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To reduce capital equipment costs and as a result in the decline in the availability of capital equipment funds, we have had a number of customers approach us to deliver systems under Platform as a Service (PaaS), Software as a Service (SaaS) or Infrastructure as a Service (IaaS) models. The customer(s) believe that they can use operations and maintenance funding to purchase solutions for a specific period of time without ever owning the capital equipment.

While true cloud service offerings offer savings through the sharing of hardware and software across many users, it isn’t clear how this applies when the Government is the sole user of the system. Our research indicates that this would fall under an “Operating Lease” as defined by the FAR since the use of Operations and Maintenance funds requires the agreement to be an operating lease with the following conditions to avoid a "color of money" violation:

The lease cannot transfer ownership of the property to the lessee by, or at, the end of the lease term.

The lease cannot contain an option to purchase the leased property at a bargain price (significantly less than fair market value).

The lease term is less than 75 percent of the estimated economic life of the leased equipment.

The present value of rental and other minimum lease payments, excluding that portion representing executory costs to be paid by the leasing organization, is less than 90 percent of the fair value of the leased property.

My question is:

Can the Government obtain IT system hardware and software “as a service” when they are the sole user of the system? Would this violate the color of money or operational lease regulations since they are effectively to sole user of the system and are calling is “as a service” to side step color of money regulations?

I would like to know if anyone has any other insight as it appears that a number of companies are offering this as an option.

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You can't say you're acquiring a service if you're going to ask if you can "obtain IT system hardware." And I never heard of leasing a service.

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Can the Government obtain IT system hardware and software as a service when they are the sole user of the system?

Yes, provided that the Contractor's "primary purpose is to perform an identifiable task rather than to furnish an end item of supply" (FAR Section 37.101). For example, many agencies purchase webhosting services, which are considered an IT service, that involve IT systems and software for the use of only that agency. As Vern mentioned, a scope of "obtain IT system hardware" could never be considered a service; whereas, "provide IT facilities, operations, and support" would be a service (see NAICS 541513). When describing your needs, you need to focus on your functional performance service requirements rather than specifying the type and quantity of devices.

Would this violate the color of money or operational lease regulations since they are effectively to sole user of the system and are calling is as a service to side step color of money regulations?

Possibly. You have historically used another fund for same intended purpose. In appropriation law, the "pick and stick" rule might apply (see Comp. Gen. Decision B-306424). This rule holds that where two appropriations are available for the same purpose, you may select which one to charge for the expenditure in question. Once you make that selection, you must continue to use the same appropriation for that purpose unless you talk to Congress.

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