Basis of Payment Terms

In Canadian federal procurement, a basis of payment is the contractual pricing method that defines how a contractor is paid and how the contract price is built. Basis of payment terms are the clauses in a solicitation and the resulting contract that state which method applies. The federal Practitioner's Guide for Pricing identifies four primary types: fixed price, fixed time/unit rate, cost reimbursable and provisional price.

CanadaBuys describes the basis of payment as the base component of the pricing approach. It can stand alone or be combined with incentives. The method a buyer selects depends on how clearly the requirement is defined, the contract duration, market conditions, contractor risk, price validation and whether incentives are appropriate. The types of basis of payment page in the CanadaBuys buyer's guide sets out these choices for contracting officers.

The four primary types of basis of payment

• Fixed price: the contractor receives a definite payment for the work regardless of the costs it incurs. See the CanadaBuys guidance on fixed price.
• Fixed time/unit rate: the fourth primary type named in the federal pricing guide, listed alongside the other three.
• Cost reimbursable: the contractor is reimbursed for allowable costs incurred during performance. It is primarily intended for situations where the scope or requirements are uncertain. See the guidance on cost reimbursable.
• Provisional price: the contract begins on a cost-reimbursable basis with a defined ceiling price or limitation of expenditure. It may move to fixed pricing once requirements become clearer. See the guidance on provisional price.

How basis of payment clauses appear in solicitations

Federal departments write the basis of payment into the bid solicitation and the contract. Department of National Defence solicitations posted on CanadaBuys use provisions headed "Basis of Payment – Fixed Price" and require bidders to submit their financial bid in accordance with the stated basis of payment. An example is this defence RFP clauses document.

PSPC's professional services supply arrangements use standard clauses for firm price, firm unit price, firm lot price and cost-reimbursable arrangements. Cost-reimbursable contracts under these clauses must include a limitation of expenditure. Invoices must show a separate line item for each relevant basis-of-payment provision. The details are in the ProServices supply arrangement.

Innovation, Science and Economic Development Canada states the same principle in its General Conditions of a Service Contract. The basis of payment defines what the contractor will be paid for the acquired service or good, the contract duration, and related costs such as travel and administration. The selected type should correspond to the nature of the contract.

Combining types and moving between them

A single contract is not limited to one method. CanadaBuys states that multiple basis-of-payment types may be used in one contract, so a solicitation can carry, for example, a fixed price for one deliverable and a cost-reimbursable element for another. Provisional price contracts build a transition into the structure: they start on a cost-reimbursable footing under a ceiling and can convert to fixed pricing as the requirement firms up.

What basis of payment terms mean for a supplier

Read the basis of payment clause and the pricing schedules before you price. Your financial bid must follow the stated basis of payment exactly. During performance, invoice according to the clause: charge the agreed fixed price or rates, document allowable reimbursable costs, and stay within any ceiling price or limitation of expenditure. Where the clause calls for separate line items, show each one separately on the invoice.