COCOF 09/0025/00-EN The simplified cost options: Flat rate for indirect costs, standard scale of unit costs and lump sums Laurent SENS ESF coordination Unit DG Employment, Social Affairs and Equal Opportunities COCOF Meeting 30 June 2009

Objectives of the presentation Presentation of the working document on the simplified cost options Overview of the general principles of the simplified cost options

The simplified cost options Objectives of the working document Present the three simplified cost options and their origin Build a common understanding on these options Provide technical guidance on how to implement and audit them Encourage good practice

The simplified cost options Drfating the working document Decision to draft a single document including all the options and all the management and audit issues. Based on: Information note to the Council with additional details and ESF ‘acquis’ Discussions during COCOF Technical Meetings and the ESF Technical Working Group Discussions with the national audit authorities and the European Court of Auditors

The simplified cost options Structure of the working document 5 parts + annex: INTRODUCTION CHAPTER 1: Indirect costs declared on a flat rate basis CHAPTER 2: Flat rate costs calculated by application of standard scales of unit costs CHAPTER 3: Lump sums CHAPTER 4: Common horizontal provisions ANNEX: Legal bases

The simplified cost options working document Introduction Origin of the options Purpose of the working document Need for an audit approach Link to national eligibility rules An important simplification introduced in the 2007-2013 ESF Regulation allowed the Member States to declare indirect costs (overheads) on a flat rate basis, up to 20% of direct costs of an operation. The simplification of charging flat rates for indirect costs was welcomed by all stakeholders, including the European Court of Auditors. The European Court of Auditors has suggested that the majority of errors found in structural actions expenditure are partly due to the complexity of the legal and implementing framework. For this reason it recommended in its annual report for 2007 to simplify "the basis of calculation of eligible cost and making greater use of lump sum or flat rate payments instead of reimbursement of 'real costs". The Financial Regulation applicable to the general budget of the European Communities and its implementing rules already allowed such approach for direct management expenditure.

Origin of the simplified cost options, an alternative to costs fully justified (‘real costs’) Training, with a number of 21,400 hours x trainees realised (sum of hours of training undergone by every trainee) Direct costs = 113 772 € 1. Personnel cost 100 763 1.1 Internal personnel – remuneration 60 895 1.2 Int. pers. - transport home/work 622 1.3 Internal personnel – travel costs 104 1.4 External personnel – remuneration 39 143 1.5 External personnel - travel costs 0 2. Participants 0 3. Product develop and consumption 13 009 3.1 Non depreciable consumption goods 9 056 3.5 Publicity 3 096 3.6 Organisation costs 857 3.7 Other costs 0 Total costs : Indirect costs = 15 191 € 3.1 Personnel costs (management) 12 000 3.4 Equipment and immovable goods 54 (depreciation) 5.1 Internal administration, accountancy, management 563 5.4 General documentation and publicity for courses and structure 906 5.5 Office supplies 856 5.8 Telephone, post, fax 20 5.9 Taxes and insurance 201 5.12 Movable material (depreciation) 109 5.13 Immovable goods 0 5.17 External accountancy costs 536 5.18 Other costs 0 128,963 € This example will be used to compare some of the simplified cost options. It is based on a training budget. As already explained with the principle of "real cost“, 1 euro of grant has to correspond to at least 1 euro of justified paid expenditure. In the case of purchase of goods or services the justification of expenditure is based on invoices and this justification is relatively straightforward. Every single euro has to be justified with financial supporting documents in order to get the grant. The payments will be mainly based on the financial input. For this example several hundred documents must be analysed, registered in the bookkeeping and archived, sometimes for very small amounts such as organisation costs, transport home / work, travel costs of personnel. Furthermore Indirect costs have to be allocated "fairly", with an appropriate proportion being charged to each of the activities taking place in a building or organised by the body sometimes, once again, for very small amounts: telephone, post, fax, taxes and insurance, … All the supporting documents have to be kept available over many years: for the 2007 2013 period, as a general rule, they have to be available three years after the closure of the programme (at least up to end 2019), except in the case of partial closure. So if there is audit in 2018, all detailed financial supporting documents must still be available, or all expenditure becomes ineligible. Given the number of documents involved, it is generally impossible for the national authorities to centralise the archiving of documents, and they have to rely archiving by the beneficiaries. In general this financial justification is also linked to verification of the “materiality” of the operation, often based on time sheets or equivalent documents. Justification: Each Euro & number of hours x trainees.

