost methodologies, indirect cost methodologies, time-recording (including the need to use full time-recording procedures for the first time). It remains to be seen how the EC will deal with audit findings resulting from non-compliance, but you can anticipate a lack of sympathy if practices are not adopted to comply with this latest guidance, now it has been made available.

The updated guidelines are available on CORDIS (www.cordis.europa.eu) and the foreword contains a useful summary of the updated sections.

Simplification - words now, action 'soon'!

The EC has launched its consultation paper 'Simplifying the Implementation of the Research Framework Programmes', which will formally open the debate within the EU institutions on how the implementation of the framework programmes for research and technological development can be simplified.  Two other recent documents, a Communication on the Commission's proposal for the Revision of the EU Financial Regulation and a Communication on the Tolerable Risk of Error will also contribute to the debate.

Compared to the predecessor programmes FP7 brought about a number of simplifications to the programme rules and processes. However calls for further simplification have continued. The  suggestions for further simplification are structured in three main strands: a first strand  with the improvements and simplifications that the Commission will implement under the current legal and regulatory framework (short term), a second strand with changes to the rules but still under the current cost-based model, and a third strand suggesting more far-reaching changes towards a result-based funding using lump sums.

We are likely to see changes in the EC approach within the lifetime of FP7 for strands I and 2, whereas strand 3 is more for future programmes. How 'soon' is soon remains to be seen - watch this space!

Simplifying the implementation of the Research Framework Programmes

In more detail the three main strands are as follows:

Strand 1: Streamlining proposal and grant management under the existing rules

The Commission proposes to reduce the administrative burdens and complexities of grant management

• the Research Participant Portal will be developed into the unique platform for all interactions with beneficiaries and all the processes of grant management will be integrated;
• the use of electronic signatures will replace paper signatures wherever possible, starting with the financial statements;
• IT systems will provide workflow support and on-line help;
• a web-based document repository and a tracking system for transactions in proposal and grant management will be installed;
• the Commission will improve the clarity and accessibility of guidance documents, removing jargon and using consistent terminology
• in response to concerns about differing interpretation and application of rules and lack of coordination in planning audits, the Commission will provide coherent audit programming respecting a single audit approach.
• the Commission will increase the time between call publication and deadline beyond the standard three months, if possible;
• more projects with smaller consortia;
• more prizes will be given.

Strand 2: Adapting the rules under the current cost-based system

There will be a more clarification on the concept of eligible actual costs for EU purposes.  Such costs will be considered eligible if they are recorded in the beneficiary's accounts according to their normal accounting practice and in compliance with accounting and auditing standards. The current acceptability criteria for the use of average personnel costs will be widened so that "average personnel cost methodologies applied as usual accounting practice by the beneficiary could be accepted, as long as they are based on actual personnel costs (that is to say - not budgets or estimates) recorded in the accounts and any double funding of costs under other cost categories is excluded".

It may be possible to have a single reimbursement rate for all activity types and categories of organisations or a uniform reimbursement rate over all activity types.   The EC will generally limit the variety of rules applicable across the different aspects of the FP7 programme and establish a "return to a common set of basic principles instead of a tailor-made approach";

There will be a reduction in the number of methods for determining indirect costs (overheads) - possibly by introducing a single flat rate for charging indirect costs for all types of organisations and funding schemes.  This would have the added benefit of contributing to reducing the error rate detected in ex-post audits, since experience shows that actual cost accounting is error-prone";

The repayment of Interest on Pre-financing may be partially or fully removed - which impacts only project "co-ordinators".  This is currently considered to be overly administrative and of minimal financial impact and also some entities cannot open interest bearing bank accounts;

There are plans to introduce more lump-sum payments and thus possibly reduce the need for timesheets.  Such lump sums are already used with success in the "People" programme (ie Marie Curie) and could be used more widely, in particular, in the case of "owner managers."  The current idea is to base such lump sums for owner managers on those scales or rates currently used within the "People" programme.

