The background to the complaint

1. The complaint concerns the refusal of the European Commission to make a final payment in relation to an EU-funded project.

2. The complainant, a Dutch company, was the coordinator of a 14-member consortium that carried out an EU-funded project entitled the STandards in European Public Procurement for INnovation (STEPPIN) from 18 October 2006 to 17 October 2008[1].

3. On 11 October 2006, the complainant concluded a contract with the European Commission's Directorate-General Enterprise and Industry ("DG ENTR"). The EU's maximum financial contribution to the project, in the form of a grant, was set at EUR 1 497 364.

4. The project was coordinated by Directorate D2 (Support for Innovation) of DG ENTR. Four project officers were, successively, in charge of the follow-up of the project. The Commission made pre-financing and additional payments of EUR 358 000, EUR 150 000 and EUR 253 891.37 on 21 December 2006, 15 November 2007 and 7 May 2008 respectively. The consortium thus received advance payments totalling EUR 761 891.37.

5. The complainant submitted financial statements and the supporting documents to the Commission concerning the last reporting period (the second of two reporting periods) on 18 December 2008. The costs claimed amounted to EUR 740 707.61.

6. An external auditor carried out an audit of the project in 2009, on the Commission's behalf. It sent a draft audit report to the complainant for comments on 24 November 2009.

7. On 25 November 2009, the complainant wrote to the Commission. It argued that it had submitted all the requisite information to the Commission on 18 December 2008, but had still not received the final payment amounting to EUR 559 819. The complainant referred to its contract with the Commission and pointed out that the Commission should have paid the outstanding amount within 90 days of 18 December 2008, when it had submitted its final report. It argued that it had fulfilled its contractual obligations and that the Commission should do likewise.

8. The Commission replied on 1 December 2009. It informed the complainant that it had put the payment procedure on hold until it made the necessary corrections to the cost claims on the basis of the final audit report. It pointed out that, according to Article II.28.8 of the General Conditions, the period set out for the approval of reports may be put on hold by the Commission at any time if it informs the coordinator of a project that a financial statement is not acceptable, either because the financial statement does not conform to the requirements of the contract, or because the financial statement is not in conformity with the activity reports submitted to the Commission for approval. The Commission further pointed out that the preliminary results of the ex-post audit showed that the financial statements had to be substantially corrected before the Commission could make the final payment.

9. On 9 December 2009, the complainant wrote to the external auditor stating that it disagreed with the draft audit report. The complainant argued that the auditor had given false information to the Commission on the issue of the "productive hours" and had not taken into account "man-hour rates" (which it argued was the generally accepted method in the consultancy industry). It also pointed out that the presentation to the Commission of the preliminary results of the ex-post audit was not in accordance with the International Code of Conduct for Auditors. The complainant enclosed with its letter eight pages of comments on the draft audit report.

10. On 11 December 2009, the complainant informed the Commission that the auditor had presented the draft audit report to the Commission without first consulting the STEPPIN consortium, thereby infringing the International Code of Conduct for Auditors. The complainant stated that the draft audit report contained false information. It added that it disagreed with the auditor's decision to send it to the Commission and with any decision taken by the Commission to publish it. It pointed out that the conclusions of the draft audit report concerning the "productive hours" were incorrect and were not in line with the Commission's own guidelines on productive hours. The complainant also pointed out that the auditor had also included non-existing project partners in the overview tables. The complainant concluded that it had serious doubts about the competence of the auditor.

11. On 16 December 2009, the auditor adopted the final audit report concerning the complainant's participation in the Project (B72-09). The final report contained the complainant's comments on the draft audit report and the auditor's observations on those comments.

12. On 18 December 2009, the Commission replied to the complainant's letter dated 11 December 2009. Referring to Article II.28.8 of the General Conditions, it pointed out that it has the right to postpone payments at any time, if it has reason to do so. The Commission argued that the financial statements submitted by the complainant were not acceptable and would have to be amended substantially before it could proceed to the final payment. It stated that the preliminary results of the ex-post audit supported this position and that it had properly informed the complainant about the results of the audit. It concluded that it would establish the final amount due for the project as soon as the final (consolidated) audit report allowed it to make the necessary corrections to the cost claims. The Commission explained that it expected to finalise the audit in January 2010.

13. On 23 December 2009, the complainant submitted the present complaint to the Ombudsman.

14. On 7 January 2010, the complainant again wrote to the Commission, pointing out that its contract with the Commission did not permit the Commission to delay payment on the basis of the preliminary results of an audit. It argued that the contract did not provide for a "preliminary ex-post audit". The complainant submitted that the Commission could not, therefore, rely on Article II.28.8 of the General Conditions. It argued that there was thus no basis for the suspension of the payment procedure and that, therefore, the Commission committed a breach of contract.

15. On 12 January 2010, the auditor adopted the consolidated audit report covering all the audited partners in the consortium. On that date, the Commission informed the complainant that, on the basis of Article II.29.1 of the General Conditions, it had the right to arrange for audits to be carried out either by outside auditors or by its own services, including OLAF. The Commission explained that these audits start with an on-the-spot visit after which the auditors submit a preliminary draft audit report to the Commission. The contractor is then invited to submit comments on the audit findings, which are taken into account in the final audit report. The Commission explained that it followed this approach in the complainant's case. It reminded the complainant that the financial statements had to comply with the financial provisions of the Contract and that, according to Article II.19.1 of the General Conditions, costs must be real, economic and necessary for the implementation of the project in order to be eligible. The Commission also referred to Article II.28.4 which states that the contractor agrees that the grant shall be limited to the amount necessary to pay for expenditure and that it may not produce a profit. It reiterated that the financial statements submitted by the complainant were not in line with the provisions of the Contract and were, therefore, not acceptable.

16. By letter dated 18 January 2010, the Commission informed the complainant that it would give effect to the conclusions of the audit. It pointed out that the concept of chargeable hours used by the complainant for the calculation of the personnel costs differed from the concept of productive or workable hours used by the auditor. The Commission enclosed a copy of the final audit report with its letter and stated that it considered the audit to be closed. It clarified that the final conclusion of the auditor was that the complainant had overcharged costs for an amount of EUR 151 624.19 consisting mainly of personnel costs (EUR 114 171.86) and indirect costs (EUR 22 926.20). On 18 February 2010, the complainant wrote to the Commission pointing out that it did not agree with the final audit report. It argued that the main issue was the calculation of the "productive hours".

