Eligible and ineligible costs – practical examples for companies

Eligible and ineligible costs in a grant application should always be assessed on the basis of the rules of the specific call, the catalogue of costs, the guidelines and the project objective. An eligible cost is expenditure that can be covered by funding if it is necessary, reasonable, properly documented and incurred in accordance with the programme rules. An ineligible cost may be needed by the company, but it will not be financed by the grant and must be covered from the entrepreneur's own funds.

In practice, errors in costs are one of the most common causes of problems at the stage of assessment, signing the agreement, implementation and settlement of the project. An entrepreneur may correctly describe the objective of the investment, but if they enter costs in the budget that are inconsistent with the catalogue, too general, inflated or unrelated to the project, they risk a reduction in the amount of funding, the need to correct the application or the expenditure being challenged later.

What are eligible costs?

Eligible costs are expenditure that can be covered by funding under a given programme. However, this does not mean that every cost entered in the budget will automatically be accepted. The expenditure must meet the conditions set out in the call documentation and comply with the eligibility rules.

An eligible cost should above all be:

• consistent with the objective of the programme
• consistent with the scope of the project
• necessary to achieve the project objective
• reasonably priced
• incurred within the eligibility period
• properly documented
• assigned to the correct budget category
• compliant with State aid rules, where applicable
• compliant with contractor selection procedures
• possible to settle under the given call

The Guidelines on the eligibility of expenditure for 2021-2027 set out uniform conditions and procedures concerning the eligibility of expenditure for projects co-financed from, among others, the ERDF, ESF+, the Cohesion Fund and the JTF. However, the documentation of the specific programme must also be checked each time, as individual calls may contain more detailed restrictions. (the European Funds Portal)

What are ineligible costs?

Ineligible costs are expenditure that cannot be covered by funding. The company may incur them if they are needed to carry out the investment, but it will not receive reimbursement or an advance payment for them from programme funds.

A cost may be ineligible for several reasons:

• the given expenditure is excluded in the call rules
• the cost does not fall within the catalogue of eligible costs
• the expenditure is not directly related to the project
• the cost was incurred outside the eligibility period
• the expenditure was not properly documented
• the purchase was made in breach of procedures
• the cost is inflated or unreasonable
• the expenditure does not follow from the budget approved in the application
• the cost relates to the company's day-to-day operations, not the project
• the expenditure is financed from another public source

In practice, an ineligible cost does not always mean an unnecessary cost. For example, a company may need additional equipment, insurance, a stock of materials or administrative expenditure that helps carry out the investment but is not covered by funding. In such a situation, these should be included as costs financed from own funds or not included in the project's eligible costs.

Eligible cost versus ineligible cost – the main difference

Put simply, an eligible cost is the part of the project financed by the grant, while an ineligible cost is expenditure that the company covers itself. The difference lies not only in the name of the cost, but in its compliance with the programme, its justification and the way it is incurred.

The same type of expenditure may be eligible in one call and ineligible in another. For example, the purchase of a fixed asset may be eligible in an investment project but ineligible in an advisory project. Advisory services may be eligible in a programme for business transformation, but may be excluded or limited in another measure. Staff salaries may be an eligible cost in an R&D project, but not necessarily in an ordinary purchasing investment.

That is why the assessment of costs should always start with three questions:

• does the call documentation allow this type of cost?
• is the cost needed to achieve the project objective?
• will the company be able to document the expenditure properly?

If the answer to any of these questions is unclear, the cost requires further analysis before it is entered in the budget.

Practical examples of eligible costs for companies

The examples below are practical and indicative. They do not replace the rules of a specific call, as each programme may have its own catalogue of costs, limits and exclusions.

Purchase of fixed assets

The purchase of fixed assets often occurs in investment, technology, production, energy, medical or digitalisation projects. It may include, for example, machinery, equipment, production lines, specialist equipment or furnishings necessary to implement the project.

