Cash flow in Horizon 2020 projects
11th April 2018 at 11:39 am
Horizon 2020 projects provide research and development funding to universities, companies of any size and any other organisations in the EU Member States and other countries. However, they’re also often an investment, especially for companies, as project-related costs are only reimbursed on the basis of actual costs (i.e. no profits). Additionally, many Horizon 2020 funding instruments are not fully covered, but only co-funded by the European Commission (EC). An example of that would be the so-called Innovation Actions where for companies only 70% of the costs are reimbursed.
The cash flow is usually great at the beginning of a project as the EC releases a large share of the total grant as an upfront payment. The percentage depends on the project type and the funding instrument, for example, 35% of the total grant are released in a 5-year Research and Innovation Action) or 75% in a 4-year Innovative Training Network. This first or upfront payment before or shortly after the start of the project is called “pre-financing” and the coordinator of each project typically distributes the percentage on the share of each partner`s grant. Part of the pre-financing (typically 5% of the total grant) are not paid out to the coordinator by the EC but are rather directly transferred to the Guarantee Fund and will not be available for distribution among the partners until the end of the project. Nevertheless, in their communication to the project consortium the EC considers these 5% as ‘paid’, which sometimes is a source of confusion for project participants.
The next payment(s) by the EC then follow(s) a few months after the end of each reporting period and only upon approval of the respective periodic report and cost claims. These so-called ‘interim payments’ (or ‘mid-term payment(s)’ in projects with periods of equal duration) are based on the cost claims of the preceding period, only limited by the 90% rule (see below). At this point, the cash flow usually is still okay, but not great.
The cumulative payments made by the EC to the consortium during the project are not allowed to exceed 90% of the total grant. In other words, the EC is required to retain at least 10% until the approval of the last periodic report and the final report. The same is true for the 5% percent that are still sitting in the Guarantee Fund. This final payment of at least 15% of the total grant is sometimes only released one year after the project or later. So, the cash flow towards the end of a project (and thereafter) is not great at all.
In some projects, the consortia agree on a payment schedule prior to the start of the project that is then defined in the Consortium Agreement, i.e. the contract between the partners – not the EU, according to which payments are only made based on delivery of tasks and achievement of deliverables and/or milestones. Of course, this can also affect the cash flow for any project partner.
Risks for participating SMEs
One of the most common challenges for SMEs is liquidity. Liquidity is a measure of an SME’s (or any other company’s) ability to cover its immediate and short-term debts and responsibilities. An SME participating in a Horizon 2020 project will face funding liquidity risks: The danger of guaranteed and contractual cash flows drying up. For example, an SME might be relying on the final payment to arrive at a certain time but problems with the final report could lead to that payment being delayed for a considerable amount of time.
Another risk associated with SMEs during Horizon 2020 projects is the acquisition of costly goods at the beginning of the project. What is often neglected is the fact that some work towards the end of the project might also lead to related costs. Considering that 15% of the total reimbursement might not arrive until up to a year after the project finishes, SMEs might be faced with financial constraints towards the end of the project.
Minimising risks for SMEs in Horizon 2020
Despite the risks, Horizon 2020 offers great opportunities for SMEs and with a little foresight, the risks associated with projects can be kept to a minimum. The main takeaways we want to give you are:
- Plan project tasks and related expenses in advance.
- Know when to expect the payments from the EC. These are not made to project partners directly but funds are distributed by the project coordinator.
- Large organisations with many projects, such as universities, research organisations or large companies typically can cope with delayed payments much better. Hence it sometimes is possible for SMEs to reach an agreement among the consortium partners, that they obtain their full funding earlier (at the expense of the large organisations), provided they have delivered all their promised output for the project.
We at accelopment have a long track record of supporting coordinators and project partners in the financial controlling and reporting in EU funded projects. Over many years we have therefore developed and refined a set of financial management tools that have proven to be helpful in now more than 40 supported projects. Learn more about our services here.