17. On 1 March 2010, the Commission established an Executive Summary for the STEPPIN Project (the "Executive Summary"). On 8 March 2012, the Commission sent a "payment information letter" to the complainant.

18. On 9 March 2010, the Commission made the final payment taking into account the conclusions of the audit.

19. On 19 April 2010, the complainant sent a further letter to the Ombudsman which contained an overview of the recent developments in the case.

The subject matter of the inquiry

20. The complainant's allegations and claim can be summarised as follows:

1) The Commission failed to pay the requested amount (EUR 559 819 to the STEPPIN partners, EUR 170 083 of which was to be paid to the complainant[2]) on time.

2) The Commission's assessment stating that the complainant had overcharged it by EUR 151 624.19 which was therefore not eligible, was incorrect.

3) The Commission did not respect the procedural rules set out in the Contract and the General Conditions. In particular, the complainant argued that:

a) The Commission did not inform it of the suspension of the payment by registered letter, as set out in the Contract;

b) The Commission requested the complainant, on the one hand, to submit information which it had already submitted on 18 December 2008 but which was lost within DG ENTR and, on the other hand, to reformulate the same information;

c) The Commission was wrong to suspend the payment on the basis of the preliminary results of the audit, a situation which is not set out in the Contract;

d) The Commission acted incorrectly when accepting an audit report drawn up by auditors who had ignored the rules and the procedures set out in the Contract.

The complainant claimed that the Commission should pay the requested amount of EUR 559 819.

The inquiry

21. On 23 December 2009, the complainant submitted the present complaint to the Ombudsman. The complaint was forwarded to the Commission on 12 February 2010 for an opinion. As the Commission had sent a copy of its letter dated 18 January 2010 to the European Court of Auditors, the Ombudsman considered it useful and appropriate also to inform the President of the European Court of Auditors of the opening of the inquiry.

22. On 19 April 2010, the complainant sent further information on the latest developments in this case. On 18 May 2010, the Ombudsman forwarded the complainant's further correspondence to the Commission. The Commission sent its opinion on 6 July 2010. The opinion was then forwarded to the complainant, which sent its observations on 30 August 2010.

23. On 12 April 2011, the Ombudsman asked the Commission for further information, more particularly with regard to the method of calculating the "productive hours". The Commission sent its additional opinion on 15 July 2011. The Commission's additional opinion was forwarded to the complainant, which sent its additional observations on 29 September 2011. On 18 June 2012, the complainant sent an e-mail to the Ombudsman to point out that it had passed on its claim against the Commission to another firm and that, in the event that a payment would be made, it should be paid to that firm.

The Ombudsman's analysis and conclusions

A. Alleged failure to pay the requested amount on time

Arguments presented to the Ombudsman

24. The complainant alleges that the Commission failed to pay the requested amount on time. According to the complainant, the consortium completed the project properly. It argued that the Commission should have begun the payment procedure on 18 December 2008, when the complainant submitted the financial report, and the payment should have been made within 90 days from that date. According to the complainant, this deadline can only be extended if the financial report is not approved by the Commission. However, the Commission did not respect the payment deadlines.

25. In its opinion sent to the Ombudsman, the Commission stated that it had not approved the cost claim of EUR 740 707.61 submitted by the complainant for the second reporting period. On the basis of the results of the audit, the Commission approved a payment of EUR 433 164.44 on 1 March 2010. The processing of the reports submitted by the complainant took some time, it argued, due to inconsistencies in the documents submitted by the complainant. The Commission stated that it sent several e-mails to the complainant about the status of the payment and about the possibility to claim interest on any unduly late payment. These e-mails explicitly mentioned the postponement of the deadlines for payment and explained the reasons for the Commission's position. They also described how the time-limits could start running again.

26. The Commission further argued that, while processing of the payment took a long time, this was because the complainant had failed to provide correct and coherent documents which were necessary to process the payments. The Commission was therefore entitled to suspend the payment procedure while it was awaiting the results of the audit.

27. The complainant did not submit observations on the Commission's opinion with regard to this allegation.

The Ombudsman's assessment

28. The complainant's allegation is that the Commission failed to pay the requested amount of the STEPPIN Project on time. The amount to be paid, which is also in dispute between the parties, is the subject of the second allegation and claim. It will be discussed in Section B below.

29. Following an amendment by the parties of Article 6 of the Contract, there were two reporting periods covering months one to 12 of the Contract (18 October 2006 to 17 October 2007) and months 13 to 24 (18 October 2007 to 17 October 2008) respectively. The present allegation concerns the alleged delay in the payment of the requested amount in the framework of the second and last reporting period, for which the complainant submitted a cost claim of EUR 740 707.61 on 18 December 2008.

30. Article 8(2)(c) and (d) of the Contract states that "within 45 days following approval by the Commission of the reports relating to the last period and the final reports [...] the Commission shall pay a final payment for that period" and that "any payment at the end of a reporting period accompanied by an audit certificate shall be considered as final, subject to the results of any audit or review" (emphasis added). Article 8(2)(e) states that:" Where no comments, changes or substantial corrections to any of the project activity reports or financial statements are required or where the Commission approves the reports more than 45 days after reception, the Commission shall make the appropriate payment within 90 days of receipt of the project activity reports and associated financial statements. Where substantial comments, changes, further information or adjustments are requested by the Commission within this period, the delay[3] is suspended upon notification by the Commission. The remainder of the 90 day payment period begins again only after submission by the contractors of the required information" (emphasis added).

31. Article II.28.8, first paragraph, of the General Conditions provided that "[t]he periods identified in Article 8 [of the Contract] regarding the [deadline] for payment may be suspended by the Commission at any time by notification of the coordinator that the financial statement is not acceptable, either because it does not conform to the requirements of the contract or because it is not in conformity with the activity reports submitted for approval to the Commission. The [deadline] for approval of the financial statement will be suspended until the submission of the corrected or revised version as requested and the balance of the [deadline] for approval will start again upon receipt by the Commission of this information (emphasis added). Article II.28.8, second paragraph, provided that "[t]he Commission may suspend its payments at any time in case of non-respect by the contractor(s) of any contractual provision, particularly regarding the audit and control provisions in Article II.29. In such a case, the Commission shall notify the contractor(s) directly by means of registered letter with acknowledgement of receipt" (emphasis added).

