Advance Payments

DATE: August 18, 1995

TO: Senior Financial Officers, Senior Full Time Financial Officers, Functional Heads of Administration

SUBJECT: Advance Payments

This bulletin replaces one issued on February 8, 1993 concerning advance payments under contract.

In two reports tabled in the House on November 17, 1994, the President of the Treasury Board identified a number of departments and agencies that accepted or made "inappropriate" advance payments which were subsequently carried forward between fiscal years contrary to government legislation and Treasury Board policy. The reports identified several reasons for these advance payments, one of which was a lack of understanding by departments of the Treasury Board policy on the making of advance payments between departments. The purpose of this bulletin is to clarify the application of this policy which was confirmed by the Treasury Board at a meeting held June 15, 1995 (TB 823038).

Policy on advance payments

The policy of the Treasury Board is that:

• advance payments will only be made under exceptional circumstances when they are considered essential to attaining program objectives and when no other reasonable alternative exists; and

• where advance payments are warranted, the amount of any such advance made in any particular fiscal year shall not exceed the value of the goods or services received in that fiscal year.

Applicability

This policy is contained in section 12.2 of the Contracting volume of the Treasury Board Manual, entitled "Financial Considerations". The policy applies to all departments and agencies, including departmental corporations and branches designated as departments for purposes of the Financial Administration Act (FAA). Further, the policies in this section apply equally to interdepartmental agreements, arrangements and memorandums of understanding as well as contractual arrangements with outside parties.

Restrictions

While section 34 of the FAA prohibits making advance payments that are not provided for by contract, it does not authorize the making of advance payments. It is actually the contractual arrangement, not the FAA, that provides the legal basis for the advance payment to outside parties. Likewise, any advance payments between departments must be included in interdepartmental arrangements or agreements.

Advance payment clauses included in contract documents, or advance payments made between departments whether or not they are covered by interdepartmental agreements, must adhere to the principles of parliamentary control, the requirements of paragraph 33(3)(a) of the FAA, and the provisions of the appropriation Acts themselves. That is:

• payments must be a lawful charge against the appropriation;

• payments can only be made for goods or services received in the same fiscal year; and

• funds must be spent in the fiscal year for which they are appropriated and cannot be carried forward by means of advance payments. For instance, funds cannot be carried over between fiscal years by making advance payments into or out of revolving funds or specified purpose accounts.

Preconditions

Advance payments should be considered only in extraordinary circumstances, that is, when they are considered essential to program objectives. Contractors are expected to finance their work from their reserves or through commercial financing based on the anticipated payments from the contracting authority for full or partial completion of the work. Departments should consider the financing and interest costs to the Crown, as well as the method of recovery, when negotiating advance payments and should evaluate these costs when comparing other alternatives.

Section 12.2 of the Contracting volume of the Treasury Board Manual sets out certain additional preconditions. These conditions are applicable to both contractual arrangements and interdepartmental agreements or arrangements. However, even if these preconditions are met, advance payments are not necessarily warranted. While progress payments may be more common, advance payments are normally very much the exception.

Timing and amount of advance payments

Section 12.2 also sets our conditions on the timing and amount of advance payments which are applicable to both payments under contractual arrangements and interdepartmental agreements or arrangements. In addition to these conditions, in the case of multi-year arrangements requiring continuing advances or an advance to cover the full duration of the contractual agreement, a minimum of a series of separate advances must be made for each fiscal year.

Amendments

Clarification of these conditions and principles will be incorporated into the Contracting and Comptrollership volumes of the Treasury Board Manual in a forthcoming revision. I ask you to ensure they are respected in your department's contracting and payment practices.

12.2.1 The Financial Administration Act. Sections 32, 33 and 34 of the Financial Administration Act prescribes various financial controls in contract expenditures. Usually the financial aspects of contract administration are the responsibility of financial managers, but contract administrators should have a basic knowledge of the law and the financial management policies of the government. Much of this information is set out in the Comptrollership volume of the Treasury Board Manual issued by the Treasury Board Secretariat.

12.2.2 Advance Payments. Section 8 of the Government Contracts Regulations permits advance payments. If advance payment clauses are to be included in contracts, they must adhere to the principles of parliamentary control, the requirements of the Financial Administration Act (paragraph 33(3)(a)), and the provisions of the appropriation Acts themselves. Where contract approval is within departmental authority, advance payments can be approved by the department. However, as required by the Regulations, where contract approval is beyond departmental authority, advance payments require Treasury Board approval.

12.2.3 Preconditions For Using Aduance Payments. Advance payments should be considered only in extraordinary circumstances, that is, when they are considered essential to program objectives. Contractors are expected to finance their work from their reserves or through commercial financing based on the anticipated payments from the contracting authority for full or partial completion of the work. Contracting authorities should consider the financing and interest costs to the Crown, as well as the method of recovery, when negotiating advance payments and should evaluate these costs when comparing other alternatives.

12.2.4 Further to the preceding, contracting authorities should consider including advance or progress payments in a contract only if:

(a) adequate security for the payment is ensured;

(b) the Crown receives value commensurate with the amount of the payment;

(c) the contracting authority has adequate funds to provide the financing; and

(d) one or more of the following criteria are met;

i) economic advantage to the Crown;

ii) contractor could suffer hardship or provide financing only with difficulty or at rates considered to be uneconomic in relation to prevailing chartered bank prime lending rates;

iii) the value of the contract is considered to be beyond the assessed financial capabilities of the contractor:

iv) long duration for the contract performance;

v) an entrenched tradition or practice or receiving advance or progress payments for the purchaser exists in a particular industry or segment of industry. (Supply Policy Manual Article 4202)

12.2.5 Timing and Amount of Advance Payments. Except in extraordinary circumstances, in accordance with the principles of annual appropriations and the basis on which funds are appropriated by Parliament,

(a) advance payments cannot be made in one fiscal year in respect of a contract that does not start until the next fiscal year;

(b) where an advance payment is in respect of extraordinary start up costs, the payment is to relate to, and cannot exceed, the actual start up costs expected to be incurred by the contractor in the fiscal year in which the payment is made; otherwise, advance payments in any given fiscal year must relate to, and cannot exceed, the value of the work to be performed or the goods or services reasonably expected to be provided during that year;

(c) multi year maintenance contracts are to, as a minimum, provide for annual payments for each year of the contract, and multi year licensing agreements should, to the extent possible, do the same; and

(d) departments cannot carry funds over from one fiscal year to the next by transferring them to revolving funds or specified purpose accounts, or by pre paying for goods and services from revolving funds.