How to prepare a project budget for a grant application?

The project budget for a grant application should be prepared so that each cost is justified, eligible, reasonably priced and directly linked to the project objective, schedule and indicators. Entering a shopping list is not enough. The budget must show why a given expenditure is needed, what effect it will help achieve and whether it can be properly settled after the grant agreement has been signed.

If costs are described too generally, overstated, incorrectly assigned to categories or inconsistent with the call rules, the project may receive a lower score, be referred for corrections or be rejected.

The budget also affects subsequent project implementation, as the grant application becomes an annex to the agreement.

Why is the project budget so important?

The project budget shows what public funds are to be spent on and whether the planned expenditure is necessary to achieve the project objective. A well-prepared budget strengthens the credibility of the application, as it demonstrates that the project has been thought through technically, financially and organisationally.

The budget serves several functions:

• shows the physical scope of the project,
• determines the value of eligible and ineligible costs,
• indicates the level of funding requested,
• shows the required own contribution,
• links project activities to the schedule,
• justifies the amount of individual expenditure items,
• forms the basis for subsequent settlement of the project,
• makes it possible to assess the reasonableness and efficiency of the investment,
• affects the assessment of the project's financial feasibility.

An application may be well described in substantive terms, but if the budget is inconsistent, the project loses credibility. For example, if the objective of the project is to implement a new production process, the budget should clearly show which equipment, software, services or works are necessary to achieve that effect. If the costs do not follow from the description of activities, there is a risk that they will be considered unjustified.

Where to start when preparing a project budget?

Preparing the budget should begin with a precise definition of the project scope. You should not start by entering amounts into a table. First, you need to establish what is actually to be delivered, which activities are necessary and what costs arise from those activities.

Before you start budgeting, it is worth answering the following questions:

• what problem does the project solve?
• what is the objective of the project?
• what activities are necessary to achieve the objective?
• what purchases, services or works are essential?
• which costs may be eligible in the given programme?
• which costs will be ineligible?
• can VAT be an eligible cost?
• what level of funding follows from the call documentation?
• what own contribution must the applicant provide?
• will the project be financed through an advance payment, reimbursement or a mixed model?
• does the company have sufficient financial liquidity for the duration of the project?

This stage brings order to the project and helps avoid a situation in which the budget is merely a list of random expenses. The budget should follow from the logic of the project, not the other way round.

Eligible and ineligible costs – what needs to be checked?

One of the basic elements of the budget is the distinction between eligible and ineligible costs. An eligible cost is an expenditure that may be covered by funding if it meets the conditions set out in the programme documentation. An ineligible cost is an expenditure that may be needed to carry out the investment but will not be financed from the grant.

In practice, you should check:

• whether the cost is included in the catalogue of eligible costs,
• whether the cost is consistent with the objective of the measure or call,
• whether the cost is necessary to implement the project,
• whether the cost will be incurred within the eligibility period,
• whether the cost will be properly documented,
• whether the cost is not excluded from funding,
• whether the cost is not excessive in relation to the project's effects,
• whether the cost does not duplicate another expenditure item,
• whether the cost will not be financed from another public source,
• whether it will be possible to demonstrate the link between the cost and the project result.

The detailed eligibility conditions follow from the documentation of the specific call and the relevant guidelines. The European Funds Portal has published the Guidelines on the eligibility of expenditure for 2021-2027, which set out uniform conditions and procedures for the eligibility of expenditure under the ESF+, ERDF, CF and JTF.

How to describe a cost in the project budget?

The cost description should be specific. It is not enough to write “purchase of equipment”, “advisory services” or “software”. The assessor should know exactly what will be purchased, what it will be used for and why it is needed.

A good cost description should include:

• the name of the cost,
• the cost category in line with the call documentation,
• a brief description of the item purchased,
• the key technical or functional parameters,
• a justification of the need to incur the expenditure,
• the link between the cost and the project activity,
• the link between the cost and the indicator or result,
• information on how the value was estimated,
• the net and gross value, if required,
• information on VAT, if relevant to eligibility.

Example of a description that is too general:

Purchase of a production machine.

Example of a better description:

Purchase of an automatic production machine enabling the cutting and processing of material with greater repeatability of parameters. The equipment is necessary to implement a new technological process, shorten order lead times and reduce material losses. The value of the cost was estimated on the basis of market quotations from potential suppliers.

The second description shows the link between the cost and the project objective. This is important because a cost in the budget should be justified functionally, not merely named.

How to justify the amount of costs?

The amount of costs should be reasonable and defensible. Assessing institutions may examine whether the amounts correspond to market prices, whether they are overstated and whether the scope of the expenditure is broader than the needs of the project.

In practice, it is worth basing the valuation on:

• quotations from suppliers,
• an analysis of market prices,
• manufacturers' price lists,
• previous orders of a similar type,
• investor's cost estimates,
• technical documentation,
• internal calculations,
• technical parameters of the planned equipment,
• data on market rates,
• a comparative analysis of several options.

Sample instructions PARP for grant applications indicate that, for costs, you should state total expenditure, eligible expenditure and the amount of funding, as well as describe the features or parameters of the cost and justify its amount. Such instructions also stress the need to justify individual expenditure items separately.

The most common mistake is adopting an amount without any justification. Such a valuation may be difficult to defend both at the assessment stage and later when carrying out the procurement procedure.

The budget and the physical and financial schedule

The budget should be consistent with the schedule. If a cost is planned for the first quarter of project implementation, it should follow from the activities planned for that period. If a particular expenditure is only needed at the implementation stage, it should not be assigned to an earlier stage without justification.