32. As regards the application of the above provisions to the present case (namely, the payment corresponding to the second reporting period), the complainant submitted the relevant reports and financial statements for the second reporting period to the Commission on 18 December 2008. Therefore, if the Commission had made no request for comments, changes or substantial corrections, the payment should - according to Article 8(2)(e) of the Contract - have been made within 90 days, that is, by 19 March 2009.

33. It is the Ombudsman's view that, given the facts of the present case, the second paragraph of Article 8(2)(e) of the Contract is applicable. The Commission's Executive Summary indeed contains an overview of several requests made by the Commission following the submission, on 18 December 2008, of the cost claims by the complainant. The Commission enclosed copies of these requests in its opinion. The Ombudsman notes that the complainant has not disputed the facts set out in the Executive Summary. It appears from this Executive Summary, and the enclosures sent with the Commission's opinion, that, immediately after the submission of the cost claims, the Commission requested several corrections from the complainant by e-mail of 19 December 2008 (which contained 10 points). These corrections were received from the complainant on 23 January 2009. The Commission then made further requests for corrections to the complainant by e-mails of 3 April 2009 (the corrected documents were received on 5 May 2009), 5 August 2009 (the corrected documents were received on 8 September 2009) and 17 September 2009 (the corrected documents were received on 13 October 2009). Several of the Commission's e-mails mentioned that the payment would not be made until it received the requested corrected documents. The requests made by the Commission were "substantial", within the meaning of Article 8(2)(e) of the Contract. By e-mail of 16 October 2009, the Commission requested further changes to the cost budget follow-up table. According to the Executive Summary, the Commission received the complete set of documents on 20 October 2009 and the reports were approved on 29 October 2009. However, according to the Executive Summary, the Commission decided not to make the payment until it received the final audit report and made the necessary changes to the cost claims. In this context, it stated that the ex-post audits carried out on several project partners revealed high, ineligible costs. This final audit report was adopted on 16 December 2009. By e-mails of 22 January and 4 February 2010, the Commission asked for further information from the complainant. By letter dated 8 March 2010 ("payment information letter"), the Commission gave the complainant its final analysis and informed it that the payment would be made. The Commission's final analysis described the various amounts which, on the basis of the results of the ex-post audit, had been rejected, including the sum of EUR 151 624.18 in respect of the complainant. The Commission paid, in total, EUR 251 965.10 on 9 March 2010.

34. The Ombudsman notes, in sum, that the 90-day (namely, 45+45) time-limit for payment, which started to run on 19 December 2008, ceased to apply once the Commission exercised its contractual right to request further (substantial) information and clarifications. The 90-day time-limit only began to run again after the complainant provided the required information and clarifications. The Executive Summary mentions that the Commission received the complete set of documents on 20 October 2009 and approved them nine days later. The Commission then informed the complainant, in its letter dated 1 December 2009, that it would not make the final payment until it received the final audit report which would allow it to make the necessary corrections to the cost claims. The Ombudsman considers that the Commission's position was in accordance with the applicable rules and, moreover, was reasonable. On the basis of the above, the Ombudsman concludes that there was no undue delay by the Commission in paying the complainant the requested amount. No maladministration was thus found with regard to this aspect of the case.

B. Alleged incorrect ineligibility of costs and corresponding claim

Preliminary remark

35. The present allegation concerns the rejection by the Commission of part of the complainant's personnel costs. The Ombudsman, therefore, considers it useful to provide a brief explanation of his understanding of the method of calculating personnel costs. Personnel costs that can be charged to the project are calculated on the basis of the following formula: the employer's annual personnel costs for each staff member are divided by the total number of productive hours for each staff member. This gives an hourly wage cost for each staff member. The outcome of this calculation is then multiplied by the number of hours spent working on the Commission-funded project, which gives the amount of personnel costs that can be charged to the Commission for the project. In other words, on the basis of the above formula, the lower the number of "productive hours" assigned to each staff member, the higher the amount of personnel costs claimed from the Commission will be.

Arguments presented to the Ombudsman

36. The complainant alleged that the Commission was wrong to consider that the complainant overcharged for costs amounting to EUR 151 624.19. It argued that the rejection of the complainant's calculation of "productive hours" was incorrect for the following reasons. The complainant had a contract with the Commission and its proposal concerning the tariffs and "productive hours" was included in that contract. Moreover, the complainant argued that it calculated the costs in accordance with the rules set out in the Call for proposals. It added that it used a "productive hours per year calculation" which led it to conclude that managers worked 1046 "productive hours" and other staff worked 1233 "productive hours". In contrast, the auditor considered that managers worked 1712 "productive hours" and other staff worked 1672 "productive hours".[4] The complainant insisted that the Commission never pointed out that the calculation of "productive hours" used by the complainant was incorrect. Further, according to the complainant, the Commission failed to answer its request to identify the document in which the concept of "productive hours" was defined. Finally, it stated that the application of this definition of "productive hours" caused the complainant to incur unreasonable losses, thus threatening its very existence.

37. In its opinion, the Commission stated that it based its decision to refuse to pay EUR 151 624.19 in costs on the results of the audit carried out by the external auditor. The Commission informed the complainant of the preliminary audit findings, which were subsequently revised where the complainant's objections were found to be justified. Apart from minor adjustments, it did not approve EUR 307 543.17 in costs claimed by the consortium, of which EUR 151 624.19 were claimed by the complainant. It made the final reduced payment to the Consortium Project on 9 March 2010. It informed the complainant of the final audit and the results thereof in a registered letter dated 8 March 2010. The complainant was also informed by telephone.

