Advance payment
Payment is the transfer between parties of some form of value (such as funds, services, assets) in an agreed exchange. This can be for goods, services or to fulfil a legal obligation such as a debt. The most common form of payment involves money although it can also take the form of other benefits, and is typically preceded by a bill or invoice specifying the amount due.
An advance payment, sometimes referred to as a down payment, or ex gratis payment, is when part of a contractual sum is paid in advance of the exchange, i.e. before any work has been done or goods supplied. Advance payments are typically recorded as prepaid expenses by the payer and recorded as assets on the balance sheet.
On a construction project, a contractor may request an advance payment to help them meet significant start up or procurement costs that may have to be incurred before construction begins. For example, where they have had to purchase high-value plant, equipment or materials specifically for the project. In these instances, the client should require an advanced payment bond. This secures the payment against default by the contractor.
For more information, see Advance payment bond.
It is also sometimes necessary for the client to pay for items even though they remain ‘off-site’, for example, where a contractor has made a large payment for plant or materials that have yet to be delivered to site, or if the client wishes to ‘reserve’ key items in order to protect the programme. However, this does put the client at risk, for example if the contractor or supplier becomes insolvent and the items are then not delivered, even though payment has been made.
Several mechanisms are available to protect the client, however, none of these is fool proof. Judgement is necessary to assess the risk to the project, or the potential loss to the client versus the benefit of greater certainty of supply.
For more information see: Off site materials.
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