A Consortium Agreement is an agreement between members of the consortium, to set out their internal arrangements for implementing the project and the administration of the EU grant. We have a dedicated article describing the Consortium Agreement in general here.
This article focuses on the unique attributes that one should take into consideration when drafting a consortium agreement in projects that implement the “Lump sum” funding model. In this article, we refer also to aspects raised by DESCA, the leading model of Consortium Agreement in Horizon Europe. DESCA has been updated to include special instructions when implementing a lump sum project.
Why do we need to pay special attention to the lump sum funding model?
In this article, we will refer only to differences that are relevant to the consortium agreement, without getting into the full description of the lump sum funding scheme. We have a dedicated discussion for understanding the lump sum funding model and its fundamental differences from the traditional actual cost funding model. Detailed information about the Lump sum model can be found here.
Here is the main thing that you should know about the implementation of the Lump sum model: the work package is the King. What does that mean?
The rule is simple. In a lump sum project, at the end of each reporting period, the EC will approve payments only for completed work packages. This is in contrast to the traditional action cost funding model, where payments were approved individually, per beneficiary, for justified claimed expenditures (in a specific reporting period).
In the lump sum funding model, payments will be approved collectively, for all beneficiaries participating in a specific work package together, after that specific work package is declared as completed (in the corresponding reporting period). The actual expenditures of the participants will not be examined by the EC (Please note though that Article 25 of the Grant Agreement is in force, and under its capacity, the EC keeps the mandate to have financial audits.).
The direct implication of that is that entities participating in lump-sum-based collaborative projects are more dependent now (more than ever before) on the performance of their peers. An underperforming partner (or even worse, a non-performing partner), may lead to a situation where a specific work package might (or can) not be completed and may jeopardise the payments to its peers.
This higher level of (inner) dependencies calls for dedicated attention in the Consortium Agreement.
What are the issues to handle in the Consortium Agreement in the case of a lump sum project?
On top of the existing topics covered in the regular consortium agreement, a set of dedicated provisions should be introduced in the case of lump sum funding.
Liability and Responsibilities
All partners should be jointly liable and responsible to fully execute their tasks, and by that to ensure the completion of the Work Packages. This is established first in the Grant Agreement. But it would be wise to address this issue, with a higher level of detail, also in the consortium agreement.
For that matter, one should consider the normal, productive conduct of the partners on one hand (which hopefully will always be the case), and on the other hand, what to do if things are not working as planned due to ill performance by some partners. This calls for a deeper level of planning of the liability and responsibilities of the participating partners during project execution.
Furthermore, a higher resolution of monitoring the project’s execution by the project’s Coordinator would be expected. This can be reached by mutual agreement of the partners while drafting the consortium agreement. The agreement should handle having a higher amount of progress meetings with WP leaders/partners, recording of meetings’ minutes and reporting, ensuring follow-ups on action items and handling any deviations or other issues, and more in a timely fashion.
Specifically, we suggest attending to the following measures in the consortium agreement:
- Internal progress reports. The DESCA model suggests including an “Internal Progress Report” mechanism that will assist in keeping close track of the execution of the project’s tasks.
- Higher responsibility of the Work Package leaders. In the actual cost funding model, the Work Package leaders are supposed to lead the Work Package work and ensure the smooth and timely delivery of the associated deliverables, as well as to meet the relevant milestones. In Lump Sum projects this responsibility is no different, but it might be wise to refer to that explicitly in the Consortium Agreement alongside dedicated relevant management measures for that matter, including such that handle deviations, amendments, and even failures of the Work Package execution process, and what this may entail.
- What happens in case a Work Package is not completed? Since the completion of Work Packages is at the heart of the Lump sum model, the scenario of an uncompleted Work Package cannot be ignored. Therefore, on top of all the mechanisms mentioned above, we would recommend that the Consortium Agreement refer to this scenario, its remedies, and implications.
- Non-compliant of a partner. Taking it a step forward, what happens in the unfortunate case of a non-compliant partner? Although this is a rarer scenario, this too cannot be ignored. A non-compliant partner, by definition, will impede the completion of Work Packages that this partner is part of. Hence, the Consortium Agreement should refer to this scenario. Both the MGA and the updated DESCA model have dedicated clauses that refer to the scenario of a “defaulting partner”, but we are in a position where under the Lump Sum model there is a need to handle these cases with higher resolution by applying securities and financial measures.
Securities and financial measures
As explained above, the Lump sum model implementation entails a higher dependency on the performance of all project partners. This calls for a better partner selection process, better project planning in the pre-award phase, and better management measures.
But what do we do in case we are facing a scenario in which a partner is not performing according to plan, and due to that a Work Package (or more) cannot be completed, or can be only partially completed, resulting in no, or partial, payment by the EC?
