For the Federal Government Contracting Officer and End-User

As Wayne Gretzky once said, “You miss 100% of the shots you don’t take.” For Contracting Officers and Government end users, a tool through which to obtain everything you require is the Multi-year Finance (Payment Plan) transaction. This often-misunderstood buying approach is a safe, legal and all-too-often underutilized tool by Federal Government buyers, largely because of perceived complexity. It is the shot seldom taken by buyers, but a high-percentage one, nonetheless.

While not perfect for every scenario - when the conditions are right, a Multi-Year Finance transaction is the single, best way to procure IT and achieve a multitude of objectives that benefit the government in terms of price and flexibility of use - while also benefitting the taxpayer.

So, let’s make the case for why that is so and review the conditions that make it so:

MARKET ECONOMICS

Unlike commercial companies that can enter into committed, multi-year contracts to procure technology, the government can only commit current fiscal year monies (i.e. one year at a time). In most cases, the vendor of technology drives for the largest order they can sell, today. Herein lies fantastic buying power for the government. If the government could commit to three years, the discounting received would be far greater than buying one year at a time. However, since the government can only commit to year one - and add options for the remaining years- the government does not receive the best possible price available. So, how can the best possible price be achieved?

LEVERAGE

The greatest negotiator in government cannot come close to obtaining a price that approaches what a multi-year financed deal can render because without the multi-year arrangement; they lack what we call “full leverage.” Instead, they have “ordinary leverage.” The government naturally has some degree of leverage conducting competitions and asking folks to submit quotes in competition. This is ordinary leverage. But, when a multi-year approach is solicited - it blows away the “one-year at a time” offering, every time!

This strategy provides the government with “full leverage,” because the financing element of the transaction enables the vendor to receive a multi-year order and therefore, provide a better price along with it. Further, the government is not constrained by fiscal year funding. The government can make one payment (a base year payment) and have full use of a solution across its entire enterprise (without limitations) from the first day of the contract. That cannot be done without the multi-year payment plan approach.

CONSIDERATIONS

When should multi-year financing be considered by the government?

There are three scenarios in which this strategy should be considered. First, a multi-year payment plan should be considered when the technology being bought is essential to the government and likely not going to need to be replaced during the contract’s period of performance including options.

The next scenario is a slight variation to the question of “when” and it gets back to leverage; technology companies are highly motivated by end of quarter and end of fiscal year considerations. They normally have greatest ability to discount, to the greatest extent, at these junctures. Therefore, taking this shot is most optimal at these points in time.

Finally, because multi-year finance solutions enable the government to utilize any amount of funding available at a given point in time, this approach breaks down all barriers commonly experienced by government. Lacking, or minimal, available budget to execute is no longer a hinderance to execution, whether in a Continuing Resolution, or simply due to a shrinking budget.

Questions that may arise.

• How are these transactions executed?
• How is it not a violation of the FAR or the law?
• Doesn’t this approach create a contingent liability?

How transactions are executed. The government would do nothing different than it does in any other procurement. It would solicit for a requirement and a payment plan as part of its RFP. The resultant contract would be a base (plus options) as any other contract that is issued in this fashion. FAR clauses 52.217-9 (Option to Extend the Contract) and FAR 52.212-4 (Commercial Items) would be included in the contract, along with all other typical FAR clauses associated with commercial items procurements.

The contractor would bid against the RFP and include terms and conditions which affirm the essentiality of the technology and assure the government’s understanding of this essentiality.

But, how does this affect the price to the government? Let’s say the offering was for a base plus two option years. The successful bidder would be providing the solution provider with a purchase order for the full 3-year discounted value of the technology, taking the risk that the government will exercise all options. This savings is passed to the government in the form of the deeper discount yet it enables the government to issue and manage the contract, and most importantly, be obligated to pay for only the base period. The offeror is effectively buying at a volume discount that can’t be obtained with ordinary leverage. Should the government non-renew an option there would be no recourse to the government. Should there be a termination, ordinary termination procedures would take place like any other contract.

This multi-year approach does not create a contingent liability for the government. The future payments are dependent upon exercise of each option and the government can choose to non-renew an option if conditions determine that exercising an option is not in its best interests.

COLORS OF MONEY BENEFITS

The multi-year offering can be the single solution that can enable the government to utilize operational dollars to acquire IT as well as enable the government to choose to own (or not own) technology upon full payment of the payment plan.

VARIATIONS ON THE THEME

“As a Service” solutions that the government enters into are powered by the same leverage dynamic. The offeror is providing the government an ability to make monthly payments for use of technology plus services. Powering this is a financed payment plan, using monthly or quarterly option payments. The same applies to customers that only wish to pay for what they use. A multi-year financed payment structure is utilized to enable this offering to be available to ensure the government is enjoying the benefits of a service.

IN SUMMARY

When the conditions are right, and there is a need for essential technology, regardless of color of money, there is no better mechanism for the government than the multi-year financed payment plan approach. It enables the deepest discount, utilizes the identical procurement process, and creates a new-found indifference to available funding or budget timelines. Further, it provides the greatest amount of flexibility in usage and payments and delivers the best value that the government can possibly obtain due to the buying leverage (i.e. full leverage) that it provides.

No other buying instrument or methodology delivers these benefits to the government buyer to a greater degree than multi-year financing transactions.