Advance Payment Authority

Advance Payment Authority is the recognised legal and delegated power that lets the Crown or another public entity make an advance payment under a contract or agreement. An advance payment is money paid before the work is done, the goods are delivered or the service is rendered. The authority applies only to that kind of payment. It does not cover progress or milestone payments made after partial performance.

In the Canadian federal system the authority rests on the Government Contracts Regulations and the Financial Administration Act, and it is shaped by Treasury Board policy. The Government Contracts Regulations define an advance payment as a payment made by or on behalf of His Majesty under a contract before the performance of the part of the contract for which the payment is made. Allied governments use the same idea, and United States interagency forms use the exact phrase "advance payment authority".

What the Government Contracts Regulations allow

Section 2 of the Regulations supplies the definition. Section 8 supplies the permission: a contracting authority may enter into a contract that provides for advance payments. Where the contract itself needs Treasury Board approval, the amounts and the timing of the advance payments must also be approved by Treasury Board.

The authority is therefore not inherent or unrestricted. It exists only when a contract expressly provides for an advance payment. Treasury Board's contracting policy notice on contracting limits and approvals lists making advance payments as a situation where Treasury Board approval should be sought if the contract or amendment requires it, and ties that requirement to section 8(2) of the Regulations.

Conditions Treasury Board attaches to advance payments

The Treasury Board Directive on Payments treats advance payments as exceptional. Chief financial officers must ensure they are made only when three conditions are met:

• the payment is essential to achieving program objectives;
• no other reasonable payment alternative exists; and
• the payment is in accordance with a contract, agreement or legislation.

The Directive also bars the use of advance payments to carry funds into a future fiscal year. For multi-year maintenance and licensing contracts, it calls for at least one annual payment for each year.

Certification, tracking and recovery inside departments

Section 34 of the Financial Administration Act requires account verification and certification before a payment is processed. The Department of National Defence's section 34 account verification guidance says the verifier must confirm that the contract contains an advance payment clause allowing payment before completion of the work, delivery of the goods or rendering of the service. Without that clause, an advance payment cannot be certified.

The same guidance sets out the controls that follow:

• Responsibility centre managers must have tracking systems that reconcile advance payments against goods or services received.
• Advance payments may not exceed the expected value of goods or services to be received in the current fiscal year.
• Any excess must be recovered immediately.
• Funds may not be carried over by voluntarily pre-paying for goods or services.

A manager's authority to approve advance payments is exercised within these limits, not apart from them.

How NATO applies advance payment rules

NATO handles the same concept through procurement directives. The Bi-SC Procurement Directive 60-70 states that, in exceptional circumstances and with Financial Controller approval, contracts may provide for advance payments. NATO normally does not make them, and contractors are expected to use their own resources.

Where they are made, the headquarters' interests must be safeguarded, for example by performance bonds. An advance payment bond secures the contractor's obligations under the advance payment provision. Such payments are normally limited to one-third of the contract price and liquidated as soon as possible.

What advance payment authority means for suppliers

Do not assume a Canadian public contract will pay you before you deliver. Federal buyers can pay in advance only when the contract contains an explicit advance payment clause, and policy treats that as an exception. If a solicitation or draft contract offers an advance payment, expect the amount to be tied to the value of work or goods expected in the fiscal year, with reconciliation and recovery of any excess.

On NATO opportunities, expect advance payments to come with a bond or similar security and a cap tied to the contract price. Read the payment terms early and price your cash flow on the payment schedule the contract actually states.