No supporting documents for indirect costs required any more The simplified cost options working document I- Flat rate rule for indirect costs Implemented by ESF OPs since the beginning of the programming period: no change (‘ESF acquis’). Copy paste of the existing ESF note (except audit part). Indirect costs reimbursed on a flat rate basis, as percentage of paid direct costs Rate and definition of direct costs to be established ex ante, i.e. agreed before or in the grant agreement No supporting documents for indirect costs required any more For the ESF the amendment does not change in any way the provisions on and implementation of the flat rate for indirect cost rule as adopted in 2006, which has, since then, been discussed in great detail with Member States. The rule enables indirect costs to be reimbursed without supporting documents or calculations, based on a pre-agreed proportion paid direct costs. The Managing Authority establishes the rate which can be applied. Beneficiaries and national or EU authorities are in those cases no longer required to analyse, register and archive the underlying documents regarding indirect costs. In case of audit, detailed financial supporting documents will be required only for direct costs. The justification of the rate itself may also be audited, once for all the comparable operations using this rate.

Indirect costs = flat rate rule The simplified cost options working document An example of the flat rate rule for indirect costs Training, with 21,400 hours x trainees realised Direct costs = 113 772 € 1. Personnel cost 100 763 1.1 Internal personnel – remuneration 60 895 1.2 Int. pers. - transport home/work 622 1.3 Internal personnel – travel costs 104 1.4 External personnel – remuneration 39 143 1.5 External personnel - travel costs 0 2. Participants 0 3. Product develop and consumption 13 009 3.1 Non depreciable consumption goods 9 056 3.5 Publicity 3 096 3.6 Organisation costs 857 3.7 Other costs 0 Indirect costs = flat rate rule Indirect costs = 13 % of direct costs = 113 772 x 13% = 14 790 € Indirect costs (€) = 14 790 TOTAL CERTIFIED: 128,562 € Example: Direct costs of an operation are budgeted at EUR 120.000 (on the basis of "real costs"). The Managing Authority has, on the basis of an analysis of comparable projects for 2000 2006, established the standard flat rate for indirect costs at 13% of direct costs. Hence, indirect costs will calculated at: 13% x EUR 120.000 = EUR 15.600. The amount granted will be EUR 135.600. At the closure of the project the real direct costs will be justified and the indirect costs calculated by applying the 13% rate. If we assume that the final real direct costs were EUR 113.772, then the indirect costs would be established at EUR 14.790. The grant paid at closure would total EUR 128.562. Justification: Each Euro of direct costs & number of hours x trainees & rate

Same structure for this chapter and the one on lump sums. The simplified cost options working document II- The standard scales of unit costs Same structure for this chapter and the one on lump sums. General principles Consequences in terms of financial management Key points for the managing authority: calculation, correlation quantities / payments, justification of quantities, choice of the standard scale Audit approach

Standard scales may be process based or outcome based ( choice). The simplified cost options working document Overview of the standard scale of unit costs Payment based on quantified activities, outputs, or outcomes multiplied by standards scale of unit costs Standard scales may be process based or outcome based ( choice). May comprise all or part of the operation (unit cost for training, for follow up, per diem allowances for trainees,…) In the case of standard scales of unit cost, the operation would be paid by the authorities on the basis of quantified activities, outputs, or results multiplied by standard scale-of-unit costs established by the Member States. The option can be used for all types of grant projects when it is possible to define numbers related to an activity and scale of unit costs. In case of audit, supporting documents will be required to justify the quantities paid – that is, to show that the outputs claimed were in fact realised. Furthermore the justification of the standard scale of unit cost (for example € 7 per hour of training per individual) will also be part of the audit trail (but this will only be checked once for all the comparable operations using this standard).

The simplified cost options working document An example of standard scale of unit costs Training, with 21,400 hours x trainees realised. For this type of training, the standard scale of unit defined by the national authorities is: €6 / hour x trainee The grant paid will be: €6 x 21,400 = € 128,400  If the number of hours x trainees decreases, the grant decreases. Example: a training of 1000 hours provided for 22 individuals: the grant will be calculated on the basis of the average cost per hour of training x number of trainees. We assume that the training cost equals (as established by the managing authority) EUR 6 per hour per individual. Hence, the maximum grant amount would be 1000 hrs x 22 people x 6 EUR/hr/person = EUR 132.000. At the end of the operation the final grant will be paid on the basis of the real number of hours x trainees. If only 21,400 hours x trainees were delivered, the grant paid will be equal to 21.400 x6 = EUR 128.400. Justification: Number of hours x trainees & standard scale of unit cost.

