Advance Payment

An advance payment is a payment the federal government makes to a supplier before the supplier has delivered the goods or services that the payment covers. The Government Contracts Regulations define it as a payment made by or on behalf of His Majesty under the terms of a contract before the performance of that part of the contract in respect of which the payment is made.

Treasury Board describes the same idea in practical terms: a government payment to a supplier in anticipation of receiving the contracted goods or services. The CanadaBuys Supply Manual glossary uses matching language, defining it as a payment made by or on behalf of Canada before delivery of the good or rendering of the service.

Where the definition comes from

The term sits within a framework made up of the Financial Administration Act, the Government Contracts Regulations, Treasury Board policies and the PSPC Supply Manual. The Government Contracts Regulations supply the legal wording. Treasury Board's Guide to Advance Payments explains how departments apply it to goods and services procured under various types of contracts and agreements.

An advance payment is not a loan

Treasury Board treats an advance payment as distinct from a loan. The supplier does not repay the amount as long as it delivers the contracted goods or services in accordance with the contract. The payment is an early instalment of the contract price, and the supplier earns it by performing.

When federal policy allows an advance payment

Federal policy says advance payments should be made only in exceptional circumstances. The Treasury Board policy sets out three conditions:

• The payment is essential to program objectives.
• No other reasonable payment alternative exists.
• The payment is authorized by a contract, agreement or legislation.

Approval levels also apply. Depending on the contract's approval authority, departmental or Treasury Board approval may be required. Where contract approval exceeds departmental authority, Treasury Board approval is required for advance payments. Federal guidance also requires safeguards, including adequate security, sufficient funds and value commensurate with the payment.

A fiscal-year control applies as well. Advance payments in a fiscal year must relate to, and generally not exceed, the value of work or goods and services reasonably expected during that fiscal year.

Contract terms, supplier obligations and recovery

The terms of an advance payment must be included in the contract or agreement before the payment is made. Those terms cover the amount, timing, purpose and method of recovery.

A supplier that receives an advance must use it for the contractual purpose and deliver the goods or services under the contract. PSPC's advance-payment form states that the funds must be used solely for the purpose of the contract and that the amount is established by the contract's conditions.

If an advance exceeds the value of the goods delivered or services rendered, the excess must be recovered promptly. The Treasury Board guidance makes recovery a standing requirement rather than a matter of discretion.

What an advance payment means for suppliers bidding on Canadian public contracts

Suppliers should not plan their cash flow around an advance payment. Federal policy reserves it for exceptional cases, so a bid that depends on one carries risk unless the solicitation or contract provides for it.

If a contract does include an advance payment, read the terms closely. They set the amount, timing, purpose and recovery method, and they bind the supplier to use the funds only for that contract. Expect the payment to be tied to work reasonably expected within the fiscal year, and expect recovery of any amount that exceeds the value delivered. Suppliers that cannot meet those conditions should raise the question with the contracting authority during the solicitation period, before the contract is signed.