Provisional price

Provisional price is a basis of payment used in Canadian federal procurement when the requirements of a contract, and the costs of meeting them, are uncertain or cannot yet be estimated. The contract begins on a cost-reimbursable basis, with a defined price ceiling or limitation of expenditure, and is intended to move to a fixed price once the work is better understood. CanadaBuys sets this out in its buyer guidance on provisional price.

The Government of Canada treats provisional price as both a pricing strategy and a basis of payment. It is meant for longer-term or otherwise uncertain requirements where a reliable fixed price cannot be set at contract award. As knowledge of the requirement grows, cost certainty improves and the risk to Canada over the rest of the contract falls.

How the cost-reimbursable phase works

Under a provisional price arrangement, the supplier is first paid on a cost-reimbursable basis. Because costs are not yet known, the contract must include a ceiling price or a limitation of expenditure. That limit caps what Canada can be asked to pay during this phase, so the uncertainty does not leave the Crown's exposure open-ended.

The Practitioner's Guide for Pricing describes the approach as commencing with cost reimbursement and moving to fixed price as certainty about the requirement and its cost increases.

The milestone and the move to fixed price

The transition does not happen at a time of the supplier's choosing. The 2024 pricing guide requires a milestone, normally tied to a percentage of work completed or to the achievement of specified performance indicators. The contract must state this milestone clearly.

• Declaration: the contractor submits a declaration that the milestone or the specified portion of work has been reached.
• Cost submission: the declaration must include a cost submission.
• Validation: costs must be validated before the basis of payment formally changes to fixed price.
• Amendment: once a reasonable fixed price is agreed for the remainder of the work, the contract must be formally amended.

Where provisional price is used

CanadaBuys states that provisional pricing is often used for longer-term contracts, including contracts of five years or more, where a fixed price cannot reliably be established at the outset. CanadaBuys also lists provisional price among the principal types of basis of payment on its types of basis of payment page. That page notes that more than one type of basis of payment may be used in a single contract.

Provisional pricing in UK defence contracts

The term also appears in United Kingdom defence single-source contracting, where it has a different use. The UK Single Source Regulations Office says that provisional pricing is not itself a pricing method. It describes a contract entered into pending agreement on aspects of the contract price, such as allowable costs or labour rates, with the price amended later. Suppliers working across both markets should not treat the two meanings as interchangeable. The Canadian meaning is a defined path from cost-reimbursable payment to fixed price.

What it means for a supplier bidding on Canadian public contracts

A supplier under a provisional price clause takes on specific duties. You must keep the cost records needed for a cost submission, and you must be able to support the declared milestone, whether it is work completed or a performance indicator. You must also take part in negotiating the fixed price for the remaining work.

Read the contract's milestone wording and the ceiling price or limitation of expenditure before you bid, because they govern when and how the basis of payment changes. The exact information required and the timing depend on the contract's clauses and the defined milestone. Plan your cost tracking from the first day of the contract so the cost submission is ready when the milestone is reached.