A 200 year-old law created to protect the government from paying for goods and services they may never receive is the latest obstacle agencies in how they buy cloud computing services.
GSA lawyers are interpreting the Advance Payment Statute, which originated in 1823, in a way that is causing agencies to pay 10% to 20% premium for software-as-a-service subscriptions.
Value-added resellers and other industry experts say this interpretation of the law is causing major headaches for agencies and providers alike.
“The government is arbitrarily categorizing subscription licenses delivered through cloud as a service when in practicality it is not a service. It’s a known quantity and it rarely deviates from that known quantity,” said Tony Colangelo, founder and CEO of Minburn Technology Group, a value added reseller. “Microsoft O365 is perfect example. It’s a subscription that is sold on a per user, per year basis. So if you have 500 users, some will use the product more than others, but all 500 will need to use the product throughout the annual subscription term to accomplish agency business. This is a non-partisan conversation and simplicity should prevail in saving taxpayers’ money. We are not trying to charge the government more, but to align commercial practices to the way the government is buying cloud services. This also is impacting small businesses as they have to finance money to pay for the contracts.”
The primary purpose of the Advance Payment Statute is to protect the government against the risk of contractor nonperformance, namely “to preclude the possibility of loss to the government in the event a contractor — after receipt of payment — should fail to perform his contract or refuse or fail to refund moneys advanced,” according to a position paper on this topic produced by Minburn Technology.
Experts say because software-as-a-service is labeled a “service,” GSA lawyers determined agencies buying from the GSA schedule, and possibly other GSA run acquisition vehicles, providers are to be paid in the arrears — like the electricity or water bill at your house when you are paying for something that you’ve already received.
Industry experts say paying in arrears is fine for consumption based cloud services like platform or infrastructure-as-a-service, but in the case for SaaS, it’s more like a magazine subscription where you know you will get 52 issues and you pay for all 52 issues up front.
Two reasons for SaaS concerns
Companies and other acquisition experts say GSA’s lawyers are conflating the term services and what cloud services or software-as-a-service really entails versus the delivery of say food or even paper and pens.
The issue, and GSA’s interpretation, isn’t necessarily a new problem. But it’s come to ahead because of two recent issues. First, the struggles of the high-profile Defense Department’s Defense Enterprise Office Solutions (DEOS) vehicle came to light only recently. The fact that military services and defense agencies are using the Navy’s enterprise software initiative contract instead of DEOS due to as much as a 20% markup of the price for the same Microsoft Office 365 license was surprising to many in the federal community.
The second issue that brought the Advance Payment Statue and SaaS problem to the forefront is inflation.
Colangelo said the cost to borrow money has gone up requiring companies like his to borrow money to pay for the annual license and wait to get paid back monthly by the government.
“It’s a large amount of money that you have to finance, and the harder it is to get the financing, the harder it is to support these orders,” he said. “Whether I have to support a $100,000 or a $50 million task order that we received through say, DEOS, I have to finance that and I know that I signed up for that. But as a taxpayer, I’m frustrated the government is paying 10%-to-12% more than they need to and when talking about a $50 million task order, that adds up. That is $5 million or more.”
Minburn had two orders where it offered the agency customer seven-figure discounts to get the payment up front, but the department couldn’t accept the discount because of this interpretation of the law.
“The government is paying for a payment structure that it doesn’t want or need,” Colangelo said.
GSA’s tail is wagging the dog?
Other value-added reseller companies are in similar situations as Minburn, having to front the funding because commercial companies do not sell SaaS this way where the customer is paying in the arrears anywhere else in the world.
One industry executive have requested anonymity because they didn’t ask permission to talk to the press, said it’s a case of the tail wagging the dog.
“Government policy and law needs to be able to keep up with how industry is changing. We are on the front end of that as the true cloud consumption model is just starting to take off. That is why the government is struggling. It takes a long time to turn a big ship around,” said the industry executive. “But by the same token, the catalyst of how much money you could save if you just change government policy and change the laws is fairly strong.”
GSA officials knew this interpretation of the Advance Payment Statute contradicted industry best practices. But former officials say attempt to make change went nowhere over the years.
To GSA’s credit, current officials recognize something needs to change as agency buying of cloud services, particularly off the schedule, closes in on $1 billion. In 2022, GSA says agencies spent about $993 million through the schedules cloud special item number. GSA says 662 contractors current sell cloud services through the schedules, and SaaS is overwhelmingly the most popular cloud service under the Federal Risk Authorization Management Program (FedRAMP) with 380 out of 422 approvals.
GSA issued a request for information on July 31 asking for industry feedback on SaaS pricing best practices and what are its options better align the schedules with industry practices for pricing and invoicing term-based software.
A GSA spokesperson said, “the RFI is designed to gather information to understand differences between federal and commercial practices, including what discounts vendors may offer if payment in advance were permitted.”
Once GSA analyzes the feedback to the RFI, which is due Aug. 23, it will determine its next steps, the spokesperson said.
Previous attempts to improve cloud buying
Colangelo said GSA implemented a re-write of the cloud SIN payment terms in July 2022, under solicitation refresh No. 13, which let cloud computing service pricing set increments beyond one month, so as to better align with commercial billing practices.
“We thought this revision to the cloud SIN billing terms was supposed to fix the advance payment issue, but it hasn’t been interpreted that way,” he said. “It’s hard to understand what the purpose was for this change to the billing term for cloud services, if not to fix the advance payment issue.”
GSA also issued a new cloud buying policy in December 2021 to promote the ability to buy cloud services on a consumption basis. But this approach helped more with infrastructure — and platform-as-a-service, than SaaS.
A former senior acquisition official in government with industry experience, who requested anonymity because they still do business with GSA, said changing the policy would be beneficial to GSA as much as industry. The former official said GSA and the Defense Department, for example, are not aligned with their interpretation and that is causing problems across the government.
“We are always trying to show ways where the government can show consistency in procurement and this is prime example of where government can and should do that,” the former official said. “GSA easily could make paying up front for cloud services an option within a blanket purchase agreement. So if an agency customer has the authority pay up front, they could have one price, but if they have to pay in the arrears, here’s your other price. GSA could do that if they didn’t want to address this policy head on.”
Larry Allen, president of Allen Federal Business Partners, worked with Senate lawmakers to try to add a technical clarification to the defense authorization bill to help solve this issue to allow for SaaS subscriptions to be paid up front.
Allen said while there was some support on Capitol Hill, it’s unlikely the provision will make it across the finish line.
This leaves industry and agencies waiting until GSA goes through the RFI process, which can take months. Meanwhile, the cost to buy SaaS, an ever growing segment of the federal IT sector, is hung up around inconsistent interpretation of a 200-year-old law. The result is costing some agencies millions of dollars more than they need to spend.
GSA acquisition leadership, its lawyers, the smart folks at the Office of Federal Procurement Policy and the Defense Department should get together to find a pragmatic approach to applying the Advanced Payment Statute to cloud services, a law which was never intended to be applied to cloud or any modern technologies.