Monday, March 19, 2012

Managing Payment

A contract manager may be responsible for managing invoicing or managing payment. What does managing payment consist of?

Contracts may be written where payment can be made in a number of ways such as:
1.A lump sum payment upon completion of the work.
2.Payments based upon completion of agreed milestones.
3.Payments based upon the percentage of the work that has been completed.
4.Payments based upon time and materials used to date.
5.Payments based upon cost plus a fee for overhead and profit.
6.There will be payment terms for when payment will be made.
7.There may be requirements for invoicing.
8.There may be terms where a portion of the payment due is withheld until final completion (retainage).
9.There can be terms such as pay-when-paid where the obligation to pay is contingent upon receiving payment from another party
10.Contracts may also included provisions for payment of reimbursable costs or expenses and have limits or guidelines that must be met.

In the negotiation of the payment approach the suppliers may want to do several things.

Front end load the payment or payment schedule so they are working off the buyer;s money.

Use the payment schedule and the amount of payments so that it is difficult or costly for buyers 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 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 both negotiating payment and managing payment a key 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 remaining money to help correct or complete the performance. Payment terms are also a good way of managing performance. For example you could have a term where if a supplier fails to meet a contract milestone on time the amount of that milestone payment will be withheld until the work is back on schedule.

When a contract manager assumes the management of a contract a part of their diligence in understanding the contract is to understand the contract rights and obligations with respect to payments.

Managing payment responsibilities may include:

1.Reviewing invoices to ensure that it represents the agreed method of payment.
2.Reviewing invoices to ensure all required back-up documentation required is provided and complete.
3.Reviewing invoices to ensure any categories or rates used are what was agreed in the contract.
4.Reviewing the invoice to ensure that the date for its submission is correct and any requirements for invoicing are complied with.
5.If retainage has been agreed that the invoice accounts for the agreed amount of retainage.
6.If it is based upon a pay-when-paid term, that the corresponding payment has in fact been received.
7.For any portion of the invoice that represents reimbursable costs or expenses it includes checking to ensure that the limits or guidelines have not been exceeded.
8.Lastly either the contract manager or another party needs to review all invoices to make sure that they are correct, complete and accurate.

If there is a problem with any of these 8 points, the contract manager needs to work with their counterpart to correct the problem so the invoice may be processed or have the invoice adjusted to remove any items in dispute or where the amount claimed has not been adequately proven or documented.

I’m a firm believer having parties submit an advance copy of invoices for review so that any problems that are found can be corrected prior to the submission of the actual invoice. That eliminates any potential delays in payment. I also believe that prior to any invoicing the Buyer’s contract manager should review their payment process with the supplier to avoid problems and delays. For example if a Buyer wants to make all payments electronically, it may require the parties to enter into a separate electronic funds transfer agreement. Information will need to be provided to set up those electronic payments such as the supplier specifying the bank and account numbers they want payments made to. The supplier needs to understand who to invoice to and how invoices are to be transmitted. As many companies batch process payments, the supplier should be advised of specific cut off dates for submissions of invoices for processing as failure to meet those dates will delay payments.

During the course of the contract the contract manager may be involved in negotiating changes to the payment terms or requirements. They may further negotiate change in rates and include those in amendments. They may negotiate new categories of costs and rates. There may also be terms in the agreement that provided for a future change or may have had a formula to change the costs or rates when certain events occurred. A good example of this would be when you have union workers and the contracted rate for them changes. There may also be costs that were subject to change based upon changes in the marketplace for those commodities. The contract manager needs to note all those potential changes and be aware of how and when those changes will be effective. You do that to make sure that invoices that cover a specific time period include the costs and rates that were agreed for that specific time period.

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