At what odds of procurement does an EDF development grant pay back?
A development grant is a co-investment, and the question a board should ask of it is how likely the ministry has to be to buy the result before the matched spend comes back.
A partner carrying 12 per cent of a EUR 40 million European Defence Fund development action puts in EUR 2.112 million of its own money. The margin on its share of the eventual order repays that only if the Member State proceeds to procurement with a probability of 58.7 per cent, against the 55 the plan assumes. That number is not a property of the action. It is a property of the work packages the partner holds: on the same action, the same cost and the same share of the order, it runs from 6.7 per cent to 86.7 per cent.
The action, and what it costs one partner
Chapter 9 calls the funding rates the most consequential piece of arithmetic in the programme, and the reason is the rate on prototyping. Research actions can be funded up to 100 per cent. On a development action, system prototyping is funded at a maximum of 20 per cent and testing, qualification and certification at a maximum of 80. The consortium finds the rest.
The workbook’s action costs EUR 40 million, of which 65 per cent is prototyping and 35 per cent testing. The blended base rate is 41 per cent. It earns two bonuses: ten percentage points for cross-border SME participation and five for putting at least 15 per cent of eligible cost with mid-caps. Fifteen points on EUR 40 million is EUR 6.0 million, which lifts the effective rate to 56 per cent and European support to EUR 22.4 million. The consortium co-finances EUR 17.6 million, 44 per cent of the cost, after the bonuses.
Line
Consortium
One partner, 12 per cent
Eligible cost
40.000
4.800
European support at 56 per cent
22.400
2.688
Co-financing
17.600
2.112
Co-financing a year, over 36 months
5.867
0.704
EUR million. Seven partners; the one modelled carries 12 per cent of the eligible cost.
That partner’s EUR 2.112 million is planned to come 55 per cent from its own balance sheet, 35 per cent from national co-financing and 10 per cent from elsewhere. Only the balance sheet share is secured, so EUR 0.9504 million of the plan is still a negotiation with a ministry on its own timetable. The sheet answers “Financing plan complete?” with a no and 1.0 m unsecured. That is a separate problem from the one this article is about: even a fully secured plan has to be repaid by something.
The comparison a board will make
The thing that repays it is an order. The workbook assumes the capability, if procured, is worth EUR 250 million, that the Member State proceeds with a probability of 55 per cent, that the partner takes 12 per cent of the order, and that it earns a 12 per cent margin on its share. Expected revenue is EUR 16.5 million and expected margin EUR 1.98 million, which is 0.9375 of the matched spend. The case falls EUR 0.132 million short on margin alone.
The useful way to state that is not the shortfall but the probability that removes it. Break-even is the matched spend divided by the margin the partner would earn if procurement were certain: 2.112 over 250 × 0.12 × 0.12, which is 2.112 over 3.6, or 58.67 per cent. The sheet answers its own question beside it: “it needs a higher probability than assumed”. Held at 55 per cent, the same case closes at an order of EUR 266.7 million or a margin of 12.8 per cent. None of those three is far from the plan, which is exactly why the number has to go to the board rather than stay in the bid team: the case is a judgement about a ministry’s intentions, and it is close.
The comparison is also generous. Matched spend goes out over the 36 months of the action; the margin arrives, if at all, when a procurement contract is let years later. Discounting the margin would raise the break-even probability further. The workbook does not discount, so its 58.7 per cent is a floor, not an estimate.
What the bonuses are worth in probability
A bonus is a number of percentage points on the funding rate, so its cash value scales with the whole eligible cost rather than with the SME work that earns it. That makes it the largest lever in the case, and it can be stated in the same unit as everything else.
Bonuses earned
EU support
Consortium co-financing
Partner co-financing
Break-even probability
Both, 15 points
22.4
17.6
2.112
58.7 per cent
Cross-border SME only, 10 points
20.4
19.6
2.352
65.3 per cent
Mid-cap only, 5 points
18.4
21.6
2.592
72.0 per cent
None
16.4
23.6
2.832
78.7 per cent
EUR million. Same action, same order, same partner share and margin. Only the bonus switches move.
