THE BACKGROUND TO THE COMPLAINT

1. The complainant, which is a Belgian company, was a member of three consortia that carried out projects in the area of transport planning financed by the European Commission.

2. After carrying out an audit, the Commission took the view that some of the costs claimed by the complainant were "ineligible" and could not, therefore, be reimbursed by the Commission.

• "Personnel costs" claimed for were "ineligible" because the persons who carried out the work were not employees of the complainant. These costs should thus have been classified as "subcontracting costs", which could not be reimbursed because the reimbursement of subcontracting costs was not provided for in the contract.
• Travel and subsistence costs claimed for one project were "ineligible" because the complainant had not submitted all the necessary supporting documents.
• Travel and subsistence costs claimed for the two other projects should have been classified as "subcontracting costs". Since subcontracting costs were not provided for in the contracts, the travel and subsistence costs were also "ineligible".
• Since overheads were calculated on the basis of eligible personnel costs, and since there were no eligible personnel costs, there were, in the Commission's view, no eligible overheads for the projects.

3. In total, the amount in dispute was EUR 490 960.77.

THE SUBJECT MATTER OF THE INQUIRY

4. The complainant alleged that the Commission erred by not accepting the complainant's interpretation of "eligible" personnel costs and by not paying all the relevant personnel costs and overheads.

5. The complainant claimed that the Commission should not require the complainant to return money already paid to it for costs it had incurred and that the Commission should pay all the costs which it had not yet reimbursed.

THE INQUIRY

6. The complaint was sent to the Ombudsman on 10 August 2007. On 18 September 2007, the Ombudsman opened an inquiry. On 19 December 2007, the Commission sent the Ombudsman its opinion regarding the complaint, which was then forwarded to the complainant for observations. On 25 February 2008, the complainant sent its observations to the Ombudsman. On 16 July 2008, the Ombudsman made a proposal for a friendly solution to the Commission. On 20 October 2008, the Commission replied to the Ombudsman. On 3 November 2008, a copy of this reply was sent to the complainant with an invitation to make observations. The complainant submitted its observations on 29 November 2008, 24 December 2008 and 27 January 2009.

THE OMBUDSMAN'S ANALYSIS AND CONCLUSIONS

Preliminary remarks

Scope of the Ombudsman's Review

7. The Ombudsman is empowered to receive complaints concerning instances of maladministration in the activities of the Community institutions or bodies[1]. He considers that maladministration occurs when a public body fails to act in accordance with a rule or principle binding upon it[2]. Maladministration may thus also be found when the fulfilment of obligations arising from contracts concluded by the institutions or bodies of the Communities is concerned.

8. However, the Ombudsman considers that the scope of the review that he can carry out in such cases is necessarily limited. In particular, he is of the view that he should not seek to determine whether there has been a breach of contract by either party if the matter is in dispute. This question could be dealt with effectively only by a court of competent jurisdiction, which would have the possibility to hear the arguments of the parties concerning the relevant national law and to evaluate conflicting evidence on any disputed issues of fact.

9. In cases concerning contractual disputes, the Ombudsman considers it justified to limit his inquiry to examining whether the Community institution or body has provided him with a coherent and reasonable account of the legal basis for its actions and the reasons why it believes that its view of the contractual position is justified. If that is the case, the Ombudsman will conclude that his inquiry has not revealed an instance of maladministration. This conclusion will not affect the right of the parties to have their contractual dispute examined and authoritatively settled by a court of competent jurisdiction.

Interviews with the Ombudsman and the taking of testimony

10. In its observations, the complainant requested an interview with the Ombudsman. It also asked him to take the testimony of the person appointed by the Commission to be the project officer[3] for the first two contracts.

11. The Ombudsman underlines that complaints submitted to him are, in principle, dealt with only on the basis of a written procedure. After carefully examining all the documents submitted to him by the complainant and the Commission, the Ombudsman found no grounds, in the present case, to pursue the complainant's request for an interview further.

12. As regards the request to take testimony from the project officer, the Ombudsman did not consider, given the information at his disposal and his conclusions, that it was necessary to take testimony from the project officer.

A. Alleged incorrect interpretation of eligible personnel costs and related claim

Arguments presented to the Ombudsman

13. The complainant was of the view that the contracts could have been carried out either by staff under employment contracts or by subcontracted staff. The complainant did not employ staff and had always subcontracted out the work. In the complainant's view, the Commission was aware of this practice, given that the complainant's balance sheets had previously been provided to it. Moreover, the Commission signed two other contracts with the complainant without indicating that it wished staff to be employed by the complainant.

14. As a result, the complainant took the view that the Commission should consider the costs claimed for staff, as well as the costs claimed for overheads, to be "eligible".