38. In its observations, the complainant stated that "productive hours" must be determined in accordance with the usual financial procedures followed by the contractor. In this context, it referred to point II.19 of the General Conditions which states that eligible costs "must be determined in accordance with the usual accounting principles of the contractor" and "the accounting procedures used in the recording of costs and receipts shall respect the accounting rules of the State in which the contractor is established". It added that it had informed the auditor in detail about this. The auditor did not, however, accept the complainant's explanation and was not able to identify the Commission document on which the Commission based its decision. The complainant added that since it could not find further information in the Call for proposals, it contacted the auditor in charge at the Commission seeking information on the calculation of productive hours. The complainant specifically wanted to know whether it could have known the applicable rules either when it made its proposal or when it signed its contract with the Commission. The complainant stated that it appeared from the conversation with the Commission's auditor that the calculation of the "productive hours" was not based on any document. The complainant then wrote to the Commission asking it to clarify its interpretation of "productive hours" and to indicate the date from which that interpretation was applied by the Commission. The Commission replied to the complainant that the audit report and the accompanying letter contained the explanations requested by the complainant. The complainant thus took the view that the applicable rules had been changed after the project had commenced. It argued that it had used a method of calculating "productive hours" which complied with the contract and the Call for proposals. The calculation of "productive hours" had also been approved by the Dutch accountant who had established the audit certificate. The complainant concluded by stating that it had incurred a loss of EUR 151 624.18 as a result of the Commission's wrong interpretation of "productive hours".

Further inquiries

39. On 12 April 2011, the Ombudsman wrote to the Commission stating that, as regards the calculation of the "productive hours", it had merely referred to the auditor's finding. The Ombudsman thus asked the Commission to elaborate further on the rejection of the complainant's method of calculating "productive hours" and to address the complainant's allegation and observations. The Ombudsman specifically asked the Commission to indicate the provisions of the contract on which its rejection of the complainant's calculation of the productive hours was based. He also asked the Commission to explain the relevance of the calculation of the productive hours for the calculation of the amount of money to be paid to the consortium by the Commission.

Further arguments presented to the Ombudsman

40. In its additional opinion, the Commission stated that it based the amount of money to be paid to the Consortium on the calculation of total eligible costs. It calculated these costs in accordance with the contract signed with the complainant. Article II. 19.1 of the General Conditions provides, in particular, that the costs must be: a) real, economic and necessary for the implementation of the project; and b) determined in accordance with the usual accounting practices of the contractor. The Commission clarified that further details on the calculation of staff costs are given in the Guide to Financial Issues relating to Indirect Actions of the Sixth Framework Programme ("the FP6 Financial Guidelines") and in the FP 6 Audit Certificate Guidance Notes. Participants in FP6 calls for proposals are informed, in the calls for proposals, of the availability of this documentation through the Commission's CORDIS website, which is the Commission's central information platform for participants in the Research Framework Programmes. As such, the complainant knew the conditions for the calculation of the eligible costs.

41. In order to determine real staff costs, individual unit costs are calculated by dividing the total annual employment costs of each member of staff involved in the project by the "productive hours" or "productive days" of that member of staff. The "productive hours" or "productive days" take into account the total number of remunerated hours or days that the employee worked for the beneficiary (workable hours or days) during the year in question. An hourly or daily rate is thus obtained for each member of staff. This hourly/daily rate is then multiplied by the number of hours or days that can be charged to the EU-funded project. The real costs associated with the employees are thus obtained, for the purpose of calculating the cost to be claimed from the Commission. The FP6 Financial Guidelines (in their version of February 2005, paragraph 6.1.1, page 144) in particular indicate the following with regard to "Personnel":

"The total costs of personnel that can be charged to the project are determined as follows: Cost for remuneration of personnel should be taken from the payroll account and should reflect the total gross remuneration plus (salary) the employer's portion of social charges (e.g. holiday pay, pension contributions, health insurance and social security payments). ... Productive hours must be calculated according to the contractor's normal practices (taking into account particularly national holidays, absenteeism, etc.). ... Where it is the usual practice of the contractor to consider all or certain types of personnel costs (such as administrative or support personnel) as indirect costs, the costs of this personnel can not be charged as direct eligible costs, but only as indirect costs" (emphasis in the original).

42. The Audit Certificate Guidance Notes[5] contain further indications on the calculation method of productive hours. These notes are primarily directed at auditors charged with the production of audit certificates. Annex 3 ("List of frequent errors in financial statements", page 25) provides:

"The calculation of hourly personnel rate

"A further problem concerns the calculation of the hourly personnel rate. The hourly personnel rate is to be calculated as 'the actual costs (gross remuneration and the employer's portion of social charges) divided by the number of productive hours'. Audit evidence indicates that in general a plausible number of productive hours are in the order of 1680 hours per year. If in the calculation of the hourly personnel rate a significantly lower number of productive hours is used, a solid justification should be on file".

Annex 4 ("Indicative model of an audit programme", page 27) provides:

"3. Review costs claimed
Direct costs - personnel.

... Verify that the hourly labour rates have been correctly calculated, i.e. gross remuneration plus the employers portion of social charges divided by productive hours (indicator: 1.680 p.a.); verify that the number of chargeable hours used for the calculation of the hourly rate is reasonable and in line with the contractor's normal practice. Ensure that the actual number of productive hours performed does not exceed the number of productive hours applied in this calculation".

Annex 5 ("Suggested model procedures to be performed") provides:

"2. Recalculate hourly personnel and overhead rates for personnel (full coverage if less than 20 researchers, otherwise a sample of minimum 20, or 20% of researchers, whichever is the greater), indicate productive hours used and hourly rates. Where sampling is used, selection should be random with a view to producing a representative sample.

Definition: Using the beneficiary's methodology, for each sampled researcher show how the amount charged to the contract can be derived using the payroll remuneration, productive hours, time recording or other allocation method.

Example: Annual employer's costs EUR 33,600, productive hours 1680 = 20 EUR per hour X 450 hours charged = 9.000 EUR charged to the project. Productive hours are the number of hours made available by the employee in a year after the deduction of holiday, sick leave and other entitlements. If other deductions of time are made for certain paid activities, these should be notified as factual findings"

43. The Commission argued that the above documentation gives general guidelines and, as such, sufficient information to potential beneficiaries to establish a cost claim in line with the cost eligibility criteria of the contract. It should be clear, it argued, that general guidance cannot include references to details that can only be identified on a case-by-case basis. Where the contract and the interpretative guidelines made available to participants in FP6 grants leave some room for interpretation and refer to the contractor's normal practices, the verification of the compliance of the declaration of the actual costs (and in particular the productive hour calculations) is subject to the professional judgment of the auditor.