The simplified cost options working document III - Lump sums Pre established lump sum in accordance with pre-defined terms of agreement on activities and/or results May cover all or part of the operation. May also be added to describe/detail different activities (and different costs) of the same operation Particularly useful for small operations or small bodies (capping to €50,000 public expenditure) but not exclusively Well adapted also when no “quantities” to apply unit costs For small operations and small bodies lump sums can constitute a considerable simplification. ESF financial rules are strict. The system of reimbursing real costs has required small, often local beneficiaries, to buy in very specialised expertise. In consequence they tend to be very reluctant to apply for ESF support even if their actions are fully in line with EU strategic priorities. In the case of lump sums, all costs or part of costs of an operation could be reimbursed on the basis of a pre-established lump sum, in accordance with a pre defined terms of agreement on activities and/or results. The grant is paid on the basis of activities or results reached In case of audit, supporting document will be required to justify that the objectives of the operation were reached. Furthermore the ex ante calculation of the lump sum will have to be substantiated in order to justify its amount. But no financial supporting document will be required at closure of the operation to justify the real expenditure.

Before implementation An example of lump sum: new activity for a NGO managing a ‘crêche’ (childcare) 1. Draft detailed budget to calculate ex ante the amount of the lump sum End of implementation: 11 additional children looked after during one year Condition fulfilled Payment of the lump sum grant of 38,753 EUR. If the condition was not fulfilled (8 children looked after), no payment  ‘Yes’ or ‘No’ approach 1.1 Internal personnel – remuneration 32 000 1.2 Int. pers. - transport home/work 600 3.1 Non depreciable consumption goods 500 3.4 Equipment and immovable goods 347 (depreciation) 5.1 Administration, accountancy, management 4 520 5.8 Telephone, post, fax 207 5.9 Taxes and insurance 43 5.17 External accountancy costs 536 Lump sum amounting to 38,753 EUR to look after 10 additional children during one year. Example 3: A NGO managing a "crèche" requires support to launch a new activity. The activity would be maintained after the initial year independently. It requests a lump sum by submitting an estimated budget to start the activity and run it over a period of one year. For example, the lump sum would cover expenditure related to the salary of one person in charge of looking after the children during one year, depreciation of new equipments, publicity costs linked to this new activity and indirect costs related to it management and accounting costs, water, electricity, heating, renting costs). The amount of the lump sum is established by comparison with this draft budget and costs of similar operations. The managing authority decides to grant a lump sum of 38 753 EUR covering all these costs. At the end of the operation, this amount would be paid to the NGO on the basis of the output, if a conventional number of additional (10) children were looked after. It would not be necessary any more to justify the real expenditure related to the activity. Before implementation Closure of operation

General audit approach Retrospective entry into force The simplified cost options working document IV - Common horizontal provisions Restricted to grants Calculation General audit approach Retrospective entry into force Combination of options Impact on certification of expenditure

Calculation of flat rate for indirect costs, standard scales of unit costs and lump sums No method defined by the Regulation but conditions that the methods will have to fulfil. MSs will define the method. 4 conditions to be respected: key issues for sound financial management Established in advance Fair Equitable Verifiable The Regulation sets out four conditions to be met by the methods to establish flat rate for indirect costs, lump sums and standard scales of unit costs, rather than setting out a method to calculate them: the calculations must be done in advance, and must be fair, equitable and verifiable. These conditions allow the management of grants to be simplified, while maintaining an effective control of expenditure. Indeed, while with the real cost system the control of both the value and the quantity of project inputs is done ex-post, with the proposed provisions on standard scales of unit cost and lump sums, the control of the value of the input is done ex-ante and only the control of the quantity is done ex-post.

Operation by operation: Calculation of flat rate for indirect costs, standard scales of unit costs and lump sums: a few examples By type of operations: Analysis of historical data: survey, statistical analysis, dedicated study, … Similar scales already used by national/regional authorities (daily allowances for example) Market prices, … Operation by operation: On the basis of draft budgets with real costs and + comparison to similar operations

Adaptation No provision on the adaptation of the simplified cost options Adaptation not compulsory, at the initiative of the national authorities. In order to take into account changes of costs.  Workload Retrospective adaptation Adequate supporting documentation The Regulation does not specify any provision on the adaptation of flat rate for indirect costs, lump sums and standard scales of unit costs. Therefore adaptation is not compulsory. However a Managing Authority may consider necessary to adapt the rates when launching a new call for proposal or it may do so periodically in order to take account of indexation or economic changes e.g. in energetic costs, levels of salaries, etc. The rates may be linked to an appropriate index or reviewed periodically[1]. Adapted rates should apply only to projects to be implemented in the future, not retrospectively. For any revision which is undertaken, there should be adequate supporting documentation to justify the adapted rates or amounts. [1] The review may also be based on the "success" of the rate. For example, if there is insufficient or no interest in training long-term unemployed persons for a given rate, that may mean that the rate is incorrectly set (bad balance between payments for process and payment for success factors).