15. The complainant also argued that the Commission failed to reply to its requests, made in March 2000, for clarification about the concept of direct personnel costs. The complainant also referred to similar requests it made on 13, 17 and 25 September 2001; 17 and 19 October 2001; 5 November 2001 and 5 December 2004.

16. The complainant also argued that that the Commission's decision to refuse to pay for the costs the complainant had incurred was disproportionate, given that the work was carried out to the Commission's satisfaction.

17. The Commission explained that the complainant received, in total, EUR 490 960.77 for the three contracts. Following its audit of the three contracts, the Commission found that:

• The "personnel costs" claimed were not eligible because they were not supported by salary slips. They should thus have been classified as "subcontracting costs". It went on to note that "subcontracting costs" were not provided for in the contract.
• 61.17% of the travel and subsistence costs claimed for one project were ineligible because they were not backed up by supporting documents.
• The travel and subsistence costs claimed for the two other projects should have been classified as subcontracting costs. "Subcontracting costs" were not provided for in the contracts.
• Subcontracting was neither provided for in the contracts nor requested by the complainant during the execution of the contracts. The auditors also noticed that there were no contracts signed between the complainant and the consulting firms to which it subcontracted work.
• Since overheads were calculated on the basis of eligible personnel costs, there were no eligible personnel costs and there were no eligible overheads.

18. The Commission noted that, in the proposals it submitted to the Commission with a view to winning the public tender, the complainant never mentioned that it had no permanent staff and worked exclusively with subcontractors. All the experts referred to by the complainant in its proposal with an eye to demonstrating its expertise were listed under the "key personnel" heading. In addition, the budget estimates provided by the complainant did not reflect the reality of its situation, that is, no costs were mentioned under the "subcontracting" heading and all costs appeared under the "personnel costs" heading.

19. According to the Commission, the complainant should have informed it in advance that it planned to subcontract the projects. The complainant should also have provided detailed invoices containing references to the subcontracting contracts and to the projects. The complainant complied with none of these conditions.

20. As regards the eligibility of costs, the Commission explained that a clear distinction should be made between "personnel costs" and "subcontracting costs". Costs could only be classified as personnel costs if the person carrying out the work had signed an employment contract with the principal contractor and worked under its supervision. Each hour should have been accounted for and should have included social security contributions. The complainant did not sign employment contracts with the persons carrying out the work and was unable to show that it had paid social security contributions. Consequently, the Commission refused to classify the costs of the persons carrying out the work as "personnel costs".

21. As regards the Commission's failure to reply to the complainant's requests for clarification, the Commission indicated that the complainant contacted members of the consortium[4] about the problem of the fees of its subcontractors. It did not contact the Commission as regards this issue. The complainant did not mention the problem of subcontracting in its correspondence with the Commission. This correspondence dealt with part-time contracts. Therefore, the Commission received no precise information from the complainant regarding its intention to work with subcontractors and about the possible eligibility of the costs involved as "personnel costs".

22. As regards the Commission's alleged prior knowledge of the complainant's practice of working with subcontractors, the Commission argued that it was not aware of this practice. In this regard, it made a request to the complainant to provide its balance sheets in order to check the financial viability of the company and to assess the usefulness of a bank guarantee. The request to provide balance sheets was not made in order to verify if the company had permanent staff.

23. As regards the alleged disproportionate nature of the Commission's position, the Commission argued that it was obliged to apply the contractual rules.

The Ombudsman's preliminary assessment leading to a friendly solution proposal

24. The Ombudsman noted that, in the cost summaries attached to the three contracts, the complainant claimed costs under the "personnel costs" heading.

25. Article 14(1) of the General Conditions annexed to the contracts, states the following as regards "personnel costs":

"only the costs of the actual hours worked by the persons directly carrying out the scientific and technical work under the project may be charged to the contract. In accordance with Article 8(3) of this Annex, such persons must:

- be directly hired by the principal contractor in accordance with his national legislation,

- be under the sole technical supervision of the latter,

and

- be remunerated in accordance with the normal practices of the principal contractor, provided that these are regarded as acceptable by the Commission."

It follows from the above that, in order for costs to be classified as "personnel costs", the contractor and the persons carrying out the work for the contractor must have an employee/employer relationship.

26. Article 41 of the Financial Regulation[5] applicable at the time the contracts were signed reads as follows:

"1. Validation of any expenditure shall be subject to the submission of supporting documents showing the creditor's claim and the service rendered or the existence of a document justifying payment."

27. The complainant did not provide the Commission with copies of employment contracts. Therefore, the Ombudsman considered that the Commission was right to consider that these costs could not be counted as "personnel costs" (as defined in the contract). He thus concluded that there was no maladministration as regards this aspect of the complaint.

