Canadian Government Ranks Pricing Structures
By Paul Emanuelli
This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
The Public Works and Government Services Canada (PWGSC) Supply Manual identifies a number of different contract pricing structures that may be appropriate in different circumstances. Those pricing structures include the following four approaches:
- Firm Price
- Firm Base Price Subject to Economic Price Adjustment
- Fixed Time Rate
- Progress Payments and Advance Payments
The PWGSC’s Supply Manual recognizes that the basis of payment should reflect the particular commodity and the duration of the contract. It also recognizes that more than one pricing structure can be used in a single contract. The following extracts from the Supply Manual provide further details about the above-noted pricing methods and their appropriate uses:
Public Works and Government Services Canada Supply Manual
6E.525 (1994-06-23) This provides for a price, which is not subject to adjustment, to reflect actual costs incurred by the contractor in performance of the contract or part thereof. It gives maximum profit incentive to the contractor for cost control, in that the contractor assumes full responsibility for all costs under or over the firm price. In addition, it places a minimum administrative burden on both contracting parties.
6E.526 (1994-06-23) Use this basis of payment when:
a. the contractor has previously manufactured the particular product or provided the particular service, or similar products or services, and has sufficient experience to permit a realistic statement of work based on firm specifications; and
b. the statement of work can be costed in terms of quantities of material and labour time required; and
c. a realistic estimate of the material prices and labour and overhead rates applicable during the contract period can be made.
6E.527 (1994-06-23) Subsequent to the negotiation of a firm price basis of payment, the contractor must resubmit the price proposal based on the agreement reached and include a price certification in accordance with clause C0003T of the Standard Acquisition Clauses and Conditions (SACC) Manual.
6E.528 (1994-06-23) Discretionary audit clauses may be included in the contract as appropriate.
Firm Base Price Subject to Economic Price Adjustment
6E.532 (1994-06-23) It may not be possible to obtain a realistic estimate of the material prices and/or labour and overhead rates required for the use of a firm price basis of payment and it may be necessary to negotiate provisions for price adjustments. These provisions provide for revisions to the firm base price upon the occurrence of certain contingencies.
6E.533 (1994-06-23) The economic price adjustments are determined as described in 6C.297.
Fixed Time Rate
6E.537 (1994-06-23) A fixed time rate provides for the payment to the contractor for the actual amount of time spent in performance of the work, as confirmed by government audit, on the basis of a predetermined fixed time rate. The fixed time rate usually includes a direct labour rate, overhead rate(s) and profit.
6E.538 (1994-06-23) Use this basis of payment when:
a. it is not possible to estimate in advance the extent or duration of the work, but it is possible to determine within reasonable limits the applicable direct labour and overhead rates during the contract period; and
b. there is provision for adequate controls to ensure that inefficient or wasteful methods are not being used by the contractor.
6E.539 (1994-06-23) Contracts or parts of contracts with a fixed time rate basis of payment may also provide for a ceiling price, by which the contractor is bound to complete the prescribed work without additional payment whether or not the actual costs exceed the ceiling price. If a ceiling price is to be used, there must be full agreement between the parties as to what constitutes the prescribed work.
Before agreeing to the incorporation of a ceiling price in a fixed time rate contract, the contracting officer should consider whether a firm price contract would be more appropriate.
6E.540 (1999-12-13) When contracts, or parts of contracts, with a fixed time rate basis of payment do not include a ceiling price, a limitation of the Crown’s liability must be made a term of the contract, unless an exception is specifically authorized by the Minister, by including in the contract SACC Manual clause C6000C or C6001C.
6E.541 (1994-06-23) Following the negotiation of fixed time rates, the contractor must resubmit the price proposal based on the agreement reached and include a rate certification.
6E.542 (1994-06-23) Time Verifications, Rate Certifications and Discretionary Audits must be provided for in contracts.
Progress Payments and Advance Payments
6E.585 (2008-12-12) Progress payments or advance payments may be considered only if all of the following conditions are met:
a. adequate security for the payment is ensured;
b. Canada receives value commensurate with the amount of the payment;
c. the client has adequate funds to provide the financing; and
d. one of the following:
i.there is economic advantage to Canada that clearly outweighs the financing cost associated with the progress payment or advance payment (see 6E.587(b));
ii. the contractor could suffer hardship or provide financing only with difficulty or at rates considered to be uneconomical 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. there is to be a long duration for contract performance; or
v. there is an entrenched tradition or practice of receiving progress payments or advance payments from the purchaser in a particular industry or segment of industry. Funds must be spent in the fiscal year for which they are appropriated and cannot be carried forward by means of advance payments.