This page is part of our successful commissioning toolkit.
Main conditions
Near the start of this guidance, we highlighted the importance of setting outcomes for your fund. Paying your provider for outcomes achieved reinforces both incentives for success and accountability. But an outcome can sometimes take some time to achieve. Your provider may need interim payments to remain financially solvent. There are a number of options:
- Up-front payments to cover costs the provider will need to deliver the outcomes
- Payments for the achievement of items of work that are stages – also known as milestones – towards the achievement of outcomes
- Payments at fixed intervals based on a agreed schedule
- Payment in advance of some, or all, of the total agreed payment. This would normally be to enable a provider without sufficient cash, but with the required expertise, to start and deliver a programme.
It is government policy that public bodies should pay invoices within 10 days of being issued as set out in the Prompt Payment Guidance for Public Sector Organisations and the Compact. Although grants are excluded from the prompt payment initiative, government guidance is that organisations should ensure that all their payment processes, including those for grants, are as efficient as possible, particularly where the recipients are small and medium sized enterprises (as many third sector organisations (TSOs) are).
Practical example: Payment formula
A Primary Care Trust (PCT) and a council decide to jointly commission relationship counselling in their area. The process results in the appointment of two TSOs that the council and PCT believe are capable of delivering the service to a high quality.
It also seems clear that the two TSOs can deliver within the overall budget. The council and the PCT both traditionally pay in arrears for achievement of outcomes (or milestones towards them). But both TSOs demonstrate that they cannot run the service on this basis. They are small organisations with small reserves and with no access to external financial investment (e.g. from a bank).
You enter into negotiations with the TSOs. For you, the main objectives are to deliver the programme’s objectives and stick to the overall budget for the programme. You will be prepared to consider some up-front funding as long as the risk this presents to the PCT and council is reasonable.
In the end, your objectives and those of the TSOs’ are similar. You reach agreement on a funding formula that combines three elements:
- Some up-front money to pay for premises and equipment for the counselling and some recruitment costs;
- Payment monthly in advance based on the number of couples to be counselled;
- Payment quarterly in arrears based on the number of outcomes (or milestones) achieved.
Clawback
You may make a grant to a TSO and, at the end of the period covered by the grant, not all of it has been spent. In this case, you have the right to recover or ‘claw back’ the unspent money [Note 1]. If grant monies have been used to acquire or develop a capital asset, such as land or buildings, then you should consider setting clawback or other conditions on such grants in the event that the grant recipient proposes to sell or change the use of such assets. You should have clearly set out the circumstances in which clawback will apply in the grant agreement you have with the TSO [Note 2].
Notes
Note 1: HM Treasury, Improving Financial Relationships with the Third Sector: Guidance to Funders and Purchasers, 2006
Note 2: HM Treasury guidance on protecting public investments can be found at https://www.gov.uk/government/publications/managing-public-money
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Successful commissioning toolkit: Table of contents