28. As regards the Commission's failure to reply to the complainant's requests for clarification, the Ombudsman noted the following:

• the e-mails of 18 and 21 March 2000, 13, 17 and 25 September 2001, 17 October 2001 were sent by the complainant to a member of the consortia (the project manager);
• the e-mail of 5 December 2004 was sent by the complainant to a person working within the Commission's Directorate-General for Energy and Transport (the project officer). This e-mail did not deal with the eligibility of "personnel costs", but rather with the fact that the complainant's manager agreed not to receive any salary. It seems that no written reply was sent to the complainant. However, it received verbal replies.

Consequently, the Ombudsman found no maladministration as regards these aspects of the complaint either.

29. The e-mails of 19 October 2001 and 5 November 2001, sent by the project manager to the Commission, did in fact deal with the problems concerning the eligibility of "personnel costs". In his e-mails of 19 October 2001, the project manager wrote the following to the Commission:

"I have asked [X] about a problem that our contractors would like to clear up concerning the reimbursement of personnel costs (...) Are work contracts (i.e. irregular lump sum salary payments to individuals) re-imbursable as personnel costs (...)? Our partners have professors etc. in their teams that have such employment terms with their main employers that deny (e.g. some university rules) regular part-time employment contracts in a private firm. The work control, responsibility, administration and accordingly the overhead cost would be naturally retained in the employing firm.

I understand our partners keep normal time and cost tracking of the expenditure and the payments are directly connected to this. In my view the difference to normal employment contract is that each work period is usually agreed beforehand and that the salary payments are not through normal payroll but through invoices sent by these individuals (...)"

"I guess the whole problem lies with the definition of 'directly hired' according to the national law and "be remunerated in accordance with the normal practices of the principal contractor provided that these are acceptable by the Commission" of Article 14.1 of the Annex II of the General Conditions. So what happens (...) is that

- there is a non-permanent contract between the employer and the employee usually to carry out a certain task

- the responsibility of the work stays with the employer

- the employer pays a lump sum based on the hours coded and the hourly salary rate

- the employer pays the social charges applicable

- the employer adds the normal overhead rate to the salary which is then charged to the project (...)"[6]

30. The Commission's reply, dated 7 November 2001, was as follows:

"The rules to be followed are the ones in the contract (and its annexes). Nevertheless, if the [guidelines] are not in contradiction with the Contract (and its annexes), these guidelines may be of application. Externally, it is very hard to give you a "blanc-seing" (full agreement), only an audit on place may say it."[7]

31. The Ombudsman noted that the Commission received a very precise question in relation to whether it was possible to classify as "personnel costs" those costs incurred through contracts with persons who do not have employment contracts with the contractors. Its reply to this very precise question was manifestly inadequate. If a question is posed as regards the meaning of a contract, it is not sufficient for the Commission to simply refer the person to the provisions of the contract and its annexes. In this regard, the principles of good administrative behaviour require that answers to correspondence shall, as far as possible, be helpful and address the questions which are asked. This was not the case in the Commission's response to the project manager.

32. The project manager, rather than the complainant, submitted the above question to the Commission. The Ombudsman considered, however, that this fact has no bearing on his evaluation of the error committed by the Commission. He therefore provisionally concluded that the failure to reply precisely to the project manager's request for clarification constituted an instance of maladministration.

33. As regards the Commission's alleged prior knowledge of the complainant's practice of working with subcontractors, the Ombudsman noted that the complainant provided the Commission with two sets of documents, both of which contained information on staff.

34. The first set of documents, which was provided to the Commission at the contract preparation phase, included two balance sheets. One balance sheet stated that the complainant had no employees. In another balance sheet, the relevant section was left blank.

35. While the Commission stated that the purpose of the balance sheets was to check the "financial viability" of a company and to assess the usefulness of a bank guarantee, the fact remains that they contained a specific section which dealt with the number of employees. Furthermore, the explanations provided on the website of the Community Research and Development Information Service for Science, Research and Development ('CORDIS')[8], where a copy of the balance sheet is available, clearly state that the balance sheets were used by the Commission to verify that the organisation had the necessary human and financial resources to carry out the work.

36. The second set of documents principally consisted of cost summaries which were attached to the contracts signed with the Commission and specifically stated that the complainant had "personnel costs".

37. The Ombudsman considered that, on the basis of the documents provided by the complainant at the contract preparation phase, the Commission should have had some doubts as to whether the complainant was a direct employer. It would have been good administrative practise, at that stage, to have asked the complainant questions in order to clarify this point.

38. The complainant later provided further documents to the Commission, in which it specifically mentioned that it had "personnel costs". In view of the definition of "personnel costs", as described in paragraph 25 above, and taking into account the documents provided by the complainant and attached to the contracts, the Ombudsman did not consider it unreasonable for the Commission to eventually assume that the complainant did in fact have employees.

