When the first H2020 projects began, EC auditors advised that the cost eligibility rules for third parties were “complex but clear” and should be read carefully. They covered subcontracting (obviously), contracting (what’s the difference?), contributions-in-kind made free of charge (if its free, how can it be an eligible cost?), contributions-in-kind made against payment (isn’t that subcontracting?) and linked third parties (don’t ask). Then there is the possibility to claim the cost of natural persons who are not employees but under direct contract (similar but not identical to FP7’s in-house consultants). Altogether, there is a bewildering array of options and corresponding rules facing an organisation which wants to use the skills of a person not their employee and claim the related cost.
Now add the SME “instrument”: funding up to €2.5 million specifically for individual small companies with large ambitions. This relaxes the usual H2020 rule that subcontracting may cover only a limited part of the project. Mixing small companies in a hurry with complex cost eligibility rules for potentially large outsourcing contracts looks like a recipe for disaster when auditors come to check. But no! The EC anticipated the problem and – exceptionally – allowed applicants for this funding to justify their choice of subcontractors in their project proposal. If the proposal evaluators accepted their justification, then auditors could not question their choices. So all will be OK.
Well, not quite. Some SMEs interpreted acceptance of their outsourcing choices as licence to subcontract the tasks identified, and changed their minds about which supplier they would use. So now the EC agency administering the SME instrument is checking carefully subcontract costs claimed in the progress reports submitted by the SMEs and rejecting those which were not awarded to the supplier identified in the proposal. This could, of course, spell financial disaster for SMEs with large value subcontracts in their projects.
Fortunately, quite a number of them have set up companies specifically for this H2020 funding, separate from their existing business and assets, thus insulating them from death by audit.