Examples of costs that may be eligible:

• purchase of a production machine needed to implement a new process
• purchase of a diagnostic device in a healthcare project
• purchase of a production line enabling the manufacture of a new product
• purchase of equipment improving energy efficiency
• purchase of laboratory equipment for research and development work
• purchase of equipment needed to provide a new service
• purchase of technical infrastructure required to implement the project

The cost of purchasing a fixed asset should be described specifically. It is necessary to indicate what the device will be used for, which parameters are relevant, how the purchase affects the project objective and why it is not merely a routine replacement of equipment with no bearing on the results.

Intangible assets

In many projects, the costs of intangible assets may also be eligible. This applies in particular to digitalisation, technology, innovation and implementation projects.

Examples of costs that may be eligible:

• purchase of software licences
• purchase of a specialist IT system
• purchase of technology or know-how
• purchase of rights to use a technical solution
• implementation of an ERP, CRM, MES or other system supporting processes
• purchase of software modules needed to implement the project
• integration of IT systems, if permitted in the call

In this case, it is particularly important to check whether what is financed is the purchase of a licence, implementation, subscription, configuration, maintenance, servicing or only selected elements. Subscription and maintenance costs are sometimes treated differently from a one-off software purchase.

Construction works and adaptation works

Construction works may be eligible in infrastructure, medical, production, energy or accessibility projects, but they are usually subject to additional restrictions. Not every renovation of a company's premises will be an eligible cost.

Examples of costs that may be eligible:

• adaptation of premises for a new production line
• adapting premises to sanitary or technical requirements
• construction works necessary to install equipment
• modernisation of energy infrastructure
• adapting a building to the needs of persons with disabilities
• installation required to put the purchased equipment into operation
• construction works resulting directly from the scope of the project

The cost of construction works should have a technical and project justification. If the construction works are a general refresh of the company's premises, they may be considered ineligible. If they are necessary to launch the investment covered by the project, they may be eligible, provided the call documentation allows for this.

Advisory and expert services

Advisory services may be eligible in selected programmes, especially where the project includes an audit, transformation, internationalisation, strategy preparation, implementation of innovation, digitalisation or environmental activities. However, the preparation of the grant application itself is not always eligible.

Examples of costs that may be eligible:

• technology audit
• energy audit
• advisory services related to digital transformation
• advisory services related to the circular economy
• development of a business model
• development of an export strategy
• foreign market analysis
• advice on implementing innovation
• specialist technical expert opinions

An advisory service that is the subject of the project must be distinguished from administrative support related to preparing the grant documentation. In many calls, the preparation of the application, formal handling or intermediary fees for obtaining the grant are not eligible costs.

Staff salaries

Salaries may be eligible primarily in research and development, training, social, organisational or implementation projects, if the staff perform tasks directly related to the project.

Examples of costs that may be eligible:

• salaries of employees involved in R&D work
• salaries of specialists performing project tasks
• costs of the project's substantive staff
• fees of trainers or experts
• costs of the implementation team, if permitted by the programme
• salaries settled according to the rates and rules set out in the documentation

Salaries require particular caution. It is necessary to check whether the programme allows this category, what documents will be required, whether time records will be needed and whether the salary relates to real project tasks rather than the company's standard operations.

Training and upskilling

Training may be eligible if it is directly related to the project. This applies, for example, to the implementation of new technology, digitalisation, automation, process changes or the development of competences required to use the project results.

Examples of costs that may be eligible:

• training employees to operate a new machine
• training on a new IT system
• cybersecurity training in a digitalisation project
• training on the technology implemented in the project
• training related to new quality procedures
• training in competences necessary to implement the project

Training unrelated to the project, e.g. a general sales course, a language course or motivational training, may be considered ineligible if it does not follow directly from the objective and scope of the project.

Materials, components and research costs

In research and development or prototype projects, the costs of materials, components, raw materials, research, tests and validation may be eligible. However, their eligibility depends on the type of project and the programme rules.