39. As regards the alleged disproportionate nature of the Commission's position, the Ombudsman concluded in paragraph 27 above that the Commission was correct not to classify the costs submitted by the complainant as "personnel costs", given that they were incurred as a result of work carried out by subcontractors. Therefore, the Commission's refusal to consider making payments on the basis of "personnel costs" cannot be deemed to be disproportionate.

40. However, Articles 5[9] and 14(3)[10] of the General Conditions attached to all three contracts do provide for the possibility to use subcontracting, provided the Commission gives its prior approval for the use of subcontracting. It is good administrative practice for institutions to ensure that measures they adopt are proportionate to the aim pursued[11]. The Commission did not contest the fact that the complainant carried out the work set out in the contracts correctly and completely. Nevertheless, it sought to recover the entire amount paid to the complainant, that is EUR 490 960.77.

41. The fact that the complainant did not, prior to using subcontracting, request the Commission to authorise the subcontracting is, at least in part, due to the Commission's failure to respond adequately to the project manager's precise questions (see paragraphs 31-32). In order to eliminate this potential instance of maladministration, the Ombudsman considered that if the complainant were now to request an authorisation to subcontract, the Commission should consider the merits of such a request. In this regard, the complainant should, along with that request, submit the appropriate supporting documents, including the contracts with the subcontractors and the invoices concerning such subcontractors. In light of the above, the Ombudsman made the following proposal for a friendly solution:

"The Ombudsman recalls that it is good administrative practice for institutions to ensure that measures they adopt are proportionate to the aim pursued.

The Ombudsman thus considers that if the complainant were now to request authorisation of the subcontracting arrangements, the Commission could consider the merits of such a request. In the event the Commission considers such an authorisation to be justified, and the complainant provides the necessary proofs of the expenses it incurred through subcontracting, the Commission should cancel its recovery order."

The arguments presented to the Ombudsman after his friendly solution proposal

42. The Commission welcomed the Ombudsman's conclusion that it was right to consider that the costs declared could not be counted as "personnel costs". It was of the view that the relation between the coordinator's question regarding temporary employment contracts and the subcontracting activities of the complainant could be subject to further discussion. Nevertheless, it shared the Ombudsman's concern to reach a friendly solution in this matter. It was ready to consider any request from the complainant for subcontracting, provided that the complainant submits, along with that request, the appropriate supporting documents. It agreed to contact the complainant in order to request the signature of an amendment to the contract. The amendment would classify subcontracting costs as "eligible costs". Upon receipt of the necessary documents, the Commission would reduce the recovery order accordingly, taking into account that overheads can only be claimed for employed staff.

43. In its observations, the complainant was glad that the Commission was ready to accept subcontracting costs as "eligible costs". It requested the Commission to apply the rules on subcontracting and to accept the invoicing of overheads. It hoped that a reasonable solution could be found and thanked the Ombudsman for his work.

The Ombudsman's assessment after his friendly solution proposal

44. The Ombudsman welcomes the Commission's positive response to his friendly solution proposal. From the complainant's observations, the Ombudsman understands that the complainant is satisfied with the Commission's reply to the friendly solution proposal. He therefore concludes that a friendly solution to the complaint has been achieved.

B. Conclusion

Following the Ombudsman's inquiry, a friendly solution to the complaint has been achieved to the complainant's satisfaction. The Ombudsman therefore closes the case.

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

 

P. Nikiforos DIAMANDOUROS

Done in Strasbourg on 7 April 2009

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[1] Article 195 of the EC Treaty states the following: "The European Parliament shall appoint an Ombudsman empowered to receive complaints from any citizen of the Union or any natural or legal person residing or having its registered office in a Member State concerning instances of maladministration in the activities of the Community institutions or bodies, with the exception of the Court of Justice and the Court of First Instance acting in their judicial role."

[2] See Annual Report for 1997.

[3] The project officer is a person working at the Commission.

[4] The Ombudsman understands that the Commission wishes to refer to the project manager.

[5] Financial Regulation of 21 December 1977 applicable to the general budget of the European Communities (OJ 1977 L 356, p. 1).

[6] Original English version.

[7] Original English version.

[8] CORDIS is the official source of information on the framework programme calls for proposals and is managed by the Publications Office. On 11 July 2008, Annex II was found at the following address: http://cordis.europa.eu/fp5/cpf_annex2.htm.

[9] Article 5 states the following: "Principal contractors may conclude subcontracts where this proves necessary for the performance of their work (...) the Commission's prior approval is required (...)"

[10] Article 14(3) states the following: "(...) Each principal contractor shall be authorised to transfer the budget provided for in the table of the indicative breakdown of estimated eligible costs between categories of costs, [provided that they inform the Commission of such transfer] (...)"

[11] Decision on complaint 1840/2002/GG.