A comprehensive overview of the two options to calculate the indirect costs of Horizon Europe projects

1. Introduction

Horizon Europe, the European Union’s key funding program for research and innovation, continues the objectives set by previous programs, including Horizon 2020. It aims to support cutting-edge research projects, boost scientific excellence, encourage collaboration, and promote impactful innovation across various sectors. To achieve these goals, Horizon Europe offers numerous funding instruments and mechanisms that seek to facilitate participation from a diverse range of stakeholders, including universities, research organizations, private companies, non-governmental organizations, and individual researchers.

One of the critical aspects of managing projects funded under Horizon Europe is the accurate calculation and reporting of eligible costs. In this context, project costs can be generally divided into direct costs and indirect costs. Direct costs refer to those expenditures that can be specifically traced to a given project, such as personnel costs, consumables, travel expenses, equipment, and subcontracting related directly to the project’s implementation. Indirect costs, on the other hand, also known as overheads, encompass the broader organizational expenditures needed to support the project but which are not directly and exclusively attributable to it. Examples of indirect costs include facility maintenance, electricity, administrative support, general office supplies, and information technology infrastructure.

Under Horizon Europe, beneficiaries are required to choose and apply a consistent approach to calculating indirect costs in their grant agreements and project management processes. While earlier framework programs introduced flat-rate reimbursements for indirect costs, Horizon Europe has built upon those practices and provided more structured approaches to ensure equitable treatment of beneficiaries while simplifying administrative procedures as much as possible.

This document provides a comprehensive and in-depth exploration of the two main options available to beneficiaries for calculating indirect costs in Horizon Europe projects. It covers the legal framework, the conceptual differences between direct and indirect costs, the core principles underpinning each calculation method, and the implications for project management and financial reporting. By examining these two approaches, beneficiaries, auditors, and other stakeholders can gain insights into how to select and apply the most suitable indirect cost calculation method in alignment with Horizon Europe’s rules and regulations.

2. Context and Legal Framework

The legal basis for Horizon Europe can be found in the Regulation (EU) 2021/695 of the European Parliament and of the Council of 28 April 2021, establishing Horizon Europe – the Framework Programme for Research and Innovation. This regulation, along with the successive implementation documents and guidelines provided by the European Commission, forms the cornerstone of the requirements that beneficiaries must follow.

In terms of cost categories, the Horizon Europe Annotated Model Grant Agreement is a key reference document. It explains the eligibility rules, clarifies the cost classification, and outlines the procedures and requirements for reporting. According to these requirements, indirect costs must be reported in a manner that is consistent with the accounting principles and management practices ordinarily used by the beneficiaries, provided these comply with the principles of sound financial management and remain in line with the specific provisions of the Horizon Europe grant agreement.

The two approaches for calculating indirect costs in Horizon Europe build upon lessons learned from past framework programs, particularly Horizon 2020. While the overarching objective is simplification and transparency, the legal framework still allows beneficiaries the flexibility to select the method that best reflects their actual costs or, alternatively, choose a standardized rate that simplifies the administrative burden.

3. Understanding Direct and Indirect Costs

Before focusing on the two calculation options, it is important to clarify the nature of direct and indirect costs in the context of Horizon Europe:

1. Direct Costs
   These costs are directly linked to the project and can be attributed to it with a high degree of accuracy. Common examples include:

   • Personnel costs: salaries, social security charges, and other remuneration of staff involved in the project’s tasks.
   • Travel and subsistence: travel tickets, accommodations, and daily allowances for project-related meetings or conferences.
   • Equipment: purchase, depreciation, or other costs related to equipment used exclusively or primarily in the project.
   • Consumables: laboratory supplies, chemicals, or other materials directly needed for the project’s activities.
   • Subcontracting costs: expenses for third-party services essential to the project’s objectives.

2. Indirect Costs (Overheads)
   These costs are necessary for the implementation of a project but cannot be attributed directly to it because they are shared across multiple activities or projects within an organization. Illustrative examples of indirect costs include:

   • Facility costs: rent, utilities, and maintenance for the premises used by project staff but shared with other teams.
   • Administrative costs: finance, human resources, procurement, and other administrative support services.
   • IT infrastructure: costs for internet connectivity, server maintenance, and general IT support.
   • Office supplies and equipment: shared printers, paper, stationery, and other general supplies not tracked on a per-project basis.