Examples of costs that may be eligible:

• materials for building a prototype
• components for technology tests
• raw materials consumed in research and development work
• costs of laboratory tests
• costs of testing and certification, if permitted in the call
• costs of services of research organisations
• costs of validating the solution

In such projects, materials consumed in project work must be clearly separated from materials used in ongoing commercial production. As a rule, the costs of the company's standard operating activities should not be transferred to the project budget.

Practical examples of ineligible costs for companies

Ineligible costs are as important as eligible costs, as they affect the actual value of the investment and the required own contribution. The entrepreneur should know which expenditure will not be financed in order to avoid incorrect financial assumptions.

Day-to-day operating costs of the company

In most programmes, the grant is not intended to finance the company's ordinary operating activities. If the expenditure relates to the day-to-day functioning of the business rather than the project, it may be considered ineligible.

Examples of costs that are usually ineligible:

• rent for an office not directly related to the project
• standard utility bills
• ongoing accounting costs
• telephone and internet costs in ordinary operations
• office supplies used generally in the company
• administrative costs unrelated to the project
• ongoing website maintenance
• the company's standard legal service costs

Some programmes allow indirect costs or flat-rate administrative costs, but this must follow from the call documentation. It should not be assumed automatically.

Costs incurred before the eligibility period

A common mistake is incurring expenditure before the date from which costs can start to be eligible. In some programmes, starting the project before submitting the application or before signing the agreement may rule out the possibility of financing certain expenditure.

Examples of risky actions:

• signing a contract with a supplier too early
• paying an advance before the eligibility period
• starting construction works before the permitted date
• ordering a machine before submitting the application, if the programme prohibits this
• issuing an invoice before the eligibility date
• acceptance of the subject of the contract before the project starts

Before entering into any commitments with suppliers, check the call rules and the rules for starting project implementation.

Costs unrelated to the project objective

Even if a given type of cost appears in the eligible catalogue, it may be challenged if it is not related to the project. The mere fact that the programme allows the purchase of equipment does not mean that any equipment will be eligible.

Examples of problematic costs:

• purchase of a car without a clear link to the project objective
• purchase of office furnishings unrelated to the investment
• purchase of equipment with parameters exceeding the needs of the project
• purchase of equipment that does not affect the indicators
• purchase of items mainly serving private or mixed use
• purchase of assets that will not be used in the project

In such cases, the justification is of key importance. If the cost does not follow from the problem, objective, activities and results of the project, it may be assessed negatively.

Inflated or unreasonable costs

A cost may be ineligible in whole or in part if its value is inflated in relation to market prices. This applies in particular to expenditure not supported by offers, a market survey or a technical justification.

Examples of mistakes:

• accepting a price without offers and comparison
• entering the highest possible value without justification
• purchasing a device with parameters excessive for the project
• no explanation of why a more expensive option was chosen
• no breakdown of the cost into its components
• failure to take into account real market rates

The principle of cost rationality matters both at the assessment stage and during subsequent implementation. The European Funds Portal stresses that expenditure should be incurred in accordance with the rules set out in the eligibility guidelines and with procurement procedures, including via the Baza Konkurencyjności where applicable. (the European Funds Portal)

VAT as an eligible or ineligible cost

VAT requires individual assessment. In some projects it may be an eligible cost, but only if the applicant has no legal possibility of recovering it and the call documentation allows such a solution. If the company can recover VAT, the tax should, as a rule, not be financed by the grant.

Before preparing the budget, check:

• whether the company is an active VAT payer
• whether the purchase will be related to taxable sales
• whether there is a right to deduct VAT
• whether the programme allows VAT to be eligible
• whether the budget should be prepared in net or gross amounts
• whether a VAT declaration is required
• whether VAT should be included as an ineligible cost

Incorrect treatment of VAT may significantly change the level of own contribution. That is why it must be determined already at the budget planning stage whether the grant will cover net or gross amounts, or only part of the costs.

How to check whether a cost is eligible?

The eligibility of a cost should be assessed before the expenditure is entered in the budget. It should not be assumed that a cost will be accepted just because the company needs it.