44. In the complainant's case, the auditor calculated the "productive hours" taking into account the statutory and national holidays, education days, sick leave and special leave. The complainant claimed there should have been a further deduction, from the "productive hours", to cover non-chargeable activities. The complainant's methodology would have resulted in an increase of the hourly/daily rate charged for the time it took to carry out the work. The auditor investigated whether there were any activities that do not fall under the usual tasks for which the employee is remunerated by his/her employer and which should be taken into account to reduce the number of productive hours of work carried out by the employee. He concluded that there was no evidence available for such activities. In view of the small size of the organisation, it was considered acceptable that standard productive hours are applied for the calculation of personnel costs.

45. The Commission pointed out that the method of calculating the "productive hours" had been addressed during the procedure leading to the final audit report, in which the complainant had been given the opportunity to react to the conclusions of the auditor. In its observations on the complainant's comments (annex 5 to the audit report, page 45), the auditor emphasised that the concept of productive or workable hours, applied for the calculation of the real costs, differed from the concept of chargeable hours on which the complainant had based its calculation. The Commission agreed with the auditor's conclusion and confirmed the auditor's position in its letter to the complainant dated 18 January 2010. For the calculation of the real hourly costs of the employee, all activities of the employee should be taken into account (workable hours). This should be distinguished from the time the employee could actually associate with activities undertaken for the clients of the organisation (chargeable hours). The Commission did not have, it insisted, any grounds to call into question the results of the audit. The Commission further explained its conclusions in a telephone conversation with the complainant on 5 February 2010. The Commission confirmed its position again in its letter dated 8 March 2010.

46. With regard to the complainant's argument that its proposal on tariffs and productive hours was included in the contract, the Commission stated that the implementation of a project has to comply with the conditions of the contract (grant agreement) and with the project proposal also known as "Description of Work", which is attached to the contract. The project proposal contains an indicative budget. The final grant is, however, established on the basis of the real, eligible costs of the project. This means that, in order to be eligible for EU funding, the costs must be real, and not estimated, budgeted or imputed costs.

47. With respect to the complainant's argument that the Commission never stated that the complainant's calculation of productive hours was incorrect, the Commission pointed out that the beneficiary has an obligation to report its costs in line with the cost eligibility criteria of the contract. For the determination of the amount of the final grant, the Commission can rely on audit certificates. Accepting the costs in the framework of the final payment does not, however, exclude the possibility that the eligible costs can be adjusted following the results of an on-the-spot audit.

48. As regards the complainant's argument that the Commission did not reply to its question regarding the document in which the definition of "productive hours" could be found, and from which point in time this definition had been applicable, the Commission stated that the concept of "productive hours" and the calculation of those hours had been the subject of several communications with the complainant. The fact that the complainant does not agree with the auditor's calculations, as endorsed by the Commission, does not mean that the method of calculating the eligible staff costs, and more particularly the calculation of the "productive hours", was not based on the concepts indicated in the Contract and in the FP6 Financial Guidelines. Nor does it mean that the audit result was not reasoned and substantiated by both the auditor and the Commission. The Commission also pointed out that the concept of "productive hours" has been applied from the start of the FP6 Programme and was also implemented, under the same conditions, in the preceding and subsequent programmes. It was not newly introduced when the project was being carried out, nor during the audit.

49. In its additional observations, the complainant pointed out that the FP6 Financial Guidelines do not refer to the Audit Certificate Guidance Notes. The complainant thus, in good faith, based its proposal on the FP6 Financial Guidelines and cannot be reproached for not acting in accordance with the Audit Certificate Guidance Notes which are addressed to the auditors and not to the contractor. The complainant also found it strange that the Commission was finally able to provide a reply to the question as to which document the calculation of the "productive hours" was based. The complainant stated that the Commission's statement, namely that the calculation of "productive hours" had been the subject of several communications with the complainant, did not reflect what actually happened. It pointed out that the concept of "productive hours" was first raised only when the auditors took their decision.

The Ombudsman's assessment

50. According to the complainant's allegation, the Commission incorrectly concluded that the complainant had overcharged the Commission by EUR 151 624.19. The Commission's letters to the complainant dated 18 January and 8 March 2010 state that the amount of EUR 151 624.18 was rejected on the basis of the results of the audit. The audit report B72-09 states that the overall amount of EUR 151 624.19 comprised: 1) personnel costs (EUR 114 171.86); 2) other direct costs (EUR 459.14); 3) indirect costs (EUR 22 926.20); and 4) adjustments to costs previously reported (EUR 14 066.99). In its complaint and additional information sent to the Ombudsman, as well as in its observations, the complainant did not enter into the details of the above division of costs, but focussed only on the calculation of the "productive hours". The key issue in the present allegation is thus the dispute over the calculation of the "productive hours", which is relevant only for the personnel costs, namely the sum of EUR 114 171.86. The complainant has not put forward arguments in its complaint to dispute the other rejected amounts, or the amounts pertaining to the other partners. The Ombudsman will therefore only deal, both as regards the allegation and the corresponding claim, with the dispute over the rejection of the personnel costs.

51. The first point that needs to be addressed is the question whether the complainant was aware of the relevant rules concerning the calculation of the "productive hours". One of the complainant's arguments is that it could not find information in the Call for proposals concerning the calculation of the "productive hours" and that it was thus not sure whether the applicable rules were already known to it when it made its proposal or when it signed the Contract with the Commission. The complainant also argued that the Commission had not replied to its question as to the document in which the concept of "productive hours" is defined.