Beneficiaries must adopt an approach that segregates direct costs from indirect costs accurately. This segregation is essential not only for meeting the program’s eligibility requirements but also for ensuring that project budgets remain transparent and that the European Commission can confirm compliance with the principles of efficiency, accountability, and value for money.

4. Rationale for Two Calculation Options

Beneficiaries of Horizon Europe projects include a wide variety of legal entities, each with different internal accounting methods, operational structures, and administrative capacities. Some large research organizations or universities have well-defined internal cost allocation systems that allow them to trace overheads precisely to various projects and departments. In contrast, smaller companies or organizations may prefer a simpler approach to minimize administrative burdens. Recognizing this diversity, the European Commission and the regulatory framework have laid out two principal options for calculating indirect costs:

1. Flat Rate Option (25%)
2. Actual Indirect Costs Option (based on real indirect costs under specific conditions)

While the first method offers simplicity, the second method seeks to accommodate beneficiaries that maintain sophisticated cost accounting systems capable of capturing and attributing their actual indirect costs more precisely. Each option comes with distinct eligibility requirements, implementation steps, and implications for project budgets and financial reporting. The following sections explore these two options in detail, explaining how beneficiaries may choose, justify, and apply them in their grant agreements.

5. Option One: Flat Rate for Indirect Costs

5.1 Overview of the Flat Rate Option

The flat rate option is the simpler of the two methods. Under this approach, the beneficiary multiplies its eligible direct costs by a predetermined percentage to arrive at an amount representing the indirect costs. Under Horizon Europe, the standard flat rate for indirect costs is set at 25 percent of the eligible direct costs. This rate is applied automatically to most direct costs, with a few exceptions specified by the grant agreement (notably, certain cost categories, such as subcontracting, may be excluded from the base to which the rate is applied).

This single percentage was selected as a balance between providing sufficient reimbursement for overheads and limiting the administrative effort required to demonstrate real indirect costs. By offering a consistent percentage for all beneficiaries, the European Commission aims to reduce complexity in the grant preparation phase and during project implementation.

5.2 Key Features of the Flat Rate Option

1. Simplicity
   The flat rate method does not require detailed tracking and allocation of actual indirect costs on a per-project basis. Once the beneficiary confirms its direct costs, the indirect costs are calculated by applying the 25 percent rate to the eligible direct cost categories allowed by the grant agreement.

2. Uniform Application
   Since the flat rate percentage is standardized, all beneficiaries that select this method apply the same rate, simplifying collaboration in consortia where multiple organizations are involved. This uniform application also reduces the risk of inconsistencies in cost allocation across partners.

3. Exclusions from the Calculation
   Certain cost categories do not generate overhead under this method. In particular, costs for subcontracting and financial support to third parties are typically excluded from the direct cost base when applying the flat rate. Beneficiaries must consult the annotated model grant agreement to confirm any specific categories that do not qualify for indirect cost calculation.

4. Limited Justification Required
   Beneficiaries opting for the flat rate method are generally not required to provide elaborate justifications or supporting documentation beyond normal project cost reporting. They are exempt from the potential complexities associated with demonstrating that individual indirect costs meet eligibility criteria.

5. Broad Compatibility
   Because it is straightforward, the flat rate option is suitable for most beneficiaries, especially those without sophisticated cost accounting systems or those who wish to reduce administrative overhead in financial reporting.

5.3 Steps to Implement the Flat Rate Option

1. Identify Eligible Direct Costs
   The beneficiary first identifies the direct costs that contribute to the project, ensuring compliance with the eligibility rules under Horizon Europe. Categories like personnel, travel, consumables, and equipment can typically be included, while cost categories like subcontracting may require exclusion from the overhead base.

2. Apply the 25 Percent Rate
   The beneficiary multiplies the total eligible direct costs (excluding categories that are ineligible for overhead calculation) by 25 percent. This calculation yields the total indirect cost amount to be included in the budget and subsequent financial statements.

3. Report in the Financial Statements
   During the financial reporting, the beneficiary records its direct costs in their respective categories and adds a separate line item for indirect costs, which is the product of the flat rate calculation. Supporting documentation for direct costs must still be maintained, but separate documentation for overheads is largely unnecessary under this method.

