Recently a federal contracting officer asked one of my sales managers, “Why on earth would you fund multiple years of an IT transaction when the government is only obligated to pay for one year at a time?” The question itself speaks volumes about the government’s annual view versus private industry’s desire to seek a meaningful solution by properly deploying capital in a risk/reward situation.
In fact, the federal government has spent at least $80 billion annually for each of the last twelve years on technology projects alone, and this year will spend an estimated $95 billion. By many accounts from government and industry, 80 percent of the federal government’s existing IT systems are legacy and outdated, because, as the government claims, it doesn’t have the budget.
Still, there is a drive by government to make itself more efficient. Partly, it has, but it also has many miles to go. The government’s “cloud first” Data Center Consolidation Initiative (“DCCI”) and a move toward enterprise-wide procurement is a positive, while the IT Modernization Act would only establish a $250 million IT working capital fund to address a multibillion-dollar problem.
Really? The answer to government’s modernization and efficiency issues already exists in FAR (Federal Acquisition Regulation), the principal set of rules in the Federal Acquisition Regulations System for agencies of the U.S. government to acquire (purchase or lease) goods and services with appropriated funds. Lease or purchase utilizing multiyear payment plans? Hint: FAR 7.4, for starters. It provides guidance about acquiring equipment by lease or purchase, and applies to both the initial acquisition of equipment and the renewal or extension of existing equipment leases.
Here is why it makes sense to fund multiple years, understanding government’s annual obligation: essential use. When a prime contractor and its financial institution determine that it makes good business sense to fund multiple years of annually obligated transactions, typically it has reviewed how essential the IT project is by assessing the following:
- How long has the agency been in this technology footprint?
- What substitutes now or in the future are available and likely for the agency’s need?
- What level of testing and analysis went into the agency’s own choice of the asset?
- What level of approval under a “name brand justification” (or Justification & Approval), if any, did the agency go through?
- If the agency were to choose its ability to annually terminate without obligation, what would it go through in terms of time and cost to replace the technology, relative to the full length of the financing?
- Who is the IT manufacturer, and can it support the agency through the finance term?
- Who is the prime contractor, and what is it required to deliver once the asset is accepted? And can it do so?
The prime contractor and its financial institution understand that the agency is annually required by FAR 17.207 to assess certain elements of available funds, ongoing requirements, prime performance, and whether there are better market alternatives. Appropriate due diligence around essential use, however, should answer materially the agency’s desire to walk away from annually obligated, multiyear funding. So, why should an agency consider a “base + option year” lease or a multiyear payment plan? Here’s why:
- To get a better deal. The manufacturer will discount more heavily for a larger, longer project.
- To fund the full cost of the project up front and pay for it over several years on a base + option basis, as the agency uses the project, not before.
- To get the project done today in today’s dollars versus tomorrow’s inflated cost.
- To put monies currently used for annual maintenance toward project payment. (Those monies arrive every year, correct?)
- To benefit from private industry’s experience crafting structures utilizing both operating or capital funds.
- To leverage the budget to complete multiple priority missions.
- To take advantage of the low cost of capital under a multiyear payment plan relative to the cost of maintaining an outdated system.
With these considerations in mind, I would ask that contracting officer, “Why on earth would you limit your agency to a one year obligation for IT assets you must have for the essential operation of your agency over multiple years?”
Yes, private industry would love to help.