52. The Ombudsman notes that the Commission has clarified, in its additional opinion, that the concept of "productive hours" was explained both in the FP6 Financial Guidelines and in the FP6 Audit Certificate Guidance Notes, and that applicants were aware of the availability of this documentation by way of the Call for proposals. Point 4 of the Call for proposals FP6-2005-INNOV-8 indeed mentions that "[t]he Commission makes available to proposers guides for proposers relating to the call which contain information on the preparation and the submission of a proposal for an indirect RTD action. The Commission also makes available Guidelines on Proposal Evaluation and Selection Procedures. These guides and guidelines, as well as the work programme and other information relating to the call, can be obtained from the Commission via the following addresses: ... Internet address: www.cordis.lu/fp6". The CORDIS website, under "Find a Document" and "FP6 project management documents and guidance", contains a copy of both the FP6 Financial Guidelines and the Audit Certificate Guidance Notes. As the complainant was able to acquaint itself with both these documents, its argument that it was not aware of the relevant rules cannot be accepted. Moreover, the Ombudsman notes in this respect that the complainant itself sent both documents as enclosures with its original complaint to the Ombudsman.

53. On the basis of the above, the Ombudsman does not agree that the applicable rules on the calculation of the "productive hours" were introduced after the completion of the contract and without the complainant being aware of their existence.

54. As regards the manner in which the auditor applied the Commission's system of calculating "productive hours", the table on page 15 of the audit report shows that the complainant calculated "productive hours" by assuming that management staff worked only three productive days per week and other staff worked three and a half productive days per week. In contrast, the auditor worked from the assumption that all staff worked five productive days per week. The auditor pointed out that, as the normal working week for the organisation is five days, the standard "productive hours" calculation should be based on that number. This meant that, whereas the complainant arrived at 1046 and 1233 productive hours per year for, respectively, management and other staff, the auditor's conclusion was 1712 and 1672 productive hours per year. The Ombudsman notes that these differences would imply that the hourly rate for management based on the auditor's method was approximately 61% of the hourly rate for management based on the complainant's method, and that the hourly rate for other staff based on the auditor's method was approximately 74% of the hourly rate for other staff based on the complainant's method.

55. The auditor pointed out on page 17 of the report that the deduction of one and a half and two days per week made by the complainant related to activities such as PR and acquisition, general management and administration. The complainant's own detailed table of the calculation of the productive hours confirms this (page 4 of its letter to the Ombudsman of 19 April 2010 and page 39 of the final audit report) and shows that it made deductions for the following items which, in its view, were "non-productive hours": i) PR and acquisition; ii) participation in on-client related networks and organisations; iii) external professional network meetings; iv) internal non-client related meetings; and v) general management and office related activities. The auditor explained that it considered these activities as "productive", and that it had, therefore, made an adjustment.

56. In its observations on the draft audit report (which were included as Annex 4 to the final audit report, pages 37 to 44), the complainant explained the above deductions by stating that: "[p]roductive hours, or chargeable hours, are those hours that generate a direct contribution to the company's turnover. Therefore any activity that is not directly related to work for a specific customer is regarded to be non-productive. Examples are sick-leave, training, internal meetings, assessments and evaluations. In organisations that employ consultants all activities that are related to marketing, acquisition and (self) study are also not productive as there are no clients that pay for these activities ... Therefore the amount of available productive hours is always less than the available work hours" (page 38) and that "[p]roductive hours are those hours that remain after the hours budgeted for acquisition, sales, networking, participation in all kind of networks and events, self study etc. are deducted from the workable days per year" (page 41, emphasis added). In its comments on the complainant's observations (Annex 5 to the final audit report, pages 45-46), the auditor disagreed with the complainant's calculation of the productive hours. It explained that "[p]roductive hours are the workable hours taking into account holidays and absenteeism. Chargeable hours as applied by the Contractor are not the same concept as productive hours ... With regard to revised calculation of productive hours provided by the Contractor, we would like to emphasize that the concept of chargeable hours differs from the concept of productive or workable hours. Therefore we consider the listed activities as productive time and thereby can not be deducted ... When asking the Contractor for secondary documentation to support time claimed on e.g. education/training, internal and external meetings he stated that the personnel's (electronic) agenda's are not used to keep track of all non-chargeable activities. We therefore consider it acceptable due to the size of the organisation that standard productive hours are applied for the calculation of personnel cost rates" (emphasis added).

57. As explained in the example of Annex V of the Audit Certificate Guidance Notes, in order to determine real staff costs (personnel costs), individual unit costs are calculated by dividing the total annual employment costs of each member of staff involved in the project by the productive hours or days worked by that member of staff. In other words, the lower the retained number of productive hours is, the higher the staff costs claimed will be. Whereas the Audit Certificate Guidance Notes mention that, on the basis of audit evidence, a plausible number of productive hours are, in general, in the order of 1680 hours per year, the Ombudsman notes that the complainant retained 1046 and 1233 productive hours per year, which are significantly lower numbers. The outcome of dividing the complainant's total annual employment costs by these lower numbers was a higher hourly rate. The Ombudsman notes that, in the auditor's view, the complainant's calculation of "productive hours" was wrongly based on the concept of chargeable hours and not on the concept of workable hours. The auditor more particularly considered that certain of the complainant's activities – namely: i) PR and acquisition; ii) participation in on-client related networks and organisations; iii) external professional network meetings; iv) internal non-client related meetings; and v) general management and office related activities - were to be taken into consideration as productive hours and could thus not be deducted as the complainant had done. The Ombudsman notes that, if the complainant's methodology were accepted, the hourly work rate charged by the complainant would be artificially increased in such a manner as to require the Commission to pay for all work carried out by the complainant's employees, including work which was not carried out on the project (such as the work described above). This would not be reasonable and should not be accepted.

58. The Ombudsman thus considers that, by confirming the auditor's findings, the Commission does not appear to have acted incorrectly. More particularly, the Commission's final assessment stating that the relevant personnel costs had been overcharged by the complainant does not appear to be incorrect, especially in view of the additional clarifications provided by the Commission in its additional opinion. The Ombudsman thus finds no instance of maladministration with regard to the present allegation. The complainant's claim is thus not well-founded.