In the schedule, you should check:

• when the cost will be incurred,
• whether the purchase date is consistent with the sequence of activities,
• whether tasks are realistically spread over time,
• whether payments correspond to the stages of implementation,
• whether deliveries, installation and acceptance are possible within the planned timeframe,
• whether training or implementation is scheduled after the technology has been purchased,
• whether costs have not been concentrated in one period without justification,
• whether the project can be completed by the deadline set in the call,
• whether the schedule allows time to select suppliers,
• whether the risks of delays have been taken into account.

The budget and schedule should form a coherent whole. If the project involves the purchase of equipment, installation, commissioning and staff training, the sequence of these activities should also be visible in the budget.

Own contribution and sources of project financing

When preparing a project budget for a grant application, you need to calculate not only the value of the grant but also the required own contribution. In many projects, funding is paid as a reimbursement, which means that the beneficiary first incurs the expenditure and only later recovers part of the costs.

In the budget and financing plan, you should check:

• the total value of the project,
• the value of eligible costs,
• the value of ineligible costs,
• the level of funding,
• the amount of own contribution,
• the method of financing VAT,
• the need for credit, a loan or leasing,
• the possibility of bridge financing,
• the dates on which expenditure will be incurred,
• the dates for submitting payment claims,
• the potential impact of the project on the company's financial liquidity.

A payment claim can be used, among other things, to receive an advance payment, obtain reimbursement of costs incurred, settle an advance payment or settle expenditure. The amount of the advance payment is calculated on the basis of the costs planned for the next period of project implementation, and when settling costs, a statement of expenditure in line with the project budget must be attached.

The budget should also be analysed in terms of financial liquidity. A project may be formally profitable but difficult to implement, if the company does not secure funds for the period between incurring a cost and receiving reimbursement.

Direct and indirect costs

In many programmes, the budget is divided into direct and indirect costs. Direct costs are directly related to the implementation of project tasks. Indirect costs usually cover administrative support, management, settlement or other activities supporting the project, if the call documentation allows this.

Examples of direct costs

• purchase of fixed assets,
• purchase of intangible assets,
• purchase of research services,
• salaries of core project staff,
• construction works,
• materials and components,
• participant training,
• technical audits,
• design documentation,
• activities directly related to implementation.

Examples of indirect costs

• project management,
• administrative support,
• project settlement,
• project accounting,
• office tasks,
• coordination of documentation,
• organisational costs, if permitted under the programme.

Costs should not be moved between categories on your own initiative without checking the documentation. What may be a direct cost in one programme may be an indirect cost or ineligible expenditure in another.

The budget and project indicators

The budget should be linked to the indicators. If the project declares the implementation of a new product, the launch of a service, a reduction in energy consumption or improved accessibility, the budget must show which expenditure leads to that effect.

It is worth checking:

• whether each significant cost supports the achievement of an indicator,
• whether the indicators are realistic in relation to the budget,
• whether the cost is not too high in relation to the planned effect,
• whether the expenditure makes it possible to achieve the project objective,
• whether the indicator does not require costs that have not been included in the budget,
• whether the budget covers all activities necessary to achieve the result.

Example: if the result indicator is a reduction in production time, the budget should include expenditure that actually affects the process, such as equipment, software, integration, installation or training. If the budget lacks elements necessary for implementation, the indicator may be considered unrealistic.

The most common mistakes in a project budget

Budget errors often arise not because the project is unjustified, but because costs have been poorly described or not linked to the programme documentation.

The most common mistakes are:

• entering ineligible costs as eligible,
• no justification for the amount of a cost,
• an overly general description of expenditure,
• no technical parameters,
• no link between the cost and the project objective,
• no link between the cost and the indicators,
• failure to account for VAT,
• incorrect calculation of own contribution,
• failure to account for ineligible costs,
• overstating the value of expenditure,
• underestimating implementation costs,
• omitting installation, transport or commissioning costs,
• lack of consistency between the budget and the schedule,
• no sources of financing for the part not covered by the grant,
• entering costs that do not follow from the project scope.

Another common problem is a budget “built around the maximum grant amount”. The mere fact that a programme allows a certain project value to be financed does not mean that the budget should be artificially inflated. Every expenditure item must be justified.

Documents needed for the budget

Before submitting the application, it is worth preparing documents that will help justify the budget. Not all of them will always be required as annexes, but they are useful for properly drafting the application and for subsequent project implementation.

Useful documents include:

• quotations from suppliers,
• technical specifications,
• cost estimates,
• technology descriptions,
• price lists,
• design documentation,
• an energy audit, if applicable,
• a needs analysis,
• a market analysis,
• agreements or letters of intent, if relevant,
• documents confirming sources of financing,
• own calculations,
• physical and financial schedule,
• information on VAT status,
• data on State aid or de minimis aid.

It is good practice to keep the materials on the basis of which the costs were estimated. They may be needed during assessment, supplier selection, audits or subsequent settlement.

How can the DOTACJE ONLINE team of experts help prepare a project budget?

Preparing a project budget requires combining knowledge of the programme, cost eligibility, funding levels, State aid, VAT, the schedule, indicators and subsequent settlement. An error in the budget can have consequences as early as the assessment stage, but also after the agreement has been signed.

DOTACJE ONLINE experts can verify whether the planned budget complies with the call rules, whether costs are correctly assigned to categories, whether the own contribution has been calculated correctly and whether the project can be settled. We prepare the budget as part of grant application preparation, and in more complex projects we supplement it with financial analyses, including an assessment of liquidity and own contribution.

As a first step, it is worth checking the available programmes in the free grant search engine with an AI Assistant.

If the project requires an individual analysis of the budget – its link to the project objective, schedule, indicators and settlement risks – please get in touch.Contact an expert