Lump Sum vs. Actual Costs: Key Differences in Funding Schemes

The European Commission has gradually introduced “lump sum” funding in recent years, after testing it in specific pilots under the Horizon 2020 programme. As of 2024, lump sum projects have become a more prevalent funding scheme in Horizon Europe.
Several key differences arise when comparing lump sum to “actual costs” funding. Let’s explore the most important distinctions at different project stages and discuss some of their most relevant features.

Proposal stage and Grant Agreement

When planning your project budget, the process remains similar in both funding schemes: you calculate costs for the usual cost categories (personnel, travel, equipment, other goods and services, subcontracting, etc.). However, under lump sum the budget template is slightly different, as the concept of ‘cost per item’ is introduced, and the final budget results from the number of items per cost category.
When transferring the budget to the Grant Agreement, the actual costs budget is first distributed per cost category, associating them to their respective Work Packages. In lump sum, the budget is directly allocated per Work Package with no further subdivisions in cost categories.

Reporting and pre-financing

Both funding schemes have three main payments: a first payment at the beginning of the project, a second payment during the project and a final payment after project end. The latter two payments are linked to project reports and the amount spent by the beneficiary so far, although the method to determine this amount differs between actual costs and lump sum.
For actual costs, you must prepare both a technical report and a financial report for the European Commission, detailing actual spending for personnel costs (following Horizon Europe methodology) and actual spending in purchase and subcontracting costs.

In contrast, lump sum payments focus on the completion of Work Packages. If you justify a Work Package completion, the lump sum allocated for that Work Package will be considered as spent. Therefore, the calculation of the corresponding payments is based on the achievement of objectives stated in a technical report.

Audit and cost justification

The most significant differences appear in the final stages, particularly in cost justification. Following the logic above, actual costs projects require personnel cost calculation and exact purchase justifications, meaning timesheets and declarations as well as invoices issued for the project, among other documents. Lump sum projects only need technical justifications, as it is assumed that the allocated lump sum was used accordingly throughout the project.

Conclusion

Financials and especially audits may be simpler with lump sums since no financial justifications are required, granting you a certain degree of autonomy in your spending. However, the European Commission controls emphasize the technical development and proper implementation of work for each Work Package. Monitoring costs per Work Package remains crucial to maximize lump sum contributions and avoid exceeding them.

Do you want to find out more about lump sum and how to manage projects with this funding scheme? Get in touch with us at: hello@getpolite.eu