If we take this to the extreme for the sake of discussion, there is the option of declaring a partner as a “defaulting partner”, which is a partner that effectively leaves the project’s consortium. The Grant Agreement (GA) instructions on the one hand, and the DESCA model on the other hand, refer to this scenario in the following ways: The GA instructs that the remaining partners should carry out the action including the part that the defaulting partner was supposed to carry out, and potentially recover the grant amounts undue. Many times, the GA also implements the Mutual Insurance Mechanism (MIM) for that matter. The DESCA model, on top of that, suggests a set of financial consequences of the termination of such a defaulting partner.
However, a “defaulting partner” declaration is in fact rather rare! The more prevailing scenario is a partner that lags, holds back, postpones, does not collaborate effectively, and so on, but eventually delivers. Such conduct might jeopardize the completion of a Work Package (on time or at all), and by that might jeopardize or delay the payment for that Work Package for all participating partners. In most cases we will not declare such a partner as a “defaulting partner”, but what else can we do instead, and how can we prepare for that in the consortium agreement
There are several ways to address that.
Proper management assisted by financial measures
The ideal case, as always, is to properly manage the project execution. A professional coordinator should know how to tackle and prevent such cases as early as possible and avoid escalation of such situations. However, sometimes this is not enough. Having pre-defined securities and/or other financial measures can assist the coordinator in ensuring smoother management of the project.
Structuring the financial measures
This mechanism is based on the following principles:
- To begin with, the coordinator does not fully distribute the pre-financing or any of the other payments by the EC and instead keeps some of the funds under its control.
- The regular distribution of these funds held by the coordinator is done according to the progress of the work plan, and subject to decisions taken by the majority of the consortium (see next points).
- The regular payment schedule should be agreed upon by the partners, when preparing the Consortium Agreement. There are several potential models and you can come up with your own model for that matter: a fixed schedule, a dynamic schedule, fixed by amounts or fixed by percentage, based on progress (or not), a combination of any of the above, and so on…
- During the project, the coordinator, based on the decision taken by the majority of the consortium, can withhold the transfer of (all or part of) the funds in case a partner does not deliver or does not comply with the project’s execution work plan.
- In case of underperformance by a partner, which leads to incompletion of work packages, the consortium can decide to reduce the grant amount assigned to the underperforming partner, while acting to carry out the tasks needed for the completion of the work package. This can be done either by a refund (recovery) or re-distribution of the funds.
- A more severe instance of such conduct is the case that leads to an incomplete work package, and consequently to a partial- or non-payment situation by the EC. On top of the regular instructions (the other partners should carry out the needed tasks, and complete the work package), one should consider applying financial penalties on the underperforming partner in such cases.
Implementing the securities and financial measures in the consortium agreement
The above-mentioned principles should be governed by the consortium agreement. The way there involves a deeper look into the details. Since it is clear that a consortium that executes a lump sum model project, must have a certain float of money for the project plan implementation, it is necessary to properly adjust the consortium agreement for that matter.
The way to do that is by attending to aspects like:
- Revisiting the work plan: the CA should reflect any issue stemming from the work plan. We strongly recommend looking for weak spots and/or any potential points of failure in the work plan and addressing them in the CA.
- What is the preferred payment structure and schedule for the specific project and specific work plan?
- How much float (securities) will remain in the hands of the coordinator? For how long?
- If the payment structure is based on the performance of the partners, the performance indicators should be decided and defined in the CA.
- What are the criteria for withholding payment from a partner?
- Would there be any agreed financial penalties in case of a non-compliant partner (partially or in full)?
- In case the project includes affiliated and / or associated partners, how will these financial measures refer to them?
- What would be the voting mechanism for all of the above?
Warning: The coordinator might be considered as a Trustee
It is our duty to alert on the following:
In any of the cases in which the coordinator holds funds for other partners until they complete the work, it is possible that according to local laws (of the coordinator), the coordinator might be considered a Trustee.
If this is the case, note that local Trust acts might have special requirements which the coordinator must comply with.
For that matter, we recommend consulting with local legal counseling.
Budget flexibility
The Grant Agreement instructions limit the ability to shift budgets during the project’s execution phase in the case of lump sum model funding. This is a critical issue, as budget shifts are often required in multi-annum collaborative projects, due to gaps between the project plan and its actual execution. In a nutshell, in case there is a change in the work plan that entails shifting money around (between partners and/or work packages), this can be done only via a contract amendment procedure, and only when transferring funds from an open (uncompleted) work package, with proper justification. This method is far more limiting than the one used in the actual cost model.
Therefore, it is important to clearly define in the consortium agreement when and how such a contract amendment should be considered by the partners.
Jurisdiction
Although quite rare, it is still possible that a commercial & legal dispute between partners may emerge during the project execution (e.g. underperforming partner led to financial damage to other partners). In such cases, judicial measures might be considered and pursued.
Therefore, it is important that the consortium agreement will include an agreed judicial jurisdiction to handle such disputes.
Need assistance?
We are aware that preparing the consortium agreement for lump sum projects might not be as simple as in the case of the traditional actual costs model projects. It indeed invites many questions and unclarity on behalf of beneficiaries working under this new scheme.
This is where our legal consulting service comes into place. We’d be happy to assist you with this task and guide you in the process.