Payment Terms for Equipment Procurement
Payment terms for equipment procurement in EPC (Engineering, Procurement, and Construction) projects define when and how the buyer pays the supplier for materials and equipment. Unlike simple commercial transactions, EPC procurement typically uses milestone-based payment schedules tied to manufacturing progress, inspection, and delivery events.
The right payment structure balances the supplier’s need for working capital against the buyer’s need to maintain use until goods are delivered, inspected, and accepted. Payment terms for equipment procurement vary by order value, material type, and project requirements.
Typical Payment Structures
| Payment Structure | Description | Common For |
|---|---|---|
| 30/70 | 30% advance, 70% against shipping docs | Standard piping materials (pipes, fittings, flanges) |
| 20/70/10 | 20% advance, 70% at shipment, 10% retention | Valves, instrumentation |
| 10/80/10 | 10% advance, 80% at shipment, 10% after acceptance | Engineered equipment (heat exchangers, vessels) |
| Progressive milestones | Payments tied to manufacturing stages | Large or custom-fabricated equipment |
| 100% against docs | Full payment upon compliant document presentation | Small orders with LC |
| Net 30-90 | Full payment 30-90 days after delivery | Repeat orders, trusted suppliers |
Milestone Payment Example
A typical milestone schedule for a large valve package ($500,000+) on an EPC project:
| Milestone | Percentage | Trigger |
|---|---|---|
| Advance payment | 15% | Upon purchase order execution |
| Raw material procurement | 15% | Against raw material certificates |
| Manufacturing progress | 20% | At 50% manufacturing completion (verified by inspector) |
| Factory acceptance test (FAT) | 20% | Upon successful FAT and documentation approval |
| Shipment | 20% | Against compliant shipping documents |
| Retention / warranty | 10% | After mechanical completion or 12 months from delivery |
Considerations
Retention (holdback): A portion of the contract value (typically 5-10%) held by the buyer until the warranty period expires or the equipment passes field testing. Retention protects against defects discovered after installation.
Payment instruments: Advance payments are typically made by TT (wire transfer). Progress and shipment payments may be structured as TT against documents or LC at sight. The choice affects cost: LCs add 1-3% but provide bank-guaranteed security.
Performance guarantees: For large equipment orders, the buyer may require a performance bond or bank guarantee alongside the procurement documents to protect against non-delivery or late delivery.
| Payment Instrument | Buyer Protection | Seller Cash Flow | Banking Cost |
|---|---|---|---|
| TT advance | Low | Immediate | Minimal |
| TT against documents | Medium | At shipment | Minimal |
| LC at sight | High | At shipment | 1-3% |
| LC with deferred payment | High | Delayed (30-180 days) | 1.5-4% |
| Standby LC | Backup only | Per agreed terms | 0.5-1.5% |
Payment terms must align with the Incoterms 2020 delivery term specified in the purchase order to ensure consistent allocation of cost, risk, and responsibility.
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