Basis of Payment

In Canadian federal procurement, Basis of Payment defines how a contract price is built and how the contractor is compensated. The Government of Canada's pricing guidance links it to factors such as the commodity or service being bought, the contract duration, and how clearly the requirement is defined. Source: Practitioner's Guide for Procurement Pricing.

Innovation, Science and Economic Development Canada (ISED) describes the term in similar words in its General Conditions of a Service Contract. There, Basis of Payment sets out what the contractor will be paid, for what is acquired, and for what contract duration. It can also cover related costs such as travel and administration.

The four primary bases of payment

The federal pricing guide identifies four primary bases of payment:

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

A basis of payment can stand alone or be paired with incentives. Government of Canada contract request documentation also refers to related pricing terms, including firm lot price, firm unit price, target price, ceiling price, incentive-fee formulas, fixed time rate and price-to-be-negotiated.

How fixed-price and provisional-price arrangements work

Under CanadaBuys guidance on fixed price, the Crown pays a definite sum for the work regardless of the contractor's actual costs. The contractor is responsible for any costs above or below that amount. A firm price is the form most often seen in the solicitations reviewed for this page.

A provisional-price arrangement is used where requirements and costs are uncertain. The contract begins on a cost-reimbursable basis with a defined ceiling price or limitation of expenditure. It can later move to fixed pricing after a specified milestone.

Where Basis of Payment appears in solicitations

Federal requests for proposal commonly require bidders to submit their financial proposal in accordance with Annex B, Basis of Payment. The buyer selects the pricing approach that suits the requirement, and ISED's service-contract conditions require selecting the appropriate type for the nature of the contract.

• Agriculture and Agri-Food Canada: one solicitation required financial bids under the stated basis of payment and provided for firm unit prices.
• National Defence: one solicitation required financial bids in accordance with the Basis of Payment and specified payment of a firm price in Annex B.
• Professional services: PSPC's Centralized Professional Services System uses an Annex B, Basis of Payment, in its high-complexity bid solicitation and resulting-contract templates for TBIPS and TSPS methods of supply.
• CanadaBuys tender notices: one request for proposal required the financial bid in accordance with Annex B and evaluated the total aggregated fixed-price cost using its pricing tables.

What it means for a supplier

Suppliers must price and submit their financial bids in the format and on the basis the solicitation specifies. That includes the required price tables, rates, units, taxes and any applicable assumptions. Read Annex B before you build your price, because it fixes the structure your bid has to follow.

The basis of payment also decides who carries cost risk. On a fixed-price contract, you absorb costs above the agreed sum. On a provisional-price contract, you work within the stated ceiling or limitation of expenditure until the contract moves to fixed pricing, if it does.