A practical checklist includes:

• checking the project selection rules
• checking the catalogue of eligible costs
• checking the catalogue of ineligible costs
• analysis of the project objective
• analysis of the link between the cost and project activities
• verification of the eligibility period
• assessment of the reasonableness of the price
• checking the required documents
• assessment of the cost's impact on the indicators
• analysis of the sources of financing the own contribution
• checking the VAT rules
• checking the supplier selection procedures

If in doubt, it is worth taking a more cautious approach. It is better to remove a cost from the eligible part or include it as ineligible than to risk it being challenged later.

How to document eligible costs?

An eligible cost must be capable of being documented. The documentation should confirm not only the fact of purchase, but also its compliance with the project, the procedure and the budget.

Documents that may be needed:

• invoices
• contracts with contractors
• acceptance reports
• proof of payment
• offers and market survey
• documentation from the Baza Konkurencyjności
• technical specifications
• cost estimates
• photographic documentation
• task implementation reports
• time records, if applicable
• accounting documents
• declarations required by the institution
• documents confirming that the indicators have been achieved

At the project settlement stage, the institution may verify whether the cost was incurred in accordance with the application, the agreement and the programme rules. The European Funds Portal indicates that payment claims are used, among other things, to reimburse costs incurred, to settle advance payments and to account for expenditure, and that a statement of expenditure in line with the application's cost estimate must be attached when settling costs. (the European Funds Portal)

The most common mistakes companies make with eligible costs

Cost errors can arise both when preparing the application and during project implementation. It is worth limiting them from the outset, as correcting the budget later can be difficult or impossible.

The most common mistakes are:

• entering a cost without checking the eligibility catalogue
• treating a company cost as a project cost
• no link between the expenditure and the project objective
• no justification for the amount of the cost
• failure to take VAT into account
• omitting ineligible costs from the financing plan
• starting purchases before the permitted date
• no offers or market survey
• describing the cost to fit a specific supplier
• entering too general a name for the expenditure
• underestimating the costs of installation, delivery or commissioning
• no documents confirming the purchase and acceptance
• breach of the competitiveness rules
• failure to take into account the cost's impact on the indicators

A cost error can have financial consequences. Even if the project is selected for funding, expenditure that does not comply with the rules may be considered ineligible at the settlement stage.

Eligible costs and the Baza Konkurencyjności

In EU projects, the rules for selecting suppliers are of particular importance. If a given purchase is subject to the competitiveness principle, the beneficiary must conduct the procedure in accordance with the programme requirements. Baza Konkurencyjności (Competitiveness Database) is a tool for publishing notices by beneficiaries using EU funds. (the European Funds Portal)

Before making a purchase, it is worth checking:

• whether the purchase requires the application of the competitiveness principle
• whether the contract value exceeds the relevant threshold
• whether the description of the subject of the contract is neutral
• whether the conditions for participation do not restrict competition
• whether the time limit for submitting offers is correct
• whether the offer assessment criteria are objective
• whether the documentation from the contractor selection will be complete
• whether the expenditure will be consistent with the project budget

A breach of procurement procedures may result in a financial correction or part of the expenditure being deemed ineligible. That is why a cost should be planned not only with the application in mind, but also with a view to the subsequent procurement.

How can the DOTACJE ONLINE team of experts help with cost assessment?

Assessing eligible and ineligible costs requires an analysis of the specific programme, the call rules, the catalogue of costs, State aid rules, VAT, the budget, the schedule and the subsequent settlement. It is not enough to check the name of the expenditure alone. It is necessary to assess whether the cost follows from the project and whether it can be defended during assessment and audit.

As a first step, you can use the free AI search engine and check the available grants for the planned investment. Those analysing several possible programmes can also use the grant search engine.

If the project requires individual analysis, it is worth considering grant advisory services or direct contact with an expert. This makes it possible to assess not only the eligibility of expenditure, but also its link to the project objective, budget, indicators and settlement risks.Contact an expert

For the full scope of support, see grant advisory services.