Financing Not Linked to Costs

OVERVIEW

What is it?

Financing Not Linked to Costs (FNLC) is a form of Union contribution introduced by the Financial Regulation (FR) in 2018 (Article 125).  

By definition, FNLC can be based on: 

• Fulfilment of conditions set out in sector-specific rules or Commission decisions (currently used by NEAR); or
• Achievement of results measured by reference to previously set milestones or through performance indicators (currently used by INTPA). 

Grant contracts signed under PRAG 2021 refer to Performance-Based Financing (PBF) as a synonym, while PRAG 2025 consistently applies the FR terminology FNLC.  

FNLC is an alternative or complementary to the more traditional cost-based forms of Union contributions (reimbursement of eligible costs or use of simplified cost options). Although all forms of Union contribution shall help achieve policy objectives and results, only FNLC allows to link payments to the achievement of results measured against predefined milestones or performance indicators without cost verification. 

Contrary to the other forms of Union contributions, FNLC does not need to be based on an estimation of the costs of the action or intervention. The stronger emphasis on achievement of results fosters policy dialogue focused on the design of interventions, while reducing administrative burden, increasing flexibility and creating incentives for efficiency. FNLC draws attention to what matters most: results and their quality. 

What can it be used for?

The EU budget rules allow the use of FNLC in direct, indirect and shared management modes. Within DG INTPA, Financing Not Linked to Costs (FNLC) can be used in EU external action in direct and indirect management modes as DG INTPA does not use shared management.

When can it be used?

The selection of the most appropriate form of Union contribution should be discussed internally as early as possible. Although such choice is not to be mentioned in the Action Document, due consideration should already be given during the design phase as to whether (or not) FNLC could be a suitable option, depending on the theme, sector, objectives, and potential implementing partner(s). The formal decision to use FNLC must only be made by the Contracting Authority during the contracting phase. 

While FNLC has the undeniable advantage of placing more emphasis on performance and results, it is not appropriate for all situations and/or sectors of interventions. A series of contextual factors need to be assessed (pre-conditions) and possibly be in place for FNLC to be considered as the most suitable form of Union contribution (as opposed - or complementary - to cost-based ones). These include:  

Who can use it?

FNLC can be chosen by Operational staff who programme, design, monitor and implement interventions in order to respond to development challenges in a specific context. It is however important that Operational and Finance & Contract teams agree on the best form of Union contribution to use. FNLC cannot be imposed on implementing partners and needs their institutional and contextual readiness and willingness. 

What are its strengths?

FNLC aims at increasing the focus on results and allows for flexibility and simplification at contract implementation level. 

FNLC aligns with the broader shift towards results-based management, both within and outside the European Commission. It addresses key limitations of traditional cost-based approaches, such as inadequate accountability for results, budget focus, and rigidity. 

Available literature shows that FNLC: 

• Draws attention to what matters most: results and their quality.
• Creates greater accountability for – and visibility of – results.
• Increases flexibility and adaptability to maximise results – creates incentives for effectiveness.
• Creates incentives for efficiency (for the Implementing Partner).
• Promotes a shared distribution of risk between funders and the Implementing Partners.
• Reduces transaction costs, bureaucracy, and administrative burden.
• Enhances quality of reporting and performance. 
  
  

What are its limitations?

FNLC does not carry specific limitations and in principle it can be used for any thematic area. In practice however, given the nature of FNLC and the focus on availability of evidence and data on performance and results, FNLC is not suitable for all situations or sectors of intervention. FNLC is particularly appropriate for actions implemented in contexts with a stable political and economic outlook with robust intervention logics and results which can be (relatively) easily measured at the output or outcome level. FNLC use in fragile macroeconomic or in crisis management situations is not to be excluded as long as sufficient data is available to define targets and values for its implementation.  