4. Maintain Compliance
   Although this method is relatively simple, beneficiaries must still ensure that they correctly identify which costs are eligible as direct costs and which must be excluded from the indirect cost calculation base. Regular internal checks can help maintain compliance with Horizon Europe rules.

5.4 Scenarios Where the Flat Rate Option is Particularly Attractive

The flat rate method is often preferred by:

• Small and Medium-Sized Enterprises (SMEs): SMEs frequently lack the administrative capacity and robust financial systems to track actual overheads in detail. The 25 percent flat rate simplifies their reporting obligations.
• New Participants in EU Funding Programs: Entities that are less familiar with EU project cost rules often find the flat rate method more approachable during their first experiences with European-funded research projects.
• Organizations with High Administrative Turnover: In cases where administrative staff may not have the continuity or expertise to manage complex cost allocations, the flat rate method reduces risk of error.

6. Option Two: Actual Indirect Costs

6.1 Overview of the Actual Indirect Costs Option

While the flat rate option is the default and most common approach, some beneficiaries may find it more appropriate to calculate their indirect costs on the basis of actual expenses incurred. This option requires robust accounting systems that can attribute overhead items to different cost centers or projects. Under Horizon Europe rules, beneficiaries choosing to declare actual indirect costs must fulfill specific requirements to demonstrate that their cost allocation methodology aligns with the program’s eligibility rules and is consistently applied across their organization.

The basic principle of the actual indirect costs option is that the beneficiary calculates the total pool of indirect costs for a given period and allocates a portion of it to the Horizon Europe project. This portion is typically determined through an allocation key, reflecting how the project consumes organizational resources relative to other organizational activities. This key can be based on parameters such as staff effort, floor area occupancy, or other metrics that link overhead consumption to the project’s activity.

6.2 Key Features of the Actual Indirect Costs Option

1. Greater Accuracy
   For organizations capable of capturing overhead data and attributing it to specific projects, this method can more accurately reflect the actual resources consumed by the Horizon Europe project.

2. Higher Administrative Burden
   Beneficiaries opting for this approach must maintain detailed records and justify their methodology for allocating overhead costs. They may be subject to additional scrutiny from auditors seeking to verify that indirect costs are accurately attributed and do not include any ineligible costs.

3. Alignment with Established Accounting Practices
   Organizations that already have advanced cost accounting systems may find it simpler to use their own methodology than to adopt the flat rate approach, which could either under-recover or over-recover overheads relative to actual usage.

4. Audit Requirements
   Beneficiaries must be able to demonstrate consistency, transparency, and correctness in their indirect cost calculations. Auditors will likely review the organization’s internal cost allocation policies, accounting records, and internal control procedures to ensure that all overheads declared are legitimate and consistently attributed.

5. Potential for Discrepancies
   Since the actual indirect costs approach involves multiple variables and allocation methods, beneficiaries must pay attention to avoid double-counting costs, attributing costs to incorrect cost centers, or including ineligible expenses in the overhead pool.

6.3 Eligibility Conditions for the Actual Indirect Costs Method

To qualify for using the actual indirect costs method, beneficiaries typically need to meet the following conditions:

1. Established Analytical Accounting System
   The organization must possess an analytical accounting or cost accounting system that can identify and allocate indirect costs to specific projects or departments.

2. Consistency with Usual Accounting Practices
   The cost allocation method used for Horizon Europe projects should be the same as that used in the organization’s regular accounting procedures, unless there are particular program requirements that dictate adjustments.

3. Compliance with Horizon Europe Eligibility Rules
   The organization must ensure that only eligible costs are included in the indirect cost pool. Expenditures that do not meet the program’s eligibility criteria, such as entertainment or excessive hospitality, should be excluded.

4. Documentation and Transparency
   Beneficiaries must document their overhead calculation methodology, explaining how they collect and attribute overhead costs. This documentation should be readily available for verification by the European Commission or external auditors.

5. Approval in Grant Agreement
   In some cases, beneficiaries may need to indicate during the grant negotiation phase that they intend to use the actual indirect cost method, obtaining explicit approval or recognition from the relevant authorities.

6.4 Steps to Implement the Actual Indirect Costs Option

1. Define the Overhead Pool
   The beneficiary identifies which indirect costs are part of the total overhead pool. This may involve analyzing the organization’s general ledger to isolate costs that are not directly attributable to any single project.

