Public Procuremet Practice STANDARD The decisio to lease or purchase should be cosidered o a case-by case evaluatio of comparative costs ad other factors. 1 Procuremet should coduct a cost/ beefit aalysis to determie the appropriate cotractig method. Defiitio Lease-Purchase Decisio is a decisio based o the results of a cost/beefit aalysis of the costs to ow, costs to lease, ad the advatages ad disadvatages of ay relevat qualitative factors. (ISM, 2000). 2 Elemet 1.1: Factors to Be Cosidered A cost-beefit aalysis ca take several forms, however, procuremet (together with fiace ad other stakeholders if appropriate) should cosider all of the elemets ivolved i the life cycle of the equipmet, icludig asset maagemet ad disposal issues. Whe makig a decisio to lease or purchase, procuremet should cosider comparative costs ad other factors that, at a miimum, iclude: 3 Estimated time period the equipmet is to be used ad the frequecy of use withi that period Fiacial ad operatig advatages of alterative types ad makes of equipmet Cumulative retal paymets for the estimated period of use Net purchase price Trasportatio ad istallatio costs Maiteace ad other service costs Availability of fuds ad cost of capital Potetial obsolescece of the equipmet because of techological improvemets The followig additioal factors should be cosidered, as appropriate, depedig o the type, cost, complexity, ad estimated period of use of the equipmet: Availability of purchase optios Potetial utilizatio of the equipmet by others after its iitial useful purpose has eded Trade-i or salvage value at the ed of the lease term Imputed iterest Availability ad cost of a servicig capability, especially for highly complex equipmet; e.g., ca the equipmet be serviced by iteral staff or other sources if it is purchased? Lease-Purchase Decisio
Public Procuremet Practice (Cot d) Elemet 1.2: Comparig Cotractig Optios There are several optios that may be cosidered whe makig a lease-purchase decisio. The cost-beefit aalysis will help to idetify ad quatify the available cotractig optios. Those optios geerally iclude: Purchasig - may be the preferred optio if: 1. The equipmet is to be used for loger tha three years 2. The agecy does ot have staff ad systems to track assets ad maage the lease with each supplier. 3. Fudig is ucertai so that the full term of the lease caot be met Lease-purchasig may be the preferred optio if: 1. The moetary value of the equipmet is substatial ad its useful life is loger tha three years 2. The flexibility of spreadig out paymets would be beeficial Leasig may be the preferred optio if: 1. Replacemet accordig to idustry life cycles is eeded 4 2. There is a busiess eed for rapid techological chage 3. Agecies are udergoig dowsizig or reorgaizig 4. There is a busiess eed for quick adoptio of ew techologies 5. The flexibility of spreadig out paymets ad usig operatig fuds (rather tha capital fuds) would be beeficial 5 Elemet 1.3: Calculatios Preset Value 6 Whe comparig leasig ad purchasig alteratives, the future moetary value you would exped i a lease or lease-purchase cotract must be coverted to its value i preset moetary value i order to compare the real costs of each optio. Calculatig Preset Value ca be used as a itermediate step to calculatig Net Preset Value (NPV). 7 Net Preset Value 8 Whe comparig cost of leasig ad purchasig alteratives, it may be ecessary to calculate the total costs ad beefits over the etire life of a project. Net preset value aalysis ivolves four basic steps. The first step is to forecast the beefits ad costs i each year The secod step is to determie a discout rate The third step is to use a formula to calculate the et preset value The fial step is to compare the et preset values of the alteratives Lease-Purchase Decisio Aalysts should follow five geeral rules whe forecastig costs ad beefits: Forecast beefits ad costs i today s moetary value amout Do ot iclude suk costs Iclude opportuity costs Use expected value to estimate ucertai beefits ad costs Omit o-moetary costs ad beefits
