Common use of Extrapolation Clause in Contracts

Extrapolation. Following an audit, the Commission services will indicate in the final report whether the possible errors detected during the audit are of a systematic nature, i.e. if they are such that it is reasonable to assume that they affect not only the Grant Agreement actually audited, but also other GA where the audited entity participates. If there are errors of systematic nature, the letter of conclusion accompanying the final audit report will require the beneficiaries to apply the findings of the audit and to correct the errors in all FP7 projects by re-submitting within a given deadline the financial statements of all projects where the audited entity participates. These revised financial statements should take into account the conclusions of the audit. The beneficiary will have the possibility of explaining why the audit findings should not be extrapolated to other GA. Should the beneficiary not react, the Commission may suspend all FP7 payments owed to this beneficiary until the revised cost statements are submitted, and follow-up audits of the beneficiaries' GA may be carried out by the Commission. The Commission has adopted in December 2009 a Communication regarding simplification of the recovery process in the framework of the implementation of the audit strategy under the Framework Programmes. The Communication permits the use of flat rate corrections based on the average error rates observed in the audited projects to establish the amounts to be recovered; in that way, the extrapolation exercise can be now performed without examining each non-audited periods of projects or even without re-calculating the sums claimed. The calculation of the actual debt can be made on the basis of one of the following methods: - Method 1: where the audit has identified the existence of a systematic error, the beneficiary shall precisely recalculate the costs affected by the systematic error in each of the non- audited projects/periods and report the corresponding adjustments to the Commission in due form. - Method 2: however, with the aim to simplify extrapolation the beneficiary may choose to adjust the individual cost category (personnel, subcontracting, other costs, indirect costs,.) affected by the systematic error by the application of a flat-rate correction. The flat-rate corresponds to the average of the individual systematic error in a given cost category identified in the audited projects/periods. - Method 3: the beneficiary may also opt to apply an overall flat rate correction to the total project costs of each of the non-audited projects/periods. In these cases, the flat rate corresponds to the average rate of the individual systematic errors identified in the audited projects in relation to the total project costs. The flat-rate(s) under method 2 and 3 will be indicated by the Commission in the letter of Conclusion of the audit. The beneficiary may carry out – at its own expense - further audits on non-audited periods/contracts. These further audits must be performed by an external, independent auditor and must be in accordance with the Commission's own approach as set out in the audit report. Should the audit provide reasonable assurance on the method used, the Commission may accept different flat-rates resulting from such audits. In any event, the Commission reserves the right to verify that extrapolation has been carried out in compliance with one of the methods described above, and to carry out further targeted audits to corroborate the average error rate.