2. Establish an Allocation Key
   The beneficiary determines how these overhead costs will be divided among different projects or cost centers. Common allocation keys include the ratio of personnel costs, the ratio of full-time equivalent staff, the square footage of office space used, or total direct costs. The key must be justifiable and consistently applied.

3. Apply the Allocation Key
   Once the overhead pool and the allocation key are defined, the beneficiary calculates the share of overheads that can be allocated to the Horizon Europe project. This figure is reported as the project’s actual indirect costs.

4. Maintain Records
   The beneficiary collects and retains evidence and documentation that supports the overhead calculations, including invoices, accounting system records, and the methodology for the allocation key.

5. Audit and Reporting
   The beneficiary includes the actual indirect costs in the project’s financial reports. During audits, the beneficiary must be prepared to present the detailed accounting records and justify the allocation key’s correctness.

6.5 Scenarios Where the Actual Indirect Costs Option is Beneficial

• Organizations with Advanced Cost Accounting Systems: Large research centers, universities, or multinational companies may already use sophisticated systems that distribute overheads with a high level of detail and accuracy.
• Entities Expecting Higher Indirect Costs than 25 Percent: If a beneficiary’s overhead structure is significantly more resource-intensive, the 25 percent flat rate might not cover the actual indirect costs. In such instances, the organization may prefer to demonstrate real costs.
• Entities with Obligations to National Authorities: In some cases, beneficiaries may be required under national or institutional regulations to track and report full cost coverage. Using actual indirect costs ensures consistency between EU project reporting and local reporting requirements.

7. Comparison Between the Two Options

When selecting between the flat rate and actual indirect costs options, beneficiaries must consider multiple factors, including administrative capacity, accuracy, and consistency with internal accounting practices. The following table summarizes key points of comparison:

This comparison illustrates that the flat rate method tends to be more appealing to entities that value simplicity and do not want to invest additional resources in detailed cost allocations. In contrast, the actual indirect costs method may be better suited for organizations that prefer a more tailored reflection of their overhead consumption and have the capacity to manage the complexities involved.

8. Budgeting and Planning Considerations

Regardless of the chosen method, beneficiaries must integrate the chosen indirect cost calculation approach into their budgeting and planning processes from an early stage:

1. Pre-Award Phase
   During proposal development, beneficiaries should identify which method they intend to use for indirect costs. In a collaborative consortium, partners may employ different methods, which is acceptable as long as each beneficiary meets the eligibility criteria for its chosen method. The projected indirect costs should be included in the overall project budget and justified accordingly.

2. Grant Agreement Preparation
   Once a project proposal is successful, the negotiation and preparation of the grant agreement will involve confirming the selected indirect cost calculation option. This step is critical to ensure clarity and alignment among all parties regarding how overheads will be claimed.

3. Implementation Phase
   Beneficiaries should ensure that their internal systems and processes are set up to monitor and record costs consistent with the requirements of their chosen method. This includes training administrative personnel, communicating clear guidelines to project managers, and maintaining documentation that supports indirect cost calculations.

4. Monitoring and Reporting
   Regular monitoring of project expenditures ensures that direct and indirect costs do not exceed the allocated budget ceilings. Interim reporting periods offer an opportunity to review financial statements and ensure that both direct and indirect costs are justified according to Horizon Europe rules.

5. Audit Readiness
   Beneficiaries should always be prepared for potential audits, maintaining documentation and internal controls that substantiate the methodology for overhead calculations. For the flat rate method, this may be limited to ensuring correct direct cost reporting, whereas for actual indirect costs, this includes verification of cost pools and allocation keys.

9. Common Pitfalls and Challenges

Although the Horizon Europe rules seek to simplify indirect cost calculations, certain challenges can arise. Beneficiaries that are aware of these potential pitfalls can better prepare to address them:

1. Misclassification of Costs
   A recurring challenge is distinguishing between direct and indirect costs, particularly when certain expenditures might have characteristics of both. For example, large equipment items may sometimes be used across multiple projects and departments. Clarity regarding how these costs should be treated in each project is essential.

2. Excluding Ineligible Items
   Whether using the flat rate or actual indirect costs approach, beneficiaries must ensure that the overhead calculation does not include ineligible items. Expenditures for activities unrelated to the project or those disallowed under the grant agreement should never be included in either direct or indirect cost reports.