The two bonuses together are worth exactly 20.0 points of break-even probability, and the cross-border SME bonus on its own 13.3. Chapter 9 lists, among its seven ways a proposal dies, a consortium with no real cross-border SME content when a bonus was assumed in the budget. The table shows what that costs even when the proposal survives: a partner whose case needed a ministry 58.7 per cent likely to buy now needs one 72.0 per cent likely, and nobody in the room has changed their view of the ministry.
The finding: it depends on which work packages you hold
The partner line in the workbook takes 12 per cent of the consortium’s European support as well as 12 per cent of its cost. That quietly assumes the partner’s own work is split between prototyping and testing in the same 65 to 35 proportion as the action. Real partners are not split that way. The firm building the demonstrator holds prototyping; the firm running the qualification campaign holds testing. With both bonuses, prototyping is funded at 35 per cent and testing at 95.
Partner’s own work
Funded at
Co-financing
Break-even probability
All prototyping
35 per cent
3.120
86.7 per cent
The action’s mix, 65 to 35
56 per cent
2.112
58.7 per cent
Half and half
65 per cent
1.680
46.7 per cent
All testing
95 per cent
0.240
6.7 per cent
EUR million. The same EUR 4.8 million of eligible cost and the same 12 per cent of a EUR 250 million order at a 12 per cent margin in every row.
Same consortium, same grant agreement, same ministry, same order. The prototyping partner needs the Member State to be very nearly certain to buy before its matched spend comes back on margin; the testing partner needs it to be barely possible. At the plan’s 55 per cent the testing partner’s expected margin is 8.25 times its co-financing, and the prototyping partner’s is 0.63 times.
The average partner does not exist. A consortium-level board paper that shows 58.7 per cent is correct for the consortium and wrong for every member whose mix differs from it. The member most exposed is the one doing the work the capability is built on.
What it means in practice
Three things follow, and none of them needs a new model.
Compute the break-even on your own work packages, not on the action’s. The funding rate that matters to your board is the rate on the activities you hold, plus the bonuses, not the blended rate in Part A of the proposal.
Negotiate the order share against the co-financing. A prototyping partner carrying a large share of the matched spend and the same share of the eventual order as everyone else is subsidising the testing partners. Its lever is a larger share of the order, or of the cost of the testing it is not doing.
Treat each bonus as a number of probability points, and do not put an unearned one in the budget. On this action the cross-border SME bonus is worth 13.3 points; losing it after award moves the case further than most arguments about the size of the order.
None of this says the prototyping partner should not bid. Chapter 9 is right that the spend also buys the intellectual property, the reference, and a place in the consortium next time, and for a firm new to the system those are real. The point is that they are strategic arguments, and at 86.7 per cent they are carrying almost the whole case. A board should be told that in those words rather than find it behind a grant rate.
Reproducing it in the workbook
Everything above is in Proposal_Economics_and_Scoring.xlsx. On the Funding rates sheet, the action cost is in C11, the prototyping and testing shares in C13 and C14, and the bonus switches in D21 to D24; the effective rate is C34 and consortium co-financing C36. On The co-financing trap, the partner’s share is C10, its co-financing C15, the order, probability, order share and margin C32 to C36, the ratio of expected margin to matched spend C38, and the break-even probability C41.
For the bonus table, set D21, D23 or both to 0. For the work-package table, set C13 to 1 and C14 to 0 for an all-prototyping partner, or the reverse for all testing: the sheet then models a consortium whose mix is the partner’s own, and C41 returns 86.7 and 6.7 per cent. The blank set carries the same sheets with your action, your plan and your call left empty, and the regulation’s rates and bonuses still filled.
The workbooks behind this article
Every figure above is a live formula in the free companion files for
Breaking Into European Defence Procurement. Each workbook ends with a Checks sheet
setting the printed figure beside the computed one. No account and no email address.
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