EXPENDITURE AND PAYMENTS: ANNEX 2
ADVANCE AND INTERIM PAYMENTS
Advance Payments
1. Advance payments to contractors (i.e. payments made before equivalent value is received in return) should be exceptional, and should only be considered if a good value for money case can be made for them, e.g. a price discount commensurate with the value of the funds in question. Such payments by the constituent parts of the Scottish Administration or bodies sponsored by the Scottish Government require the prior approval of the relevant portfolio Finance Team within the core Scottish Government.
2. In considering a case portfolio Finance Teams will require evidence of compliance with EU procurement rules which protect the right of all potential suppliers to compete on equal terms - it would not be acceptable, for example, to offer advance payments to the successful contractor to secure a further price advantage - and assurance that adequate steps are being taken to public funds in the event of the contractor going into liquidation or otherwise failing to meet contractual obligations.
3. The following are excluded from the scope of these guidelines:
- services and maintenance contracts requiring payments at the point the contract commences provided a service is already available and can be called on from the date of payment. (Protecting public funds is nevertheless an important consideration in such contracts and safeguards such as quarterly payments in arrears should be built in wherever possible);
- grants or grants in aid to sponsored bodies or pre-funding of other public sector bodies, including voluntary and community bodies, subject to the proviso that no payments should be made in advance of need;
- minor services such as training courses, or attendance at conferences.
Interim Payments
4. This term is used to describe payments which are made at a prescribed stage or at intervals during the progress of a project. Interim payments may have an element of prepayment and so public sector organisations should consider them carefully before agreeing to them. However, if they are genuinely linked to work completed or physical progress satisfactorily achieved, preferably as defined under a contract, they may represent acceptable value for public funds. Taking legal advice as necessary those responsible for negotiating and operating contracts should have due regard to the following points:
(a) the reduced financial burden on the contractor of having to borrow commercially to provide working capital should reduce prices. It is important that a financial appraisal is undertaken to ascertain whether the arrangement does in fact provide value for money and to ensure that all bidders are competing on equal terms;
(b) contractual terms should be drawn up to protect the paying organisation's position by guarding against the risk that nothing useful has been delivered for the payment e.g.
- contracts might describe these as payments on account towards the total price rather than a final payment for the part of the work done - this will make them subject to review and recoverable if necessary;
- interim payments should be related to value received and delivery of tangible outputs, including transfer of ownership of assets, rather than simply the passage of time; and
- a performance bond in the form of a guarantee (issued by bank or surety company) may be appropriate. Consideration must be given to the risks of breach of contract (at which point the guarantee would be called in) against the additional cost in the contract of providing such a guarantee, consulting legal advisors as appropriate.
(c) Organisations should ensure that interim payment arrangements do not detract from the contractor's own obligations to pay its suppliers and contractors promptly.
Page Published / Updated: December 2008