Public Procuremet Practice (Cot d) Costs ad Beefits to Quatify 9 Purchasig Lease-Purchasig Leasig Equipmet Price Residual value of equipmet Maiteace Costs Procuremet Costs** Equipmet Price Residual value of equipmet Maiteace Costs Procuremet Costs** Equipmet Price N/A equipmet is retured at ed of lease Maiteace Costs Procuremet Costs** * Staff costs iclude time spet o istallatio, maiteace, moves/adds/ chages, de-istallatio, ad disposal. Costs will vary depedig o who is resposible for maiteace i leasig cotracts. ** Procuremet costs iclude procuremet staff time spet o processig purchase orders, trackig leased equipmet, dealig with surplus equipmet, etc. Note: I the aalysis, it is importat to use Preset Value calculatios to equalize price comparisos. Use the preset value formula as a guide. Make sure that the time frames cosidered for all three optios are the same. Elemet 1.4: Choosig a Vedor Selectig the right vedor is a importat step i ay procuremet, however, it becomes eve more importat whe usig a lease cotract. Because leasig compaies rage from equipmet producers to third parties, it is importat that both sides uderstad each other ad are committed to the project. At a miimum, the followig should be cosidered whe choosig a vedor: Fiacig optios offered by the vedor The type of equipmet that is beig offered The services (e.g. maiteace, troubleshootig) offered by the vedor 10 The eeds of the orgaizatio or ed users Use of a Request for Iformatio (RFI) or Request for Proposal (RFP) 11 Elemet 1.5: Negotiatig the Cotract 12 The egotiatio process provides a opportuity to develop the specific details of the leasig agreemet ad to select the best vedor. The followig should be cosidered: Develop a cross-fuctioal team that icludes: ed-users, legal, fiace, purchasig groups, ad ay other areas that ca led their expertise, or may be affected by the procuremet method Select specific members of the cross-fuctioal team to be resposible for direct egotiatios with the vedor Esure that all viewpoits from the cross-fuctioal team are represeted ad cosidered i the proposal review process Esure that the legth of the lease correspods with the ecessary life cycle of the equipmet ad with the idustry stadard for life cycles Examie alterative cotract scearios ad calculate cost impacts Esure that accoutig issues have bee resolved for the type of lease cotract that is beig used Lease-Purchase Decisio
Public Procuremet Practice (Cot d) Elemet 1.5: Negotiatig the Cotract 12 (cot d) Cover issues such as early termiatio or cotract extesio with all vedors Esure that obligatios are uderstood durig the lease period (i.e. achievig residual value at the ed of the lease period) Decide what types of flexibility the ed user may eed withi the cotract (e.g. equipmet chages, optios for icreasig/ decreasig service levels) the egotiate for the most importat items Ask vedors to provide a copy of the lease agreemet ad review terms ad coditios carefully Elemet 1.6: Maagig a Lease Cotract 13 A lease cotract must be closely maaged durig the course of the cotract. Failure to implemet appropriate cotrols ad oversight will result i uecessary charges ad weake the effectiveess of the lease cotract. The followig should be cosidered whe maagig a lease cotract: Assigmet of regular staff to maage the lease cotract through the term of the lease Track the life cycle of the equipmet alog with the fiacial pla for makig lease paymets. This allows staff to esure the terms of the lease are beig eforced, ad eables them to track the utility of the lease cotract ad the ability of the vedor to meet busiess eeds Develop a method to effectively track leased equipmet to avoid additioal charges whe returig equipmet. Develop a method to effectively track problems with the equipmet. Early idetificatio of potetial problems reduces the risk of icreased vedor charges Be able to measure the performace capabilities of the leased equipmet ad to idetify cost savigs, improved efficiecy, ad other results due to the leasig strategy Make sure that the lease does ot automatically reew, ad that the leasig compay does ot expect certai otificatio requiremets about edig the leasig cotract Prepare for the ed-of-lease by havig procedures i place to maage the trasitio of equipmet, whether it is ew equipmet from the same vedor, or if a etirely differet vedor or procuremet method is chose Lease-Purchase Decisio