Retrospective entry into force Why? Ensure legal certainty for some operations already using this kind of approach BUT: simplified cost options have to be defined ex ante very difficult to implement for operations on their way, so not recommended by the Commission Possible in the case of multi annual operations for the remaining part / period of the operations. The entry into force of the provision on standard scales of unit costs and lump sums (and for indirect costs on a flat rate basis for ERDF) is possible with effect from 1 August 2006, date of entry into force of Regulation (EC) No. 1081/2006. This possibility of retroactive entry into force was created in order to ensure legal certainty in relation to the eligibility of expenditure for some operations that already used some particular cases of standard scales of unit costs under national schemes. Given that the flat rate, lump sums and the standard scales of unit costs have to be defined in advance, a retroactive application will be very difficult for operations that are already on their way on the basis of real costs. It would be theoretically possible under the conditions to modify all the legal acts and to open the possibility to all the operations in order to ensure an equal treatment. In consequence, this would imply a huge workload for the national authorities and the beneficiaries, with potential inconsistencies between real costs that would be known and the flat rate, standard scale of unit costs or lump sums applied. In any case, if a managing authority intended to do so, it should be done before the closure of the operation. That’s the reason why as a general principle the Commission strongly recommends to avoid retrospective use of the simplified cost options . However, in the case of multiannual operations it is possible to settle the accounts and the corresponding activities of the operation after a first part of the operation has been carried out and then to introduce the option of standard scales of unit costs or lump sums for the remaining part/period of the operation. In such cases, the period for which real costs are declared should be clearly separated from the period for which costs are declared on the basis of the simplified cost options, in order to avoid project costs being declared under both systems and double declaration.

Combination of options Possibility to combine the simplified cost options (with or without real costs) under two conditions: Different categories of eligible costs Different projects in the same operation Why two conditions? Prevent any double financing of the same expenditure => Importance to know the types of costs covered by the standard scales of unit cost. The amended Structural Funds regulations create the possibility for a managing authority to choose between four options to manage grants co-financed by an ERDF or ESF programme: (a) real costs, including both direct and indirect costs, (b) indirect costs calculated on a flat rate basis of direct costs (c) flat rate costs calculated using standard scales of unit costs, (d) lump sums. The options may be combined only in the following cases, in order to prevent any double financing of the same expenditure: (1) they must each cover different categories of eligible costs, or (2) they must be used for different projects in the same operation (by definition an operation is a project or group of projects).

Combination of options: Different categories of eligible costs Example of a training session combining: a standard scale of unit cost for the trainers, € 450 / day real costs: room rented = €800 / month during 6 months a flat rate for the indirect costs, for example 10% of direct costs. At the end of the training: 100 days of trainers were justified, Final grant paid: Direct costs: wages of the trainers 100 days x €450 = €45,000 + training room: 6 months x €800= €4,800 subtotal direct costs : €49,800 Indirect costs: 10% of direct costs = 10% x €49,800 = € 4,980 Grant to be paid: [€45,000 + €4,800] + € 4,980 = €54,780  The standard scale of unit cost shall not relate to any costs linked to the renting of the room or to other indirect costs. Has to be checked ex ante and has to be verifiable. Case 1 of combination: Different categories of eligible costs Example of a training session combining:- a standard scale of unit cost for the wages of the trainers, for example € 450 / day ;- real costs: room rented = €800 / month during 6 months- a flat rate for the indirect costs, for example 10% of direct costs.At the end of the training if 100 days of trainers were justified, the grant will be paid on the following basis:Direct costs: wages of the trainers 100 days x €450 = €45,000 training room: 6 months x €800= €4,800 subtotal direct costs : €49,800 Indirect costs: 10% of direct costs = 10% x €49,800 = € 4,980 Grant to be paid: [€45,000 + €4,800] + € 4,980 = €54,780 In that case different categories of costs seem to be concerned: wages of trainers, rent costs for the room, indirect costs. However in order to verify the absence of double financing the authorities must ensure that the standard scale of unit cost does not relate to any costs linked to the renting of the room or to other indirect costs (salary of administrative staff or of the accountant for example). Reciprocally the same applies for the definition of indirect costs that should not relate to costs covered by the standard scale of unit costs or real costs of renting the room. If there were risks of overlaps the MA would have to choose the more appropriate option to grant the operation in order to suppress any (risk of) double financing. Given that the standard scales of unit costs or the flat rate for indirect costs shall be verifiable, it will be possible at any time to check the absence of double financing. However this check should already be done ex ante by the MA, at the moment the option of management is chosen.

