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.
Examples of risk reduction include:
| # | Risk Description |
|---|---|
| 1 | Payment with order reduced/deferred, calculated on pro rata basis: [delivery lead time x interest on advance payment] |
| 2 | Retention of final payment until satisfactory acceptance, calculated on pro rata basis: [(installation period + period of non acceptance) x interest on retention sum] |
| 3 | Staged payments, calculated on pro rata basis: [balance of the contract sum x interest on the remaining period of staged payment, pro rata] |
| 4 | Title and risk with supplier until final acceptance, based on the value of insurance premiums, security, double handling, off-loading costs, etc |
| 5 | Liquidated damages ie costs recovered for non-performance etc. |
| 6 | Reduce risk of loosing stage payments should the supplier default on contract |
| 7 | Other |
| 8 | Not specified |