Saturday, January 29, 2011

Payment, Payment Schedules

For many purchases the negotiation of payment terms is very simple, you negotiate a certain number of days after some event in which you make payment. For example:
a commitment to pay net sixty days after the date of delivery.  The key factors in establishing the payment term for the Buyer are:
1.     Value of money for the use of the money during that term.
2.     Ability to perform inspection, test, and possibly rejection before you are obligated to make payment.

In major procurement activities the ability to pay after the work has been completed may not be possible and in those situations you may need to negotiate a payment schedule with the Supplier. In negotiating payment schedules Suppliers may want to do several things.
·      Front end load the payment so they are working off your money.
·      Use the payment schedule and the amount of payments so that it is difficult or costly for you to change suppliers. The more you have paid them up front the more difficult it may be to change as they have your money.

For Buyers one key in negotiating payment schedules is to make sure that you haven’t paid the Supplier more than the work is reasonably worth at the time the payment will be made.  This ensures that if the Supplier fails to perform, you still have the money to correct the performance. Having money owed to the Supplier is one of the best forms of leverage to get performance. For example, in some contracts payments will be structured based upon the percentage of the work that is completed less a certain amount of retainage to further ensure that all the work is completed.  It doesn’t matter whether you are having a building constructed, a major piece of capital equipment delivered, or a major piece of software development completed, in all instances you want to make sure that the Supplier has provided all they are supposed to provide before you want to release substantial amounts you may owe them.

In negotiating payment schedules it is also important to have any progress payments not be tied to time.  Time may pass and the Supplier may be running behind on the schedule so you don’t want to reward them for not performing.  Always tie payments to deliverables or actual progress. You can also use your payment schedule as leverage to try to drive the Supplier into making commitments to get you back on schedule simply by including a requirement that if they are late in meeting the milestone, percentage of performance or deliverable, you have the right to withhold those interim payments until they are back on schedule.  Delaying one payment may not be enough to have the Supplier invest in bringing the work back on schedule, but withholding all may drive the desired behavior.

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