Federal Financing 101 | Case Studies | Links

The Federal government of the United States is the largest single purchaser of goods and services in the world. As one would expect, the most common way that the Federal government makes these purchases is to pay “cash on the barrelhead.” In such instances, Congress funds specific purchases by Federal agencies by appropriating earmarked money to that agency, with varying levels of detail on how the agency should spend the money. As a general rule, the more expensive and unique the acquisition, the more Congress will instruct the Federal agency on the details of the procurement.

But such “capital appropriations” are simply one end of the appropriations spectrum. At the other end, Congress annually appropriates large, general “Operations & Maintenance” (commonly known as “O&M”) funds. Federal agencies use O&M funds to purchase the vast myriad of goods and services that, while generally neither expensive nor unique, are essential to everyday agency operations. To use a simplistic analogy, O&M appropriations are used to “keep the trains running on time” while capital appropriations are used to buy new trains and tracks.

O&M funding is remarkably constant from year to year. Congress may debate intensely over whether to buy another aircraft carrier or a new generation of combat ground vehicles, but there is rarely much debate on whether the electric bill at Fort Bragg is too high. As a consequence of both the mundane nature of such spending and the fact that there are perhaps millions of individual expenditures under the O&M account of Federal agencies, Congress generally gives Federal agencies broad discretion on exactly how such O&M funds are spent.

Moreover, Congress recognizes that their ability to exercise “command and control” over the O&M expenditures of the Executive Branch is simply impossible given the limited size and resources of Congressional staffs. Nevertheless, Congress wants to encourage efficiency and has enacted several laws that encourage Federal agencies to use the O&M funding stream in the most rational manner possible, including Federal leasing, performance contracts, and Federal service contracts resulting from A-76 competitive sourcing. These laws have created several contract vehicles that, unlike the standard “cash on the barrelhead” procurement process, allow Federal agencies to avoid large up-front costs for goods and services. Instead, agencies pay over time, with the stream of payments often conditioned on the performance of the acquisition and / or a net reduction of O&M spending within a specific account. The following are several major contract vehicles created by Congress toward this end:

• Federal Service Contracts: These contracts provide the U.S. Government a contract vehicle to acquire the expertise of the private sector to economically perform services that are not inherently governmental. The functions include information technology, security, telecommunications, and utility services, among many others and generally involve the service provider to invest capital to perform the service. Many of these contracting opportunities are through the A-76 Competitive Sourcing process.
• Share-In-Savings Contracts: These contracts, currently promoted by GSA add an interesting dimension to the bread and butter service contract, namely the Federal vendor will get paid based on the savings generated by the vendor’s effort. These contracts follow the successful path blazed by the Energy Savings Performance Contract program (ESPC) (see below).
• Energy Savings Performance Contracts (ESPC): These contracts permit an agency to own upgraded energy-consuming infrastructure in Federal buildings (heating, cooling, lighting, etc…) but pay for the upgrade over a period of up to 25 years. The government makes no payment unless there is a net reduction in energy and maintenance expenditures out of the O&M account for those buildings sufficient to cover the amortization payments for each year of the contract.
• Utility Energy Savings Contracts (UESC): These contracts are similar to Energy Savings Performance Contracts, but the vendor must be a utility and are generally limited to 10 years. The primary purpose of this is to allow Federal agencies to take advantage of incentive programs that utilities might offer other non-Federal customers.
• Federal Leasing: The Federal government is not only the single largest purchaser of goods and services in the world, it is also one of the largest users of leasing in the world. In recent years, Federal procurement of information technology and telecommunications have increasingly utilized Federal leasing arrangements, as is appropriate in any area characterized by rapid technology advances and ever-increasing technical complexity. These arrangements include Lease with Option to Purchase (“LWOPs") and Lease To Purchase (“LTOPs”). These transactions are often contracted using GSA Sin 132-3, the Federal leasing schedule for IT assets, such as offered by Hannon Armstrong.

In all of these contracts, Federal agencies accept goods and services from a vendor who is not paid up-front but rather accepts a stream of Federal payments over time. As many businesses cannot easily accept the stress this creates on both their balance sheet and cash flow, this creates a market for third party financing.

Third party financing in its most simple form allows a vendor to get a lump sum payment at the time goods and services are delivered to the government instead of recovering their costs as the periodic payments are made over time by the government.

Congress and the Executive Branch are both committed to greater use of the private sector to provide critical support services to the U.S. Government’s main missions. These contract vehicles allow the U.S. Government to leverage the technical and financial resources of the private sector to the maximum extent.