Why you need to understand the GSA view of buying SaaS

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"Advance payments" and "upfront payments" may sound like the same thing but in the world of selling software-as-a-service there are some important distinctions, writes Tara Franzonello of the immixGroup.

In federal procurement, words and context matter, especially when it comes to the difference between advance and upfront payments in procuring software. GSA recently issued instructions elaborating on federal procurement of software as a service (SaaS). It is important for vendors to carefully follow the instructions to avoid misunderstanding of when the government will pay for SaaS procurements.

GSA’s acquisition letter titled “Guidance on Payment for Software Licenses Delivered via SaaS” outlines its position on the specific differences between advance payments and upfront payments with regard to SaaS licensing.

In the document, GSA acknowledges the potential price savings and small business benefits provided by upfront payments. By regulation, the government is prohibited from making payments in advance of receiving goods or services, except under limited circumstances (31 U.S.C. § 3324, 41 U.S.C. § 4505).

GSA’s letter explains that “under specific conditions” upfront payment for SaaS is not considered an advance payment when subject to such limitations.

This guidance followed AL MV-21-06, issued by GSA on Dec. 16, 2021, to:

  • Provide for the procurement of cloud computing on a consumption basis under the Federal Supply Schedule (FSS) program
  • Create a GSA clause with ordering procedures for procuring cloud on a consumption basis
  • Establish ordering procedures under the FSS program for buying cloud computing on a consumption basis

Defining upfront versus advance payment

Recently, GSA released Refresh 21 to its Multiple Award Schedule, which included language from the acquisition letter to clarify payment for SaaS. The refresh states that payment made upfront means payment is made “contemporaneously with the receipt of the software license and the beginning of the license term.”

Conversely, GSA describes advance payment as “a specific type of contract financing method where payments are made prior to delivery or completion of the product or service.”

The key distinction is the “contemporaneous” access to SaaS with the payment.

Clarifying upfront payment criteria for SaaS

GSA states that upfront payment is not considered advance payment for SaaS procurement when it matches the following criteria:

  • The software access license is granted at the same time payment is made.
  • The license is acquired on a fixed-price basis, or fixed-price with economic price adjustment, even if other parts of the contract are not fixed price.
  • The license is priced at a fixed term or limited period of time, whether applying to a single seat, multi-seat, unit or subscription price.
  • The license’s pricing and billing model uses no other consumption metric other than quantity to affect costs over a negotiated term.
  • The license requires no upfront payment other than the fixed seat, unit, or subscription cost for access or when negotiating a pricing discount.
  • In the context of end user or other license agreements, the license service is continuous and uninterrupted across the negotiated term.

GSA notes that upfront payment does not apply to software licenses delivered or accessed via SaaS. The government will not pay a vendor what amounts to a fee for the development of a particular piece of software, which is another type of transaction altogether.

The takeaway

Why is this important? These criteria spell out how GSA understands SaaS. If it is sold “as a service,” it is understood to be available already and payment is not “made prior to delivery or completion of the product.”

Therefore, the notion of advance payment should not enter the discussion of how most SaaS vendors should expect to be compensated.

Two small words, “upfront” and “advance.” But when it comes to SaaS, they can mean the difference between making the sale or not.

Tara Franzonello is program development manager for immixGroup, the public sector business of Arrow Electronics. immixGroup delivers mission-driven results through innovative technology solutions for public sector IT. Visit www.immixgroup.com for more information.