Contract Payment Stream: Introduction

Contract Payment Stream: Introduction

A Contract Payment Stream refers to the cash flow from the customer’s end to a particular Profit and Loss site in return for the services or repairs done. It represents how a customer is billed for various fees. All the factors contributing to a Contract Payment Stream are taken into consideration to ensure that the cash flow during the contract period remains relatively constant.

The Contract Payment Stream or fees may include any of the following as detailed in the contract:

• Fixed Fee

• Factored Fired Hours Fee

• Periodic Payments

• Adder Fee

• Taxes

• Escalation Amounts

Contract Payment Stream: Periodic Payments 

These payments may be calculated monthly, quarterly, or even annually, as specified in each individual contract. Sometimes, payments are made periodically during the term of the contract. Note that these are the normal components that are included in the Invoice Total. When a customer asks for the Invoice Subtotal, normally only the Fixed Fee, Factored Fired Hours Fee, and Periodic Payments are included.

You will now learn about the fundamental details of the various Contract Payment Stream.

A Fixed Fee is essentially the standard fee that is typically paid every month. This can also be paid quarterly or annually. In some contracts, the amount may change over time with different periods having different set of amounts. The customer, however, pays as specified in the contract. The customer is expected to make this fixed fee payment at the time specified in the contract.

This specified fee, which is decided at the beginning of the contract, ensures smooth flow of cash into the Contract Payment Stream.

Factored Fired Hours Fee is a major contributing factor to the payment stream. This fee is an amount charged for the hours of actual turbine operation, or the fired hours. The customer has to submit accurate and complete documentation of the operational data of each gas turbine unit for the calculation of Factored Fired Hours. This turbine operational data includes the number of fired hours, types of fuel used, and the number of starts.

The Factored Fired Hours Fee is the product of the number of Factored Fired Hours and the Fired Hour Rate.

The Fired Hour Rate is the per hour fee that a customer pays for operation of the gas turbine. In a contract, the Fired Hour Rate may be specified either as a set value or a variable value for the contract period.

Periodic Payments or Milestone Payments are made periodically or at predefined milestones. The milestones usually pertain to significant maintenance events.

The benefits of Periodic Payments are:

§  Customers are able to maximize cash retention until their maintenance is due.

§  CS is assured that there is cash in hand prior to performing the maintenance.

§  For CS, deferred revenue is minimized if the quantum of periodic payment closely matches the actual costs.

In a typical contract, the two types of Periodic Payments are:

§  Quarterly Payments

§  Mobilization Payments

Click each type of Periodic Payments to know more about it.

Periodic Payments or Milestone Payments are considered to be an important component of the payment stream. These payments are made periodically or at predefined milestones. The milestones usually pertain to significant maintenance events, such as a payment of $500,000 for every 10,000 Factored Fired Hours.

Typically, a CPM needs to ensure there is regular cash inflow at predefined milestones during the term of the contract. This helps avoid the need to borrow money to pay for repairs and maintenance services. 

Periodic Payments ensure that money is received prior to the performance of the maintenance. The benefit to the customer is that they get retain the majority of their cash till the time when the maintenance is performed. The benefit to GE is that there is cash in hand prior to performing the maintenance. Another benefit of periodic payments for CS is that deferred revenue is minimized if the quantum of periodic payment closely matches the actual costs.

In a typical contract, the two types of Periodic Payments are Quarterly Payments and Mobilization Payments. Click each type of Periodic Payments to know more about it.

The monthly Invoice Subtotal can be calculated only after the individual components of the Contract Payment Stream for the month are calculated. The components normally referred to when a customer asks for the Invoice Subtotal are Factored Fired Hours Fee, Fixed Fee, and Periodic Payments. Therefore, to calculate a customer’s monthly Invoice Subtotal, the components and fee that were due for the month are added together.