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Basis of payment

‘Basis of payment’ can include payment:

  • ‘Up front’ to finance set-up costs
  • On the completion of stages of work or the achievement of milestones (steps towards an output or outcome)
  • On the achievement of outputs or outcomes
  • At fixed intervals
  • At the end of the period of the agreement.

Payments can:

  • Vary to reflect the cost of each stage, period or achievement in question
  • Be spread out over a longer period.

The basis of payment can also include:

  • The arrangements for the funder or commissioner to recover any underspent grant. (This cannot apply to awards made through the procurement channel)
  • Arrangements for the provider to compensate the government body – over and above any clawback – for the consequential loss associated with any failure to deliver generally only apply to an award made through procurement. You cannot sue a provider for consequential loss if the award was a grant or grant-in-aid.

Timing of payment to the provider

This can be in:

  • Arrears: after the provider has incurred the expenditure and after the product, work or service – or an agreed part of it – has been delivered
  • Advance: before the provider has incurred the expenditure and before the product, work or service – or an agreed part of it – has been delivered Payment in advance can be made to TSOs where there is a ‘clear operational requirement’ for this [Footnote 1].

Agreeing basis and timing

A funding model must include the appropriate mix of bases and timings – called the ‘payment formula’. The payment formula must follow from:

  • The objectives of the programme
  • The agreed approach to risk management.

In addition, the following five criteria must be met:

  • You must agree the payment formula with the provider
  • You must record the agreed payment formula in the financial agreement (contract, service level agreement or grant award letter, as appropriate)
  • All aspects of the payment formula must meet an identifiable need of the programme
  • No element of the payment formula may be novel or contentious (unless specific approval has been given by the Treasury)
  • Each element of the payment formula must be wholly necessary (for example, large TSOs with substantial liquid reserves may not need advance payment).

Ensure arrangements for making the payments are clear – for example, if you will need the TSO to invoice you, make clear the dates on which invoices should be raised, and give them a realistic indication of how long it will take from them raising an invoice until they can expect to receive payment.


  1. See Government Accounting, section 9.3.1, and the Compact Funding and Procurement Code, paragraph 5.6.

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