In too many cases, supply contracts can “run out of money” because the amount of the contract underestimated the funds needed for its length.
The general rule in a municipality is once out of money, invoices cannot be processed until additional funds are added to the contract. Even with the best will in the world it can be problematic in certain cases to place a dollar value on a contract.
To assist municipal staff in doing so, it is advisable to establish clear rules on valuation within the context of the purchasing policy.
For instance, a municipality might adopt the rules along the following lines:
- In the case of construction work contracts, the value would include the cost of supplying of all goods and the provision of services related to the construction process.
- In case of contracts for the rental or hire of a good, the value would be total cost of the contract over the whole contract term.
- In case the contracts for the lease purchase of a good – for the whole contract term including any final purchase price (generally the anticipated residual value of the good) payable to acquire the good at the end of the term of the lease.
- In case of recurring supply or service contracts of an indeterminate amount, valuation could be based on the actual aggregate value of similar contracts concluded over the previous fiscal year and adjusted, where possible, for anticipated changes in quantity or value.
- In case of contracts for an indefinite period, valuation could be made by reference to the monthly instalment multiplied by the anticipated life of the contract, or alternatively over the normal municipality’s budget cycle.
- In case of insurance services, the total payable premium inclusive of all fees and commissions.
- In case of financial services, the aggregate of all interests, costs, fees and commissions as well as the cost of any related legal, accounting or professional services.
- In case of contracts that involve capital project work, the full anticipated cost to final completion, including a contingency allowance.
Whatever methods of valuation may be used, care must be taken to ensure the selection of the valuation method is not with the intention of avoiding the applicable laws or policy. Clear rules and procedures for securing necessary dollar value extensions must be in place.
Although it may occasionally be necessary to draw against reserves to meet an unanticipated expenditure that must be made or an expected expenditure that turns out for some reason to be greater than was anticipated, there is no general authority to spend funds in a way that has been approved by council, whether directly or as part of the budget process.
The term “spending authority” generally describes the designation of a person who may give signature authorization to approve payment of a budgeted expenditure.
Generally, this authority will be conferred on senior levels of municipal management and departmental general managers may be empowered to designate additional employees for this purpose up to some preset limit.
A common procedure for designating such employees is to complete a signature authorization form, naming the responsible person and describing the authority conferred. The completed form is then returned to accounts payable before transactions can be processed against the new budget code and authorization of the person named.
The accounts payable department will use the form to verify the employees who have signed an invoice to direct that payment be made are authorized to do so and that their signatures match the signature on authorized form. The intent behind this procedure is to protect the municipality from the possibility of unauthorized or fraudulent expenses posting to accounts.
Stephen Bauld is a government procurement expert and can be reached at [email protected]. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.