PRACTICAL APPLICATION

Key elements

Several elements are worth highlighting when considering FNLC as an approach: 

• FNLC results and indicators need to be clearly indicated in the description of the Action and in the logframe matrix.
• Budget Structure: The FNLC portion of the budget will be structured along the lines of the agreed results and related FNLC performance indicators and targets, not on costs.
• Co-financing: Provisions on estimated budgets, co-financing, and no double funding do not apply to FNLC, as disbursement is based on defined conditions or results.
• Expenditure Verification: Cost eligibility and rules for financial verification of costs do not apply. Implementing partners must provide supporting documents to prove results were achieved.
• Indirect Costs/Remuneration: A flat rate of indirect costs cannot be calculated on FNLC portions of the budget, which are all-inclusive.
• Management mode: FNLC can be used in direct, indirect, and shared management, though DG INTPA uses only direct and indirect management modes.
• No-Profit Principle: The no-profit principle does not apply to FNLC grants.
• Payment: Payments are made based on meeting conditions or achieving results, measured by reference to previously set milestones and performance indicators.
• Pre-financing is also possible in the context of FNLC.
• Reduction in payments: The contribution may be reduced if results are achieved poorly, partially, or late, or if conditions are not fulfilled.
• Reporting: Narrative progress and final reports should include a description of the results achieved. The reports should clearly present indicator values and evidence of performance, measured through the pre-defined and agreed indicators (with relevant data sources provided as evidence according to the specifications in the Description of the Action). This evidence will form the basis against which results are validated, and pre-financing cleared. As for financial reports, there is no obligation to provide information and/or evidence on costs incurred linked to the achievement of FNLC results.
• Validation of results reported: The submitted progress/final reports are to be approved by the Operations team in order to allow for clearing of pre-financing by the Finance & Contracts team, and disbursement of the further pre-financing requested. The assessment and validation of the reported results can be performed internally or via an independent third party assessment according to the contractual stipulations.  
  
  

Requirements

Data/information: Key requirements for the successful use of FNLC include: robust intervention logics with results which can (relatively) easily be measured at the output or outcome level; clearly defined indicators (accompanied where relevant by technical specifications) with related agreed baselines, targets and sources of information, and sound monitoring systems. Indicators should be RACER (relevant, acceptable, clear, easy to monitor, robust).   

Time: The choice of the most suitable form of Union contribution is to be subject to internal discussion as early as possible. Even though the choice is not to be mentioned in the Action Document, due consideration should already be given during the design phase as to whether (or not) FNLC could be a suitable option depending on the theme, sector, objective, potential implementing partner(s), etc.  

Skills: EU Operational and Finance and Contracts teams will require varying levels of expertise to identify suitable indicators and assess accuracy of reported achievements, depending on the intervention type. This includes assessing both the quantity and quality of results achieved against agreed standards.  

Facilities and materials: If internal expertise to adequately identify suitable indicators and assess accuracy of reported achievements is lacking, embedded or ad-hoc technical assistance may be considered for the identification of indicators and provisions. An independent third party assessment is recommended to assess the achievement of the results/indicators (FNLC) claimed to be achieved by the Implementing Partners in the progress and final reports. For direct-awarded grant contracts the third party assessment is the default option (derogation possible by prior approval). 

Financial costs and sources: N/A 

Tips and tricks: N/A 

EU RESOURCES

Chapter 10 of the INTPA Companion: INTPA eCompanion 16.0 - Chapter 10

INTPA intranet: Financing Not Linked to Costs (FNLC) (europa.eu)

Capacity4dev restricted group: Financing Not Linked to Costs (FNLC) | Capacity4dev (europa.eu).

• For further information, contact: INTPA-FINANCING-NOT-LINKED-TO-COSTS@ec.europa.eu  
• Financing Not Linked to Costs (FNLC) Financial Regulation (FR) in 2018 (Article 125).  

For further information, any revision or comment, please contact INTPA-ICM-GUIDE@ec.europa.eu
Published by INTPA.D.4 - Quality and results, evaluation, knowledge management. Last update  May 2025