Basis of Payment (BOP)

Basis of Payment (BOP) is the contractual pricing method that defines how a contractor's price is built and how the contractor will be compensated. It sets the structure of the pricing arrangement, and it can be used on its own or combined with incentives. The federal Practitioner's Guide for Pricing defines the term this way.

In Canadian federal procurement, contracting authorities select and document a basis of payment that suits the commodity, the contract duration and the certainty of the requirement. The basis of payment is related to, but distinct from, the statement of work, price schedules, limitation of expenditure, incentives, economic price adjustment and payment terms. Each of those elements does a separate job in the contract.

The four primary bases of payment

Public Services and Procurement Canada's pricing guide identifies four primary bases of payment:

• Fixed price
• Fixed time/unit rate
• Cost reimbursable
• Provisional price

The method chosen depends partly on how clearly the buyer can define the requirement and its costs. A well-defined requirement with predictable costs points toward a different method than one where the work or the costs are still uncertain. The guide is available on CanadaBuys.

How fixed-price and provisional-price contracts differ

Under a fixed-price basis of payment, the contractor is paid a definite sum for the work regardless of the costs it actually incurs. The contractor is responsible for any costs above the fixed price, which gives it an incentive to control its costs.

A provisional-price basis of payment works differently. It begins on a cost-reimbursable basis when requirements or costs are uncertain, and it includes a defined ceiling price or limitation of expenditure. After a defined milestone, and supported by a contractor declaration and cost submission, it may transition to fixed pricing.

Where the basis of payment appears in a solicitation

CanadaBuys solicitations commonly include an Annex B, Basis of Payment. Bidders are required to submit their financial bids in accordance with that annex, as in this federal request for proposal. In a Department of National Defence solicitation, the resulting clause states that the contractor will be paid the firm price specified in Annex B, Basis of Payment (RFP clauses).

The annex also appears in professional-services templates. The Centralized Professional Services System bid solicitation guidance refers to Annex B, Basis of Payment, in TBIPS and TSPS high-complexity solicitations. Other departments use the term as well. Innovation, Science and Economic Development Canada's general conditions for service contracts state that the basis of payment defines what the contractor will be paid for the service or good, the contract duration, and related costs such as travel and administrative expenses.

What it means for a supplier bidding on Canadian public contracts

The practical obligation is to price and submit the bid exactly as the solicitation's basis of payment and pricing tables require. Read Annex B closely before building the financial bid. Check how the solicitation treats the following:

• Taxes and customs duties
• Travel and administrative expenses
• Unit rates
• Ceilings and limitations of expenditure
• Milestones
• Any supporting cost information

The basis of payment also tells you where the cost risk sits. Under a fixed price, you carry the risk of overruns. Under a provisional price, you are reimbursed up to the ceiling until the contract moves to fixed pricing. Knowing which method applies lets a bid team set its price and its assumptions before submitting.