3. Overlapping Project Timelines
   Many research organizations run several projects concurrently. This overlap can complicate the attribution of indirect costs or even direct costs if there is insufficient clarity on shared resources, such as laboratory consumables or staff time. Beneficiaries must maintain robust time-recording systems and inventory tracking if they wish to ensure proper cost allocation.

4. Varying Audit Methodologies
   Horizon Europe projects can be audited by different bodies, including the European Commission’s staff, external auditors appointed by the Commission, or national auditors in some cases. Each auditor may approach cost verification with a different focus, so beneficiaries should keep comprehensive records to address varied inquiries.

5. Changes in Organizational Structure
   If the beneficiary undergoes organizational restructuring or merges with another entity, the overhead calculation methodology may need to be revised. It is crucial to document such changes and inform the granting authority if they have a material impact on the project’s cost allocation.

10. Detailed Example of the Flat Rate Approach

To illustrate the simplicity of the flat rate approach, consider a hypothetical research project where the direct costs are broken down as follows:

• Personnel Costs: EUR 200,000
• Travel Costs: EUR 20,000
• Equipment (Depreciation): EUR 30,000
• Subcontracting: EUR 10,000
• Consumables: EUR 40,000

According to Horizon Europe rules, subcontracting costs typically do not generate indirect costs. Therefore, the base for calculating overhead is:

• Total direct costs (excluding subcontracting) = (200,000 + 20,000 + 30,000 + 40,000) = EUR 290,000

Applying the 25 percent flat rate:

• Indirect costs = 290,000 x 0.25 = EUR 72,500

The beneficiary would thus include EUR 72,500 as overhead in the budget. The total cost claimed (direct + indirect) would be:

• Total costs claimed = EUR 290,000 (eligible direct costs) + EUR 10,000 (subcontracting) + EUR 72,500 (indirect costs) = EUR 372,500

This example demonstrates how straightforward the flat rate method can be in practice. The beneficiary does not need to collect electricity bills, administrative staff timesheets, or other overhead invoices for the project specifically. They only need to correctly identify direct costs, exclude ineligible cost categories from the overhead base, and then multiply by 25 percent.

11. Detailed Example of the Actual Indirect Costs Approach

In a more complex scenario, consider a large research university that decides to use its analytical accounting system to declare real indirect costs for a Horizon Europe project. The university’s annual overhead pool comprises:

• Administrative Staff Salaries and Related Costs: EUR 2,000,000
• Building Rent, Utilities, and Maintenance: EUR 1,000,000
• IT Services and Library Costs: EUR 500,000
• General Office Supplies: EUR 200,000
• Other Shared Services: EUR 300,000

Total overhead pool: EUR 4,000,000

The university determines that its total direct costs for all ongoing projects and core operations in the same year amount to EUR 20,000,000. The ratio of overhead to direct cost at an institutional level thus stands at 4,000,000 / 20,000,000 = 20 percent. The university’s cost accounting policy dictates that each project be allocated overhead based on its share of direct costs relative to the institution’s total direct costs.

If the Horizon Europe project’s direct costs (excluding subcontracting if not allowable for overhead) amount to EUR 500,000 in that year, the allocated overhead would be 20 percent of EUR 500,000, which equals EUR 100,000.

However, this is a simplified illustration. In reality, universities often have multiple cost centers, and overhead might be allocated differently to teaching, research, and other departments. Additional complexity arises if the university calculates overhead rates specifically for research activity, distinguishing it from other functions. In such cases, the organization might have an overhead pool that only captures costs relevant to research, leading to a different overhead distribution ratio.

Using the actual indirect costs approach requires the university to document:

1. How it collects and categorizes indirect costs.
2. How it differentiates overhead pools if there are multiple.
3. The precise allocation key and rationale for using it.
4. Proof of consistent use across all research projects, not just for Horizon Europe projects.

During an audit, the university would need to present these records. If the auditors find that the methodology is sound and that the overhead pool only includes eligible costs, the university’s claimed EUR 100,000 in indirect costs for the Horizon Europe project would be considered valid.

