Procurement Post: February 2021
Prepayments: What Are They, and Are They Allowable?
Prepayments or advance payments occur when a supplier asks for a deposit or initial payment before goods or services are received. Although prepayments are acceptable under some circumstances, in most cases, they are discouraged, prohibited, and/or subject to restrictions.
While prepayments are a common business practice and are required by suppliers in certain situations (e.g., catering, software licenses, monthly rent, operating capital for specialized equipment), where possible, departments should avoid committing the university to paying in advance, as there is a risk the supplier will fail to fulfill the terms of the agreement or meet the expected standards of performance (e.g., quality or timeliness).
After carefully considering the risks, if your department wishes to move forward with a prepayment, you will need to document that the benefits of prepaying outweigh the risks. Financial Affairs will review the prepayment terms to determine whether they are acceptable.
Services that will automatically be approved for prepayment include:
- A continuous need for the maintenance or service of a research project
- A mission-critical need of the department
- Customized equipment or furnishings
- Other (justification provided by the requesting department)
Be sure to include the prepayment justification in the requisition or contract notes. Financial Affairs will review and determine if the prepayment is acceptable.
Services that are strictly prohibited from prepayments include:
- Professional services, including but not limited to, consulting, accounting, and legal services
- Internal UCF charges, other than monthly contracts (e.g., advance payment for next month’s copier lease is allowable, but not prepayment for next FY’s lease)
- Any expenditure intended to expend current year operating budget prior to fiscal year close
If you have questions about prepayments, reach out to firstname.lastname@example.org.