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Purchasing - Division of Business and Finance

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Equipment Service Contracts, Leasing and Lease Purchase

A. Equipment Service Contracts

Most equipment generally requires service to continue in proper operating condition. For equipment which cannot be serviced on campus, such as specialized scientific apparatuses, copiers, etc., it is often more economical to arrange for a service or maintenance agreement with the manufacturer or service agency. The cost of service on the equipment, which must be borne by the campus department, usually includes charges for the service calls, labor, and parts each time repair or maintenance is required. Parts are usually covered in a service agreement; therefore, the savings on service calls and labor charges can make the lump sum payment for a service agreement very reasonable.

Service agreements for individual pieces of equipment should be requested on a purchase requisition along with a copy of the vendor's service agreement. Justification for a service agreement may be requested by the Purchasing Department when the costs appear exorbitant.

When lump-sum equipment service contracts are executed by the Purchasing Department, the campus department will normally pay for the entirety of the service prior to performance. Nothing of value is received until such time as an equipment failure occurs or contractual preventive maintenance is performed. The execution of the purchase order written for lump-sum equipment service contracts, thus, serves as the authority for payment of the vendor's invoice.

Service agreements should normally be arranged to coincide with the beginning and ending dates of the fiscal year. When agreements are begun after the beginning of the fiscal year, the agreement should be pro-rated to end no later than the final day of the fiscal year.

B. Leasing Versus Purchase of Equipment

The leasing of any equipment will be accomplished using the same procedures as with purchasing equipment. Competitive procedures and associated regulatory and guidance practices will apply.

Prior to pursuing an extended lease of any equipment, however, the campus department shall accomplish a lease-versus-purchase comparison. Such a comparison must clearly demonstrate that it is more cost advantageous to the university and the State to enter into a lease in lieu of making a purchase.

This justification will address the "life-cycle" costs which may be imposed by both a lease and a purchase. Cost elements to be addressed, as a minimum, by this cost study will include initial acquisition cost; initial (supplies) start-up costs; repetitive maintenance; and sustainment (supplies) costs. This study should assume a three-year baseline for applying costs.

C. Lease-Purchase Agreements

Lease-purchase agreements may be permissible but are not encouraged as they are viewed by the State as "negative spending." The State Advisory Budget Commission prior to acceptance must approve any request for a lease-purchase agreement.

The burden of justifying such a lease-purchase request lies on the campus department. As such, lease-purchase should only be considered as an alternative to outright purchase when extremely large sums of money are involved.

Any justification must be accompanied by a supporting lease-purchase versus purchase comparison. Such a comparison must clearly demonstrate that it is more cost advantageous to the university and the State to enter into such an arrangement.

 

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