C. Alleged failure to respect the procedural rules

Arguments presented to the Ombudsman

59. The complainant alleged that the Commission had not respected the procedural rules set out in the Contract and the General Conditions. In particular, the complainant argued that: a) the Commission did not inform it of the suspension of the payment by registered letter, as set out in the Contract; b) the Commission has requested the complainant to submit information which it had already submitted on 18 December 2008 but which was lost within DG ENTR and, on the other hand, to reformulate the same information; c) the Commission was wrong to suspend the payment on the basis of the preliminary results of the audit, a situation which is not provided for in the Contract; d) the Commission acted incorrectly when accepting an audit report drawn up by auditors who had ignored the rules and the procedures set out in the Contract.

60. In its opinion, the Commission argued that it had respected the procedures set out in the Special and General Conditions and that it had acted in a prudent manner with respect to financial management of grants. It pointed out that the complainant had already submitted most of its allegations in letters addressed to the Director-General of Directorate-General Enterprise and Industry (DG ENTR) and that these letters were replied to in a prudent and timely manner.

61. As regards part a) of the allegation, the Commission pointed out that Article 8 of the Contract and Article II.28.8 of the General Conditions lay down the modalities for suspending payments. It stated that notification by means of a registered letter with an acknowledgement of receipt is only required where there is a suspicion of irregularity or in the event of non-respect by the contractor of any contractual provision, particularly regarding the audit and control provisions. The Commission stated that it notified the complainant in several e-mails about the postponement of the payment and requested further clarifications and corrections of the documents submitted. The Commission also sent a notification to the complainant by ordinary mail of 1 December 2009, indicating that the cost claims were not acceptable and that the payment had been suspended. The receipt of this letter was not contested by the complainant and its subsequent communications confirmed that the letter was received.

62. As regards part b) of the allegation, the Commission argued that it had not lost any documents that had to be resubmitted by the complainant. However, the Commission indeed requested correction of documents, supplementary information and submission of mandatory annexes in order to constitute a complete and coherent set of documentation necessary for the approval of the reports and the cost claims. The Commission in this context referred to several e-mails which it had enclosed with its opinion.

63. As regards part c) of the allegation, the Commission argued that, in verifying compliance with contractual provisions, it may use all legally available evidence. This includes, most notably, the results of audits, which cover aspects relating to the proper execution of the project and the Contract. In cases where there is reason to believe that the findings will impact substantially on the amount requested, the Commission may suspend payments awaiting the result of an audit. When cost claims are submitted, the auditor verifies whether the eligibility criteria laid down in Article II.19 of the General Conditions are met. The high amounts rejected by the auditor for some STEPPIN partners did confirm the need to ascertain, prior to payment, the eligibility of expenditure declared and to remove any doubt which had justified the prudent application of the rules.

64. As regards part d) of the allegation, the Commission stated that, as set out in Article II.29 of the General Conditions, it may arrange for audits to be carried out, including by external auditors. The work of the auditors, which notably consists in checking whether the costs declared are eligible on the basis of the Contract, is based on contractual arrangements between the Commission and the auditor commissioned and is performed in accordance with applicable international and national standards on auditing. The Commission did not act incorrectly in any way when considering the audit conclusions submitted by chartered auditors as appropriate. The Commission saw no grounds to call into question the performance of the auditor. The auditor performed the audit and the subsequent procedure in accordance with accepted practice and in consultation with the Commission.

65. In its observations with regard to part b) of the allegation, the complainant pointed out that the Commission had argued in its opinion that it had not lost documents, whereas, in an e-mail of 30 June 2009, the Commission had indicated that it was missing parts of the complainant's report. According to the complainant, the Project Officer indicated in that e-mail that she could not locate all the documents and reports sent by the complainant on 19 December 2008 and 23 February 2009 and asked it to send them again.

66. As regards part c) of the allegation, the complainant argued that, according to the "Code of Conduct", the draft audit report should not have been published. The complainant stated that it had, therefore, complained against the use of this draft audit report as a reason to suspend the payment procedure.

67. As regards part d) of the allegation, the complainant argued that, in its view, the audit report was completely incorrect on a number of points and that it had informed the auditor thereof. The complainant had also indicated to the Commission that it rejected the audit report because of serious mistakes by the auditor, namely reaching conclusions about information which had not been audited and taking positions which were not supported by documents. The complainant had not, however, stated that the auditors had set aside the rules and the procedures of the Contract.

The Ombudsman's assessment

68. As regards part a) of the allegation concerning the alleged failure of the Commission to inform the complainant of the suspension of the payment by registered letter, the Ombudsman notes that Article II.28.8 of the General Conditions sets out three different instances in which the time-limits for payment can be suspended:

"The periods identified in Article 8 regarding the [deadlines] for payment may be suspended by the Commission at any time by notification of the coordinator that the financial statement is not acceptable, either because it does not conform to the requirements of the contract or because it is not in conformity with the activity reports submitted for approval to the Commission. ...

The Commission may suspend its payments at any time in case of non-respect by the contractor(s) of any contractual provision, particularly regarding the audit and control provisions in Article II.29. In such case, the Commission shall notify the contractor(s) directly by means of registered letter with acknowledgement of receipt.

The Commission may suspend its payments at any time where there is a suspicion of irregularity committed by one or more contractor(s) in the performance of the contract. ... The Commission shall notify the contractor(s) of the justification for the suspension of the payment directly by means of registered letter with acknowledgement of receipt".

69. It is clear from the above provision that the need to inform the contractor by registered letter only applies in the last two instances, namely in case the contractor does not respect contractual provisions, particularly regarding audits and controls, or where there is a suspicion of irregularity by the contractor. It appears that the complainant was in neither of these situations as no such allegations have been made by the Commission against the complainant. More specifically, the Commission did not allege that the complainant had committed an irregularity or had failed to respect audit and control provisions, for instance by failing to collaborate with the auditor. It should be pointed out in this context that the simple fact that an audit is carried out does not require the Commission to inform the complainant by registered letter of a suspension of payments. On the basis of the above, the Commission was thus not bound to inform the complainant by registered letter. The Ombudsman notes that the notification of the complainant by several e-mails, and also by letter dated 1 December 2009 was thus adequate[6]. The Ombudsman thus finds no instance of maladministration with regard to this aspect of the case.

