This is where, for example, changes to payment terms, such as staged payments or retentions, will result in a reduction in both cost and risk. This type of efficiency is likely to be a one-off and should not, therefore, be extended over the life of the purchase.
Note: In general 'up-front' ie pre-payments should be avoided due to the risk of your institution becoming a creditor in the event of liquidation. However, where they are made, it is strongly recommended that a Banker's Guarantee be obtained to cover the value of the 'up-front' payment. Later, in the event that the supplier defaults on the contract or goes into liquidation, the value of the Banker's Guarantee may be recorded in the EMM as the money that has been retrieved rather than lost.
Examples of risk reduction include:
R1 - Payment with order reduced/deferred, calculated on pro rata basis:
[delivery lead time x interest on advance payment]
R2 - Retention of final payment until satisfactory acceptance, calculated on pro rata basis
[(installation period + period of non acceptance) x interest on retention sum]
R3 - Staged payments, calculated on pro rata basis
[balance of the contract sum x interest on the remaining period of staged payment, pro rata]
R4 - Title and risk with supplier until final acceptance, based on the value of insurance premiums, security, double handling, off-loading costs, etc
R5 - Liquidated damages ie costs recovered for non-performance etc.
R6 - Reduce risk of loosing stage payments should the supplier default on contract
R7 - Other
R8 - Not specified
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