Public Procuremet Practice (Cot d) Backgroud As resposible stewards of public fuds it is up to procuremet to coduct proper aalysis whe makig ay purchasig decisios. Oe such decisio, where proper aalysis is required, is the lease-purchase decisio. The lease-purchase decisio may be ecessary whe cosiderig the purchase of equipmet or to support decisios to iitiate, reew, or expad existig cotracts that would result i a series of measurable beefits or costs extedig for three or more years ito the future. 14 I some public sector departmets or orgaizatios the budgets might be fixed aually, therefore the cost aalysis of a leasepurchase aalysis might be secodary to fuctioality ad/or services provided i a lease versus purchase decisio. The way that idividual procuremets are coducted reflects how a orgaizatio uderstads its eeds ad its curret eviromet. The advatages ad disadvatages of certai procuremets should be weighed accordig to the situatio, the a cost-beefit aalysis should be coducted to assist with the fial determiatio of value. If doe properly ad i the right situatio, leasig ca be cost-effective ad efficiet. If doe poorly or without due cosideratio, leasig will be more expesive ad harder to maage tha a outright purchase or a lease-purchase procuremet. 1 Federal Acquisitio Regulatios (FAR).. (2012). Subpart 7.401: Acquisitio cosideratios. Retrieved from https://www.acquisitio.gov/far/html/subpart%207_4.html. 2 Natioal Istitute of Govermetal Purchasig, Ic. (NIGP). (2012).Public procuremet dictioary of terms. Herdo, VA:NIGP. Lease or Buy Decisio. Available from: www.igp.org. 3 Op. Cit. 4 I order to obtai the most cost-effective lease, the lease term should alig as closely as possible with the equipmet s recommeded idustry life cycle. 5 Govermet policy ca ofte dictate whe a leasig optio is preferred (i.e. Public Fudig Iitiatives (PFI) to build ew hospitals ad schools have bee prevalet i the UK ad ecouraged by the UK Govermet over recet years). 6 Texas Departmet of Iformatio Resources. (1998). Lease v. purchase: Guidelies for lease vs. purchase of iformatio techologies. Austi, TX: DIR. 7 Note: Methods for calculatig the more advatageous method of purchase will vary by type of procuremet. The most simple situatio would ivolve calculatig Preset Value, while more complex situatios may require multiple calculatios (e.g. Net Preset Value), to arrive at a decisio. Please cosult with your local govermet accoutig/ fiace professioals to decide which formulas are acceptable whe calculatig your specific sceario. 8 The Govermet Fiace Officers Associatio (GFOA) offers comprehesive guidace o calculatig NPV. For more iformatio see: Michel, G. (2001). Net preset value aalysis: A primer for fiace officers. Govermet Fiace Review, February (2001), 28-31. 9 Op. Cit. 10 By egotiatig a lease cotract that icludes services, a agecy ca avoid cotractig with a separate vedor for maiteace, thus avoidig the cost of maagig multiple vedor cotracts. If iteral staff was previously resposible for maiteace, staff maiteace costs ca be saved, ad persoel ca be freed for more complex, strategic work (Texas DIR, 1998). 11 A RFI ca be less explicit tha a RFP, but should still cotai sufficiet iformatio so that resposes address requiremets accurately. The RFP should iclude all expectatios ad relevat iformatio about the eeds of the agecy. This is the best ad ofte the oly opportuity for vedors to demostrate their uderstadig of the eeds ad their ability to meet the eeds i a cost-effective maer. Defie the requiremets ad expectatios. Weights may eed to be established i order to idetify the most critical eeds, but requiremets should be listed so that a effective compariso ca be made betwee proposals (Texas DIR, 1998). 12 Texas Departmet of Iformatio Resources. (1998). Lease v. purchase: Guidelies for lease vs. purchase of iformatio techologies. Austi, TX: DIR. 13 Op. Cit. 14 Office of Maagemet ad Budget (OMB). (2012). Circular A 94 revised. Retrieved from http://www.whitehouse.gov/omb/circulars_a094 Lease-Purchase Decisio 2012 CIPS ad NIGP