Currency of Payment

Currency of payment is the currency or currencies in which the employer actually disburses payments to the contractor during contract execution, as defined in the contract data or special conditions, which may or may not be the same currency in which the bid price was originally expressed.

What is Currency of Payment?

In many international and MDB-financed contracts, the payment currency is split between foreign currency and local currency to reflect the contractor's actual cost structure. The portion of the contract covering imported equipment, expatriate labour, or head-office overheads is typically paid in a hard currency such as US dollars or euros, while the portion covering local labour, local materials, and in-country services is paid in the country's local currency. This split is stated in the contract data and corresponds, ideally, to the currency breakdown the contractor specified in its bid.

The distinction between currency-of-bid and currency of payment matters because the exchange rate used to convert between them, and the timing of that conversion, creates foreign exchange exposure. If the employer pays local currency but the contractor bid on an assumed exchange rate that later moves adversely, the contractor's margin on local-currency components can be eroded significantly, particularly on long contracts with monthly progress-payment cycles.

Why Currency of Payment matters for bidders

The currency of payment clause is a key financial risk item to read before finalising your price. Identify which of your costs are in hard currency and which are local, and check that the contract's payment split matches that structure. If it does not, quantify the exchange rate exposure and decide whether to hedge it, absorb it as a risk premium in your price, or raise a clarification before bid submission. Development bank contracts often allow the contractor to specify the desired currency split in the bid, up to the proportions justified by the cost breakdown, so use that option deliberately rather than accepting a default that does not match your cost structure.

FAQ

Can a contractor specify its preferred currency of payment?

In many MDB-financed contracts, yes. The instructions to bidders allow the contractor to indicate the currencies in which it wishes to be paid, up to the amounts justified by foreign-currency cost components.

What exchange rate applies to multi-currency payments?

The contract specifies the exchange rate or the rate source, typically the central bank rate on a reference date, used to convert between currencies for payment and evaluation purposes.

What happens if the local currency depreciates after contract award?

Unless a price-adjustment-formula or specific exchange rate guarantee exists, the contractor absorbs the adverse currency movement on local-currency payment tranches.