70. As regards part b) of the allegation, the Ombudsman notes that, with respect to the alleged loss of documents and the need to send them again, there are three e-mails in the file which merit closer attention. The Commission enclosed with its opinion two e-mails sent on 4 February 2009 by the Commission's Project Officer to the consortium. The first e-mail, sent at 12:10pm, reads as follows: "We had a look at the file you left me recently. The first and immediate question was: where are the reports??? (management and activity-periodic and final). Could you please provide me with these documents even if they were already sent to [X, a colleague] before. As far as I could find out from emails, he had asked for some changes in the reports as well, therefore it would be great to receive them in hard copy again" (emphasis added). The second e-mail, sent at 17:19pm, had as subject "Docs found" and reads: "I have found everything!!! ...". There is also a third e-mail of 30 June 2009 from the Commission's Project Officer to the complainant which the complainant enclosed with its observations and which reads as follows: "Please send me in some emails the reports for both periods and also all deliverables electronically!! I just prepare everything for your payment, so that nothing will be delayed during my absence but I did not find anything on our server. I am sure [X] had them somewhere but I guess it is easier if I save them again. Thanks a lot" (emphasis added).

71. Article 24 of the European Code of Good Administrative Behaviour ("Keeping of adequate records") provides that the institutions shall keep adequate records of their incoming and outgoing mail and of the documents they receive. The combined reading of the above e-mails would suggest that the Commission's Project Officer had some problems locating some documents which had already been submitted by the complainant and that she therefore requested the complainant to send these documents again. The fact that four Project Officers were successively in charge of the project might account for this situation. However, although the e-mails suggest that it was difficult to locate some documents, it is not apparent from these e-mails that documents had been definitively lost by the Commission. Indeed, it appears from the e-mails quoted above that, after some search by the Project Officer, all the sent documents were found. The Ombudsman, therefore, finds no instance of maladministration in this respect. However, he trusts that the above problem encountered by the new Project Officer in locating documents is an isolated event. The Ombudsman also encourages the Commission to keep adequate records, especially where the documents concerned are necessary for making payments.

72. As regards the second aspect of part b) of the allegation, the Ombudsman notes that the complainant has not specified which information it had to reformulate. The complainant did not provide further clarifications in its observations on the Commission's opinion, let alone react to this issue. In the absence of further details, there is no need for further inquiries into this aspect of the complaint.

73. As regards part c) of the allegation, the Ombudsman would like to point out that the draft audit report was sent to the complainant on 24 November 2009. It is useful to underline that, contrary to what the complainant appears to believe, the payment procedure was initially not suspended on the basis of the draft audit report, but much earlier, namely on 19 December 2008, one day after the complainant had submitted the financial statements and when the Commission requested the complainant to make several corrections, informing it at the same time that the deadline for payment was suspended. The issue of the postponement of the payment is dealt with in detail above, under the first allegation. It is important to recall in this context that the complainant itself, in its letter dated 25 November 2009 to the Commission, pointed out that, by that time, the Project Officer had already indicated nine times that the payment would be postponed. The complainant's allegation that the payment was postponed on the basis of the preliminary outcome of the audit appears thus to be based on a wrong assumption. No instance of maladministration is thus found with regard to this aspect of the case.

74. As regards part d) of the allegation, the Ombudsman points out that he cannot investigate the behaviour of the auditors themselves, including the audit report which they adopted, since he can only look into possible maladministration by the EU institutions, bodies, offices and agencies. The Ombudsman would only be able to find that the Commission acted incorrectly if it would have accepted an audit report which was manifestly erroneous or from auditors which manifestly ignored the rules set out in their contract with the Commission. In its letter to the Commission dated 11 December 2009, the complainant indicated that the auditor had violated the Code of Conduct by giving a draft audit report to the Commission, without prior consultation with the consortium. The complainant further stated in its letter that it had informed the auditor that the draft audit report contained false information. It argued that its main objections to the draft audit report were the following: The auditor's conclusion on productive hours was not based on the results of the audit and showed that the auditor was not aware of the Commission's guidelines on productive hours. In addition, the auditor included non-existing project partners in overview tables and made a series of minor errors. The complainant therefore stated that it had serious doubts about the competence of the auditor. In its letter dated 18 January 2010 to the complainant, the Commission replied that it understood that the complainant did not agree with the auditor's findings, but that it considered that the auditor's conclusions were appropriate. In its reply of 18 February 2010 to the Commission, the complainant maintained that it did not agree with the findings of the auditor, pointing out that the main point concerned the issue of the productive hours. The Ombudsman notes that this issue is dealt with in detail above under the second allegation. The Ombudsman notes, for the rest, that the complainant did not indicate any specific rule of the auditor's contract with the Commission which the auditor would have infringed. Therefore, in the presence of mere general assumptions on the part of the complainant, the Ombudsman does not consider it necessary to conduct further inquiries into this aspect of the case.

D. Conclusion

On the basis of his inquiry into this complaint, the Ombudsman closes it with the following conclusion:

There are no grounds for further inquiries into the alleged procedural error, namely that the Commission acted incorrectly when accepting an audit report drawn up by auditors who had ignored the rules and the procedures set out in the Contract. As regards the other allegations, the Ombudsman finds that there has been no maladministration by the Commission.

The complainant and the Commission will be informed of this decision.

 

P. Nikiforos Diamandouros

Done in Strasbourg on 7 September 2012

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[1] The STEPPIN project was funded under the Sixth Framework Programme for Research and Development (FP6), following the Call for proposals FP6-2005-INNOV-8 (OJ 2005, C 91, p. 6).

[2] According to the complainant's calculations.

[3] The Ombudsman assumes that, every time a reference is made in the contract to the term "delay", it mistranslates the term "délai" from French. A more accurate translation of "délai", in the present context, is "deadline". The Ombudsman's decision will therefore make the necessary modifications in further quotations.

[4] In line with the explanation set out in paragraph 35 above, if the number of productive hours deemed to apply is higher, the hourly rates to be charged by the Consortium will be lower. Thus, the complainant had an interest in contesting the auditor's position that the complainant's productive hours calculations were too low.

[5] The 2005 version of the Audit Certificate Guidance Notes was updated in 2007 (this is the version which the complainant enclosed with its complaint), but the provisions relevant for the present case have not been changed.

[6] The Ombudsman notes that it is nowhere suggested that these communications were not effective.