Agreeing payment terms is an important part of the quotation/tendering process. The buyer may set out the payment terms which the supplier will be expected to follow. However, during the Battle of the Forms, the supplier may try to impose its own payment terms. Payment terms are often subject to clarification/negotiation and can result in a fruitful outcome for the buyer.
There are a number of issues to be considered:
Fixed versus variable prices
It is the buyer's choice to decide upon a fixed or a variable price. Consideration should be given to both options. When making a choice between fixed and variable prices, buyers should consider:
- economic factors
- financial forecasts
- money markets
When considering an offer based on Price Variations, never accept 'Price ruling at date of despatch'.
Contract price adjustment
All orders placed on a price variation basis should incorporate an agreed formula for calculating any change in price. A notable example is the BEAMA recommended formula for contract price adjustment. The formula allows for a fixed element with separate elements for material and labour. The formula, as printed, is intended as a guide that allows for the elements to be varied appropriately. The percentage breakdown allocated to each element is mutually agreed between the purchaser and seller prior to award of the order.
The advantages of a BEAMA type formula are:
- The percentage of the elements can be varied, allowing adjustments according to whether the product or service is more labour or materials intensive; and
- Price adjustments are calculated on Government price indices published monthly in the Trade and Industry Journal
Price variations should be:
- Calculated between the date of quotation and the agreed delivery date
- Invoiced separately at the end of the contract.
Payments made in stages during the course of the contract should only be made when the buyer can demonstrate overall savings to the institution. In general advanced payments should not be made to suppliers/contractors unless:
- the payments are linked to material received/work completed
- the supplier agreed to provide a Certificate of Ownership for materials received or work completed by the supplier
Advance payments should not exceed the value of the goods received/work completed. For custom-built equipment it is not unusual to offer advance payment on approval of drawings and plans. Payments in this case are normally in the region of 10% of total value.
Where advance or stage payments are being considered it is important to minimise the risk of the supplier failing to fulfil the contract and the payments made being lost. In such instances the institution should consider the use of bonds and guarantees to minimise the risk.
In certain cases it may be advantageous to delay payment to the supplier for a given period after receipt of goods. These retention periods are used to ensure that a supplier fulfils his obligations under the terms of the contract. This is common in the case of civil engineering contracts.
Payment of invoices
The institution should have a clearly stated policy to make payment to suppliers within a given time period. This period is now incorporated into law under the Prompt Payment Regulations contained with The Public Contracts Regulations 2015. All valid and undisputed invoices should be paid within 30 days and payment of invoice clauses should contain a clause requiring any subcontractor of the main contractor to also be paid within 30 days.
There is also a duty for colleges to publish how many invoices have been paid in compliance with the Prompt Payment Regulations at the end of each financial year. This report should be published on the internet and we suggest the college’s website be used to hold this information.
For more information see the Prompt Payment Regulations which also has model contract clauses, a reporting template and further information on what constitutes a valid and undisputed invoice.
Note: These regulations apply to FE Colleges in England only. Schools, Academies, Sixth Form Colleges and contracting authorities outside of England are exempt.
Discounts for prompt payment
Some suppliers will be prepared to offer discounts for prompt payment of their invoices. These offers should be negotiated with the supplier. When considering prompt payment discounts it is important to know
- whether the department will be able to authorise invoices for payment quickly enough to enable the Accounts Payable section to pay the invoice within the time period being considered
- whether there are any costs to the institution associated with prompt payment, for example, the need to run a specific payments process etc
The costs of making the prompt payment must not be more than the financial gains from the discount offered for the prompt payment.