Combination of options: Different projects in the same operation Combination of training project for young unemployed people, followed by a seminar for potential employers of the region: training paid on the basis of standard scales of unit costs (1,000 € / day of training). seminar would be paid on the basis of lump sums. Two different projects => no risk of double financing as far as each project costs are clearly separated. Case 2 of combination: Funding of different projects in the same operation Example of an operation in two steps, combining an training project for young unemployed people, followed by a seminar for potential employers of the region: The costs related to the training could be paid on the basis of standard scales of unit costs (for example 1 000 € / day of training). The seminar would be paid on the basis of lump sums. Given that they are two different projects within the same operation, there is no risk of double financing as far as each project costs are clearly separated.

Impact of simplified cost options on the certification of expenditure Modifies the concept of expenditure "paid" by beneficiaries: change the definition of what is considered as expenditure to be certified to the Commission. Indirect costs: "paid" if due proportion of direct costs Standard scales of unit costs / lump sums: certification of the grant by CA based on real progress of the operation, not on (real) expenditure. Legal agreement can foresee advances, intermediary or only final payment, BUT expenditure certified to the Commission must rely on progress/completion of the operation certified by the beneficiary and verified by the managing authority/intermediary body RISK: to declare national advance payments to the Commission, subsequently rejected as not supported by activities The simplified cost options modify the concept of expenditure "paid" by beneficiaries that have to be certified in the statement of expenditure. Member States have still the possibility to make advance payment to the beneficiaries in addition to interim payments or final payment but the definition of what is considered as an advance payment will be different. In the case of flat rate for indirect costs, indirect costs are considered as "paid" in due proportion of direct costs: if 50% of the direct costs are paid by the beneficiary, 50% of the indirect costs (in any event, not exceeding the 20% of the direct costs) may be considered as paid. Reciprocally where the bulk of "indirect costs" have been front-loaded, without underlying direct costs having occurred, they should be considered ineligible to be certified to the Commission at the time of the declaration of related expenditure because they would be considered as an advance payment to the beneficiary. In the cases of standard scale of unit costs and lump sums there is also no paid expenditure in the usual sense. "Paid expenditure" will be calculated on the basis of declared and certified quantities and not on payments made to the beneficiaries. Even if they could coincide, expenditure to be certified to the Commission is calculated on the basis of certified quantities, not payments made to the beneficiary. For example payments to the beneficiaries could be done on a monthly basis (1/10 of the grant each month during 9 months + final payment) without any justification of quantities, except for the final payment. Such a system should be deemed acceptable but the monthly payments are considered as advances and shall not be certified to the Commission (except in the case of State Aids under the conditions of Article 78(2) of Regulation (EC) No1083/2006). National authorities would have to wait for the final payment where quantities are certified and verified in order to declare this operation.

Don’t forget … An important step towards simplification National authorities have 4 possible options for grants. No choice = use of ‘real cost’ principle Choice to do => fully understand the three simplified cost options and their consequences Never forget the purpose of these cost options that is to simplify the management of the Funds and via this simplification to reduce the error rate. It has been shown that a large proportion of the supporting documents inspected by controllers and auditors are needed to justify a minor part of expenditure. This means that a great deal of the human resources and administrative effort involved in the management of the structural funds is absorbed in accumulating and verifying documents, rather than focusing on the achievement of policy objectives. It is expected that the application of these provisions will lighten the administrative burden on beneficiaries and management bodies and will contribute both to a more efficient and correct use of funds. When defining their systems, or selecting one rule rather than another one the national authorities should keep that in mind. The simplified cost options are an occasion for all the stakeholders to reduce the administrative workload and the number of supporting documents required to justify the expenditure – even if there are still supporting documents required. It is a unique occasion to improve the efficiency of the management by concentrating human resources on the outputs and on the main expenditure related to operations. However as all the new concepts these options will have implications for the management and control of the structural funds : all actors involved will have to adapt their working methods and practices in order to achieve the positive effects of simplification without compromising the legality and regularity of expenditure. That’s the reason why the national authorities fully understand how to implement the three cost options and their consequences.

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