Strand 3: Moving towards result-based instead of cost-based funding

To move away from a cost-based system focused on input towards a system of funding based on prior definition and acceptance of output/results;

The three options suggested are:

1. Project-specific lump sums as a contribution to project costs estimated during grant evaluation/negotiation, and paid against agreed output/results: An ex-ante estimation of adequate total eligible costs of the project and the definition of measurable output/results would be part of the evaluation and negotiation process. A project-specific lump sum would be established on the basis of the estimated total eligible costs. The lump sum would be paid on the basis of the acceptance of the agreed output/result.
2. The publication of calls with pre-defined lump sums per project in a given subject area and selection of the proposals promising the highest scientific output for the specified lump sum: the evaluation of proposals would include (in addition to the main criterion of scientific excellence) an award criterion: the resources that the consortium is willing to invest itself in addition to the lump sum. The approach would provide an incentive for a higher leverage effect of EU funds and would introduce a more direct element of competition between bidders.
3. A high-trust "award" approach consisting in distributing pre-defined lump sums per project without further control by the Commission: the selection of the awardees would be based on a highly competitive process. It could be understood as a "best-proposal prize". After the selection, the funding would be given as a lump sum without further financial or scientific checking by the Commission. The approach would rely on the self-control and the incentive structure inherent in the scientific community and would be particularly suitable for the projects under the European Research Council.

Future perspectives - beyond FP7

Research Framework programmes are a long time in the making and proposals for FP8 are already under discussion. There is a long way to go there are already indications of possible changes to the grant agreements in order to reduce the problem areas in the financial requirements. We will monitor developments, but some ideas currently on the agenda are:

1. A clear position on average costing in the grant agreement.
2. Adaptation of the "directly hired" principle for staff to contemporary working arrangementsand clear definitions of personnel, consultant and subcontracting, while reiterating that the personnel should perform the work on the premises of the beneficiary (except for agreed teleworking) if overheads are to be claimed
3. Accommodation of the specific needs of group companies in the grant agreement.
4. Requirements for time recording and productive hours calculation to be provided for in the grant agreement to make them binding.
5. Inclusion of the extrapolation exercise (including the relevant parts of Commission decision COM 2009 1720 dated 15/12/2009) in the grant agreement, clear specification of the audit and associated recovery procedures for audit results
6. Reinforcement and further precision of the rules regarding subcontracting in particular relating to conflict of interest issues (introducing the concept of conflict of interest and the obligation to declare it in advance to the Commission) and introduction of clear rules on minimum procedures to be carried out and minimum documentation to be retained.
7. Either a clear indication that the contractual conditions are of primary importance and that the usual accountingand management practices and principles only apply when there is no contractual provision and no financial guideline issued by the Commission or, alternatively, full acceptance of usual accounting and management practices.
8. Clear requirements on time recording systems

Quickscan

Our Dutch colleagues in Polaris International have developed a new tool to highlight potentially problematic policies and procedures adopted by beneficiaries.  Called 'Quickscan' it is a questionnaire that covers the key accounting policies and practices used by a beneficiary in completing the financial statements and focuses attention on areas that may cause difficulties with the EC audit units.

Please contact us if you would like to test yourself against Quickscan.

About Littlejohn

Littlejohn is an independent, top 30 firm of chartered accountants and business advisors based in London's Canary Wharf.  The firm is one of the largest single office practices in the UK and provides a full range of audit, tax, accountancy and financial services to UK and overseas-based clients.

Our RTD audit team

Littlejohn's dedicated RTD audit team has worked extensively with the European Commission over the last 12 years on the 4^th, 5^th and 6^th RTD Framework Programme financial audits in both the UK and internationally.

We have significant experience of the whole range of business entities involved in this field, ranging from small owner-managed businesses to large plcs, universities and research organisations.  Our work has encompassed all the differing types of research activity that the RTD programmes cover.

We recognise the uniqueness and complexities involved in RTD contacts and our team is able to draw on its extensive experience of working with the EC, applying it to address our clients' individual needs.

Contact us

We believe in building enduring professional relationships with our clients.  Our RTD specialist partners are supported by a team of managers and staff.  We deliver added value by ensuring that each client receives a significant and ongoing level of partner involvement.

For an initial discussion with our experienced team, contact:

In London:

David Frame
T 020 7516 2207
E dframe@littlejohnllp.com

Jane Sheridan
T 020 7516 2282
E jsheridan@littlejohnllp.com

In Brussels:

Julian Rummins
T 0032 (0)2 456 89 18
E jrummins@littlejohnllp.com