12. Financial Reporting Implications

Regardless of which option is chosen, the following reporting considerations apply:

1. Periodic Reporting
   Most Horizon Europe projects follow periodic reporting intervals (e.g., every 12 or 18 months). Beneficiaries must compile and submit financial statements in the form specified by the European Commission. These statements provide a breakdown of direct costs by category and a separate line for indirect costs (either by applying the flat rate or by indicating the actual costs with supporting documentation).

2. Use of the Funding & Tenders Portal
   The EU’s Funding & Tenders Portal is typically used for submitting these reports. Beneficiaries must input cost data carefully and ensure consistency with other project documents, such as technical reports on progress and deliverables.

3. Certificate on the Financial Statements
   For higher-value Horizon Europe grants, a Certificate on the Financial Statements (CFS) may be required at the end of the project or once a certain financial threshold is reached. An independent auditor issues this certificate, verifying the costs claimed by the beneficiary.

   • Under the flat rate method, the CFS will focus primarily on verifying direct costs.
   • Under the actual indirect costs method, the CFS will also examine the beneficiary’s accounting records related to overhead calculation.

4. Exchange Rates and Currency Fluctuations
   For beneficiaries located in countries with currencies other than the euro, indirect costs must be calculated and reported using the applicable exchange rate rules established by the grant agreement. This requirement applies equally to either indirect cost approach.

5. Consistency Across Reporting Periods
   Once a beneficiary selects an indirect cost calculation method, it should remain consistent throughout the project, barring exceptional circumstances. Changes to the methodology might lead to questions or require amendments to the grant agreement.

13. Audit Considerations

Audits can occur during or after the project’s lifetime, and beneficiaries must keep financial records for a prescribed period (often up to two years after the balance payment) in compliance with Horizon Europe rules. Key points for each method include:

1. Flat Rate Audits

   • Primarily focus on verifying that the direct costs are eligible and exclude cost items that should not be part of the overhead base.
   • Auditors will check for double counting (for instance, ensuring that some costs are not claimed both as direct and indirect).

2. Actual Indirect Costs Audits

   • Review of the entire cost accounting system, including the creation of the overhead pool, the allocation key, and the exclusion of ineligible expenses.
   • Verification of consistency with internal accounting policies and with other projects and activities within the organization.

Overall, well-prepared beneficiaries typically maintain internal controls and documentation procedures that facilitate smooth audits. Regular internal or external reviews during the project can help identify issues early and correct them before the final audit.

14. Harmonization with Other Funding Programs

Horizon Europe often overlaps with other funding programs at national and regional levels. Some beneficiaries also participate in programs managed by other European Commission bodies or by public entities worldwide. While the rules for indirect cost calculation might differ across programs, it is crucial for beneficiaries to maintain a single robust system that can adapt to multiple requirements.

Beneficiaries using the actual indirect costs approach for other major grants, such as those funded by national research councils, may already have established overhead calculation procedures that are recognized and approved. In many cases, the same procedures can be adapted to meet Horizon Europe’s requirements, simplifying the administrative workload.

Meanwhile, beneficiaries that consistently rely on a flat rate method in different contexts must confirm that this approach does not conflict with other relevant funding bodies’ stipulations.

15. Strategic Choice of Indirect Cost Calculation Method

While beneficiaries are not obliged to justify their choice of indirect cost calculation method to an extensive degree, it is prudent to approach the decision strategically:

1. Administrative Capabilities
   An organization should assess whether it has the necessary expertise and systems to handle the actual indirect cost approach effectively. If not, adopting the flat rate might be more time- and cost-efficient.

2. Financial Projections
   By estimating the total direct costs of a project, beneficiaries can compare the estimated overhead recovery under the 25 percent rate to a rough calculation of actual overhead costs. If the difference is substantial, the additional administrative burden of using actual costs might be justified.

3. Consistency with Institutional Policies
   Some universities or research institutions have strict policies that require full cost coverage on projects. If so, using the actual indirect cost approach can ensure alignment between institutional reporting and project reporting.

4. Risk Management
   Each method carries different levels of audit risk. If an organization is concerned about properly supporting an actual indirect cost methodology, the flat rate can be less risky in terms of compliance checks.

5. Future Implications
   Beneficiaries might also consider how they plan to participate in other Horizon Europe calls or other EU programs. Choosing a single method across multiple projects could simplify internal processes if that method is consistently supported by the organization’s management systems.

