Leasing Equipment - 404

Departments may acquire equipment by lease or purchase. The decision to lease or purchase should be the result of a careful analysis of all factors involved, especially the total cost to the state for the expected period of use.

Purchase costs are usually lower than lease costs if the equipment is used for an appreciable portion of its useful life.  One major disadvantage of consummating a purchase is that the buyer may be "locked-in" to the acquisition if a major breakthrough in the technology becomes available.  Leasing provides a measure of flexibility.  This method is frequently used when the department acquiring the equipment is unable to forecast its future need either due to lack of planning data or to unresolved decisions outside of its control.

Departments may lack budgeted funds sufficient for outright cash purchases of equipment and cite this as a reason to lease.  Such funding limitations need not preclude the purchase of equipment on conditional sales or installment payment contracts.  There are unique tax advantages available to suppliers and lending institutes selling to governments that allow them to quote special low-interest rates on conditional sales contracts.  The combined total of both lower equipment costs and lower interest charges on conditional sales contracts often shows the purchases to be less expensive than leasing overtime periods of three to five years or more.

Cost Analysis – Lease vs. Purchase

Before initiating the acquisition, departments are expected to perform a cost analysis of leasing versus purchasing. Departments should follow the directions contained in SAM, Section 3700 et seq., in making cost analyses.

Cost analyses are to be based on the "contract or program life" of the items being required. "Contract or program life" is the anticipated life cycle of the requirement for which they are to be used, less any reasonable estimated length of time when a substitute capability will become available at a lesser cost. "Contract or program life" is not to be confused with "usable" or machine life. Modern electronic equipment can be expected to operate within design specifications for up to ten years when adequately maintained. This period is their "usable" or machine life.

When the lease/purchase analysis indicates leasing is the least costly acquisition method, departments are to enter into such a contract in accordance with the procedures set forth herein and SAM, Section 3700 et seq., except when:

• Insufficient funding is available for either outright or deferred purchase; or
• A short period of operational experience is desirable to provide validity of a system or equipment design with which there is no previous reliable experience.

The terms of such contract should be equal to the predicted "contract or program life."

The completed lease versus purchase analysis form must be uploaded to the FI$Cal system and kept in the procurement file.

Use of any financing arrangement other than Golden State Financial Marketplace (GS $Mart) is prohibited without prior approval from the Department of Finance per Budget Letter 06-27.  

Please select the link to access the Lease vs. Purchase Analysis form.

Purchase Option Credits

Many lease contracts allow the accrual of monetary credits which the contractor agrees may be applied toward the eventual outright purchase of the equipment being leased if the user so elects.  If the probability of exercising a purchase option is remote, the inclusion of purchase option credits in a bid evaluation process will distort the evaluation to a point where it is likely that the bid with the lowest cost will not be selected, and the state will incur higher costs than it would if the winning bid was selected based on the rent alone.  Purchase option credits should be cost evaluated in a lease contract only if there is a reasonable probability that a purchase option in a lease contract may be executed.  Otherwise, purchase option credits are to be excluded from the cost evaluation.

Lease Purchase Financing

All state departments and tax-funded local government agencies, are permitted to enter into either installment purchase agreements (commonly referred to in the industry as “lease purchases”) or financed leases as described in the Uniform Commercial Code, Section 2A (commonly referred to as “operating leases”), via DGS’s State Financial Marketplace, which includes “GS $Mart” or “Lease $Mart.”

Extensions or Renewals of IT Activity Contract

If a "contract or program life" is accurately estimated at the time of the initial acquisition, there will normally be no need for extending the agreement.  To enable an orderly termination of contracts, which may include supplier notifications as well as internal management adjustments, or to provide lead time for renewing or rebidding the contract, the following procedures apply:

• Each IT equipment and/or equipment maintenance; personal services; and IT processing and support services contract is to have a scheduled review, which should be concluded no later than six months before the scheduled expiration date, to determine whether the contract can be permitted to expire and, if applicable, any leased equipment returned to the supplier.  (This is general guidance.  The amount of lead time may be as much as 12 months or more depending upon the scope of the contract.  A rule of thumb that may be used is the amount of time required to plan and conduct the original procurements.)
• If it is determined that there is a continuing need for the goods or services provided under the contract, the department should document those reasons and re-estimate a "contract or program life."  The department should conduct a lease/purchase analysis for the new period if hardware is involved.
• If the lease/purchase analysis or other considerations indicate that a purchase is more desirable than a lease, action should be initiated to affect the purchase.
• When a lease/purchase analysis indicates that leasing is more appropriate, contracts may not be extended with the same supplier unless it can be demonstrated that the incumbent supplier's prices are competitive or there is no alternative source.  To determine if prices remain competitive, the market is to be tested by obtaining quotes from a reasonable number of suppliers, and the incumbent supplier.  The supplier quotations should be in writing and placed with the contract file.  If there is no alternate item or source, a statement supporting this fact is required in the contract file.
• If it appears that extension of the lease with the incumbent supplier is the most appropriate course of action, approval of such an extension should be requested from DGS/PD.  The analysis supporting such extension and all supporting documents must accompany such requests.  If, however, a lease is appropriate but continuation with the incumbent supplier is not, the department must immediately contact DGS/PD to initiate a new competitive procurement.