Countries that are candidates for European Union (EU) accession face the complex and urgent task of building administrative institutions so that they can fulfil the “Copenhagen criteria”. Such institutions must be able to implement the acquis communautaire within tight budget constraints and ensure favourable conditions for a competitive private sector. They must also provide candidate countries with the institutional capacity to participate effectively in future policy-making within the European Union upon accession. This paper lays out basic principles, tools and issues for building institutions. The target audience includes all those involved in Institution Building within candidate countries, EU Member States, the European Commission and the aid community. The paper highlights the issues associated with building effective institutions while providing concrete examples of how Member States and candidate countries have responded to such challenges. The definition of a number of key terms (in bold type) are provided in the Annex together with links to additional sources of information (SIGMA and PUMA publications as well as relevant web sites).