16. Examples of Best Practices

Below are some of the best practices that beneficiaries can adopt, regardless of which indirect cost option they select:

1. Clear Internal Guidelines
   Publish an internal policy or guideline that explains, in plain language, how to identify, record, and report direct and indirect costs. This document serves as a reference for both project managers and administrative staff.

2. Training Sessions
   Conduct periodic training for staff, ensuring that everyone involved in financial administration understands Horizon Europe rules. For organizations using actual indirect costs, specialized training in cost accounting may be necessary.

3. Regular Reconciliation
   Implement monthly or quarterly financial reconciliations, aligning the project budget with the organization’s accounting records. Early identification of anomalies can prevent issues from accumulating.

4. Robust Time-Recording Systems
   If staff members work on multiple projects, beneficiaries should ensure that timesheets or equivalent systems are in place to track personnel costs accurately. Although personnel costs are typically considered direct costs, their accurate recording also impacts how indirect costs might be allocated if the organization relies on staff-based allocation keys.

5. Document Retention Policies
   Maintain a consistent policy on how long financial and administrative documents must be kept, in line with grant agreement requirements. These records should be easily accessible in the event of an audit.

17. Coordination Within a Consortium

Horizon Europe projects often involve consortia of multiple beneficiaries, including academic institutions, private companies, and public bodies from different EU Member States or associated countries. While each beneficiary can select its own method to calculate indirect costs, consortium coordinators should keep the following considerations in mind:

1. Consistency and Clarity in the Consortium Agreement
   The consortium agreement should clarify that beneficiaries may use different methods for indirect cost calculations. It is recommended to establish a reporting format that accommodates both flat rate and actual indirect cost figures in a coherent manner.

2. Comparability of Budgets
   When setting up the overall project budget, the coordinator may wish to understand how each partner calculates its overheads, as this will affect the total budget and potentially the distribution of funding.

3. Potential Impact on Cost-Sharing
   In certain projects, in-kind contributions or cost-sharing arrangements may be relevant. Different approaches to overhead calculation can influence how partners perceive fairness in cost and revenue distribution.

4. Communication with the European Commission
   The project officer overseeing the grant may ask for clarifications regarding overhead methods used by specific partners. Having transparent documentation readily available can facilitate straightforward communication.

18. Future Developments and Simplifications

The European Commission and other EU institutions continuously explore ways to simplify the administrative processes for research and innovation funding. Flat rate approaches have, over multiple framework programs, proven to be an effective simplification tool, especially for small organizations and newcomers. There is ongoing discussion regarding further standardization of cost categories, lump-sum financing, and alternative forms of simplified cost options.

During Horizon Europe, some calls may pilot or adopt different funding modalities (e.g., lump-sum funding) where indirect cost calculation may be embedded into a single fixed amount per project task or deliverable. In such cases, the distinction between direct and indirect costs can be less prominent or entirely unnecessary. However, for most standard actions under Horizon Europe, the two options described in this document remain the primary methods for indirect cost calculation.

19. Conclusion

The two options for calculating indirect costs in Horizon Europe—namely the flat rate method (25 percent) and the actual indirect costs method—reflect the program’s effort to balance accuracy with administrative simplicity. By offering a straightforward flat rate, the European Commission reduces the burden on organizations that do not have extensive cost accounting systems. Meanwhile, the actual indirect costs option allows beneficiaries with robust financial structures to claim a more precise share of overhead expenses.

When choosing between these two methods, beneficiaries must consider factors such as the complexity of their internal accounting systems, their administrative resources, the relative size of their overheads, and their broader institutional policies. The goal is to ensure compliance with Horizon Europe’s legal framework while maintaining efficiency in project management and financial reporting.

Regardless of the selected method, sound project governance, clear internal policies, regular training, and meticulous record-keeping are essential. These practices not only facilitate accurate cost reporting but also prepare beneficiaries for potential audits. In the case of consortia, open communication and explicit guidelines in the consortium agreement help avoid misunderstandings about overhead calculations.

As Horizon Europe continues to evolve, so will the ways in which indirect costs and overall project financing are managed. Nonetheless, the core principles of eligibility, consistency, and transparency remain at the forefront. By understanding the nuances of the flat rate and actual indirect costs approaches, beneficiaries can confidently navigate the financial aspects of their projects and focus on delivering impactful research and innovation outcomes.