The incentive effect in grant projects – why must an investment not be started too early?

The incentive effect is one of the fundamental conditions for the eligibility of expenditure in projects co-financed from EU funds. In practice, it means that the funding must have a real impact on the decision to carry out the investment – the project cannot be started before the grant application is submitted. A breach of this principle most often results in support being refused or the funds paid having to be returned.

Below we explain exactly what the incentive effect is, how to document it correctly and what mistakes applicants most often make.

What is the incentive effect and where does this requirement come from?

The incentive effect (in Polish: efekt zachęty) is a concept derived from EU State aid regulations. Its legal basis lies in Commission Regulation (EU) No 651/2014 of 17 June 2014 (GBER – General Block Exemption Regulation), as amended by Regulation 2023/1315. Article 6 of this Regulation states explicitly that State aid has an incentive effect if the beneficiary has submitted a grant application before work on the project starts.

This principle is not merely a formality. Its purpose is to ensure that public funds go to projects that would not have been implemented without support, or would have been implemented on a significantly smaller scale. Funding is therefore intended to change the applicant's economic behaviour – hence the name “incentive effect”.

In the Polish system for implementing European funds, this principle is reflected in programme documents and the guidelines of managing authorities. The Guidelines on the eligibility of expenditure under programmes financed from the ERDF, ESF+ and CF specify that the project start date may not precede the date of submission of the grant application, unless the call rules or the grant agreement explicitly provide otherwise.

What does “start of the project” mean?

This question is crucial and gives rise to the most misunderstandings in practice. Applicants often mistakenly assume that the project starts only when the contract with the contractor is signed or the first payment is made. However, the interpretation of managing authorities is much broader.

Under the applicable guidelines, the start of project implementation includes:

• signing any contract with a contractor or supplier concerning the subject of the project (even a preliminary agreement or letter of intent, if it gives rise to financial obligations),
• placing an order for the supply of machinery, equipment or services covered by the project,
• starting construction or installation works,
• making any payments related to the investment (including an advance payment or deposit),
• issuing an internal decision, management board resolution or other corporate document irrevocably approving the project and earmarking funds for its implementation – in the case of large enterprises in the context of regional aid.

By contrast, activities which as a rule are not considered to be the start of the project include:

• feasibility studies, market analyses, energy audits and other preparatory work,
• obtaining building permits and other administrative decisions,
• preparing technical and design documentation (provided that its costs are not included in the application as eligible costs),
• valuations, information-only requests for quotation and legally non-binding market surveys.

It should be emphasised that the interpretation of the above categories may differ depending on the operational programme and the implementing body. In case of doubt, a written position should be requested from the competent intermediate body or managing authority.

Why do applicants make mistakes in this area?

Breaches of the incentive effect principle rarely result from bad faith. Much more often they are the result of the following situations:

• Time pressure and operational needs. The entrepreneur needs a new machine park or an extension of the production hall, and the investment schedule is dictated by commercial contracts. The call for applications opens during or after the first implementation steps have been taken.
• Not knowing where preparation ends and implementation begins. Many companies commission external design offices or architects to prepare complete technical documentation, assuming that this is only a preparatory stage. The problem arises when the contract with the designer includes author's supervision during construction – such a contract may already be treated as part of project implementation.
• Earlier corporate decisions. In capital companies, the management board or supervisory board often adopts resolutions approving investments many months before the application is submitted. In certain regional aid schemes for large enterprises, such documents may determine that there is no incentive effect.
• Misinterpretation of cost eligibility. Some applicants confuse the concept of “cost eligibility” with “no breach of the incentive effect”. These are, however, two separate issues: a cost may be eligible by its nature, but if it is incurred before the application is submitted, the project will lose its incentive effect.

Consequences of breaching the incentive effect principle

The legal and financial consequences of detecting a breach of the incentive effect are serious and may include:

• refusal of funding at the application assessment stage – if the assessing institution finds that the project was started before the application submission date,
• termination of the grant agreement – where the breach was detected after the agreement was signed but before the project was completed,
• an obligation to repay all or part of the funds received with interest – if irregularities are found during an audit or verification after the project has been completed,
• exclusion from applying for funding in subsequent calls – in cases of particularly serious irregularities.

Given that project audits may be carried out up to five years after the end of the eligibility period, the risk does not end with the payment of the last instalment.

How to document the incentive effect correctly?

Proper documentation is essential not only to meet the formal requirements, but also to protect the applicant in the event of an audit. Practical recommendations are presented below:

• Priority rule: submit the application before taking any implementation steps. The investment decision may be taken earlier from an operational point of view, but no legal or financial commitments should be entered into before the application submission date.
• Keep internal documentation. Minutes of management board meetings, internal memos and internal correspondence should clearly indicate that the final decision to implement the project in the form submitted depends on receiving funding.
• Draft preparatory contracts carefully. If it is necessary to conclude a contract with a designer or adviser before submitting the application, make sure that its scope is clearly limited to preparatory work and does not include elements directly related to the implementation of the investment.
• Document market surveys carefully. Requests for quotation and price analyses carried out before submitting the application should be clearly described as information-gathering activities that create no obligations for either party.
• For regional programmes, check the detailed requirements. Each operational programme and each support instrument may specify the incentive effect principle slightly differently. The call rules take precedence over the general guidelines and should be read first.

The incentive effect and de minimis aid – does the principle always apply?

It is worth noting that the incentive effect principle in the strict, formal sense applies primarily to projects covered by State aid granted under the GBER. In the case of de minimis aid, this requirement does not arise directly from the EU regulation; however, a significant number of Polish managing authorities introduce an analogous condition into their call rules, treating it as a general rule on the eligibility of expenditure.

This means that even if the project benefits solely from de minimisaid, the applicant should not assume that it is automatically exempt from the obligation to maintain the chronology between submitting the application and starting the investment. The provisions of the rules of the specific call must be verified in each case.

Information on current calls, including conditions relating to the incentive effect, can be found in the grant search engine available on our website.

If you are planning to apply for funding and want to make sure that your preparations do not breach the incentive effect principle, we invite you to use the free grant search engine or to consider contacting an expert dotacje-online.pl.