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4.65. Exchange Rate Fluctuation Risk Mitigation

  1. The exchange rate risk on the purchase of materials, components or products from outside Canada is generally considered a normal business risk for suppliers. However, in some cases, it may be in the interest of Canada to accept the risks and benefits of currency fluctuations. In such circumstances, the bidder may be offered the choice to mitigate their risk by having an exchange rate fluctuation provision included in the contract.
  2. When determining if an exchange rate fluctuation provision will be included, contracting officers may consider such factors as: the likelihood that currency fluctuations will reduce the number of bidders; the duration and value of the contract; previous concerns of suppliers; potential impact on prices, and the willingness and/or ability of the client department to accept such provision.
  3. An exchange rate fluctuation provision would not generally be applied to procurements done by the European and Washington regions, or procurements on the behalf of the Canadian Commercial Corporation. This provision should also not be used with telephone buys nor with cost reimbursable contracts (or cost reimbursable items of a contract).
  4. The solicitation must indicate if an exchange rate fluctuation provision is included as a choice for the bidder, and explain clearly how such provision will be applied. The solicitation must indicate the method for determining the initial exchange rate. For example the initial exchange rate is the Bank of Canada rate published on the solicitation closing date. The Bank of Canada publishes its rates each business day by 16:30 Eastern Time (ET).
  5. The solicitation must also indicate the date to be used in determining the exchange rate for adjustment purposes. This will be the rate published by the Bank of Canada on such a date, by 16:30 ET. It is often preferable to use the delivery date as the exchange rate for adjustment purposes. Contracting officers may also choose to use the direct shipment date, as indicated on the Canada Customs Coding Form, CBSA Form B3-3, or some other date. Contracting officers must always ensure that the solicitation (and contract) clearly specifies the method for determining the date for the exchange rate for adjustment. Where a modification to a clause is required, contracting officers are encouraged to work with the Procurement Process Tools Division (outilsapprov.proctools@tpsgc-pwgsc.gc.ca) and legal services to modify the appropriate Standard Acquisition Clauses and Conditions (SACC) Manual clause. Generally, bids must be submitted in Canadian currency.
  6. Exchange rate fluctuation provisions must be identified in procurement plans, contract requests, and Contract Planning and Advance Approvals (CPAA), since it is part of the basis of payment and may impact the total contract costs. The client should be informed of and agree with the decision to use this provision in the solicitation and the contract. The client should provide a buffer in the commitment, or alternatively, be aware that a supplemental section 32 certification of the Financial Administration Act may become necessary in order for the payment to be made. The client project authority may need to inform the department financial authority of a potential impact to the commitment. Approval of the procurement/contract does not need to be sought again due to any increases in the total contract value resulting from exchange rate fluctuation that may occur.
  7. To have the exchange rate fluctuation provision apply, bidders must identify this choice as per the instructions in subsection j. The FCC is defined as the portion of the price or rate that will be directly affected by exchange rate fluctuation. The FCC should include all related taxes, duties and other costs paid by the supplier and which are to be included in the adjustment amount.
  8. When bidders are offered the choice to mitigate their risk against the exchange rate fluctuation, SACC Manual clause C3010T must be incorporated by reference in the solicitation, and clause C3015C, which may be used for various methods of payment such as milestone and cost incurred progress payments, must be used in the resulting contract clauses.
  9. Whenever exchange rate fluctuation is not expected to be an issue, and therefore it is not proposed to offer mitigation against it, the SACC Manual clause C3011T must be included in the solicitation to clearly indicate to bidders that a request for exchange rate adjustment will not be considered and that inclusion of such request in the bid will render the bid non-responsive.
  10. To have the exchange rate fluctuation provision apply, the bidders must identify this choice and clearly indicate the applicable FCC, generally in Canadian dollars, and the applicable foreign currency for each line item in the financial proposal for which the adjustment will be applied. Bidders may indicate this using form PWGSC-TPSGC 450 Claim for Exchange Rate Adjustments. The FCC amount will then be used in the calculation of the adjustment amount when invoiced and paid.
  11. The exchange rate adjustment amount will be calculated by the successful bidder using the following formula:
    Exchange Rate Adjustment = FCC x Qty x ( i1 - i0 ) / i0
    where formula variables correspond to:
    FCC
    Foreign Currency Component (per unit)
    Qty
    quantity of units
    i0
    initial exchange rate (CAN$ per unit of foreign currency [for example US$1])
    i1
    exchange rate for adjustment (CAN$ per unit of foreign currency [for example US$1])
    This calculation may be done for each line item and the sum of adjustments shown as a single line item on the invoice.
  12. Example: In a solicitation for 100 "regular chairs", the successful bidder bid CAN$200 per chair and specified an FCC for each chair of CAN$100 (50%) representing the initial value of materials from the US, including all applicable customs, taxes and exchange rate costs which are impacted by the exchange rate. The solicitation specified that the initial rate is based on the bid closing date and that the rate for adjustment is based on the delivery date. The bid closed on March 1, and on that day, the exchange rate was 1.0000 CAN$ per US dollar. On May 1, when the chairs were delivered, the exchange rate changed significantly to 1.1500 CAN$/US$.
    Calculation:
    Exchange Rate Adjustment
    = (FCC per unit) x Qty x ( i1 - i0 ) / i0
    = $100 x 100 x (1.1500 CAN$/US$ – 1.0000 CAN$/US$) / 1.0000 CAN$/US$
    = $1,500
    Figure 1: Sample invoice including exchange rate adjustment
    Description of unit Qty Unit price (CAN$) Value (CAN$)
    Regular chair 100 $200 $20,000
    Exchange rate adjustment (on regular chairs, US$ exchange rate for March 1, 2013 to May 1, 2013) 100 $15 $1,500
    Subtotal: $21,500
    Alternatively, had the new rate been 0.8900 CAN$/US$, then the exchange rate adjustment would be: $1,235.96 representing a reduction in the price paid by Canada.
    Note: Suppliers should submit a separate calculation sheet for each invoice submitted showing the exchange rate adjustment for all line items with an FCC.
  13. The exchange rate adjustment will only be applied when the exchange rate fluctuation is greater than 2% (increase or decrease), i.e. abs[(i1 – i0) / i0] > .02, where "abs" represents the absolute value.
  14. The choice by a bidder to mitigate their risk against the exchange rate fluctuation will not have an impact on the evaluated price. The exchange rate adjustment is applied at the time of payment.
  15. The client payment office is responsible for ensuring that the adjustment is in accordance with the contract provisions.
  16. Contracting officers must ensure that the initial exchange rate, the FCC for each item, and the associated foreign currency for each FCC is clearly indicated with the prices in the contract to facilitate the payment process.
  17. Contracting officers must also ensure that the basis of payment clause specifies:
    "The price paid will be adjusted in accordance with the exchange rate fluctuation provision (as applicable)."
    Note: The words "as applicable" are used, since it is the bidder's choice to include an exchange rate fluctuation provision and the exchange rate fluctuation must be greater than 2% (increase or decrease).
  18. Invoicing: The supplier must indicate the exchange rate adjustment amount (either upward, downward or present no change) as a separate item on each invoice or claim for payment submitted under the contract. This must be shown even when there is no adjustment claim due to the change in the rate being below the threshold.
  19. The total estimated cost of the contract must be amended upward, where needed, to address changes due to the exchange rate fluctuation. The final contract amendment should amend the contract price upward or downward, as needed, to reflect the actual price paid.