Post in Bargaining in Maintenance and Procurement: Core Administrators Network Forum: ABRF Discussion Forums

Here at the U of A I have had the most luck in negotiating service contract discounts when bundling their purchase with that of the equipment itself. We try to do this with as large a pool of funds as possible, which gives us more bargaining power. I have also been able to get much larger discounts (upwards of 30%) when negotiating based on prepayment for future years' services. When I can get a higher discount rate on the prepayment of service contracts than our investment office's return rate on cash investments (typically around 4%), it makes sense to make the prepayment. To be absolutely clear, when I say "discount rate" I am referring to the interest rate implied when calculating the present value of an annuity due <http://www.accountingtools.com/questions-and-answers/what-is-the-formula-for-the-present-value-of-an-annuity-due.html>. By setting the prepayment [full price x (1-discount given)] equal to the formula for an annuity due, where the PMT amount is equal to the full list price of the annual service contract, and n equals the number of years I am purchasing, I can solve for r, which is the implied discount rate. Again, if that is greater than the earnings rate on cash investments for your institution, it makes sense to prepay for the service contracts and pass the savings on to the user base. It may even make sense to prepay when the rates are equivalent, because there is no risk involved in the prepayment, whereas there is always a risk that cash investments may not earn as large a return in the future. Noah Noah Curtis, MAcc Manager, Business Analysis, Core Facilities Phone: (520) 621-1085 | Fax: (520) 621-7507