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Free Services Advisory

Applicants and service providers are prohibited from using the Schools and Libraries Support Mechanism to subsidize the procurement of ineligible or unrequested products and services, or from participating in arrangements that have the effect of providing a discount level to applicants greater than that to which applicants are entitled.

This Advisory provides information about such practices, which are not consistent with the program rules for the Schools and Libraries Support Mechanism.

Basic principles to guide applicants and service providers include the following:

  • The value of all price reductions, promotional offers, and "free" products or services must be deducted from the pre-discount cost of services indicated in Funding Requests.
  • Costs, trade-in allowances, and discounts must be fairly and appropriately derived. For example, the cost for eligible components may not be inflated in order to compensate for discounts of other components not included in Funding Requests.
  • A proportionate cost allocation is required between eligible and ineligible components.

Funding Requests or applications inconsistent with the provisions of this Advisory are contrary to program rules and will be denied. The "30% Rule," which provides that a Funding Request can continue to be processed if the value of the ineligible products and services is less than 30% of the total amount of the Funding Request, does not apply in cases of serious violations of program rules, such as those indicated in this document. In addition, applicants and service providers are cautioned that willful violations of program rules can result in criminal penalties.

The examples that follow provide further details of prohibited practices.

Example 1: Applicant receives a discount for services received.

Assume that a service providerís regular price for a service is $100, but that it will offer the applicant a 20% price reduction. The Funding Request for this service must specify $80 as the pre-discount cost, and the applicant must pay its share of this $80 cost. It is a violation of program rules to submit a Funding Request in excess of the actual cost expected to be charged and paid.

Example 2: A discounted or free service is provided in exchange for applicant purchase of an eligible service.

Assume that a service provider offers to provide an eligible service for $200, and also offers a 60% discount on a $300 ineligible service when both the eligible and ineligible service are purchased together. (The 60% discount means that the applicant would need to pay only 40% of the usual $300 cost.) Because such an arrangement may have the effect of using program funds to subsidize ineligible services, any discounts (or free services) must be allocated proportionately. For this example, the pre-discount cost of the eligible service should be shown as $128, as illustrated in the following calculations.

Quoted cost for both services: $200 + ($300 * 40%) = $320

Usual cost for both services: $200 + $300 = $500

Percent of usual cost to be paid: $320 / $500 = 64%

Proportional cost of elig. service: $200 * 64% = $128

Example 3: A service provider commits to providing additional free or discounted products or services as a sales inducement.

Assume that a service providerís successful bid includes an offer to provide five "free" personal computers, worth $6,000. Program rules are violated if the Funding Request does not reduce the pre-discount cost by the fair market value of the five computers, or otherwise cost-allocate the eligible and ineligible components.

Applicants must select the most cost-effective solution, and may not consider the benefits of ineligible components in this evaluation unless those ineligible components are allocated out of the Funding Request, the full package is a reasonable business bundling, and the prices of the eligible components are reasonable, e.g., meet the conditions as provided in the Cost Allocation Guidelines for Products and Services that Contain Eligible and Ineligible Components posted in the Reference Area of this web site.

Some service providers will donate products and services to applicants. Program rules do not prohibit that practice, so long as the donation is not provided as a sales inducement; or, if the donation is in fact tied to a bid for services, the value of the donated products is subtracted from the pre-discount cost included in the Funding Request.

Example 4: A Request for Proposal specifies both eligible and ineligible services, and seeks only a single price for the mixed-eligibility bundle.

Assume that an applicant issues a Request for Proposal that seeks Internet access (eligible), caching service (ineligible), and filtering (ineligible). Responses received provide only a single cost for the bundled package.

A Funding Request that provides only a single cost for both eligible and ineligible components cannot be approved. Eligible and ineligible products and services must have separated costs, so that the ineligible components can be subtracted from Funding Requests.

A limited exception exists to the requirement for separated pricing. In some cases, an eligible product or service can include ineligible components on an ancillary basis, and the full package can be eligible for discount if certain conditions are met. For example, if a service providerís standard Internet access service also provides caching and filtering as standard components, and this offering is the most cost-effective solution without considering the ineligible features, then the full cost can be submitted as the pre-discount cost in a Funding Request. The distinction in this case is that the added features are ancillary, they are not specifically requested by the applicant, and they are a part of the standard Internet access package from the service provider.

The document Cost Allocation Guidelines for Products and Services that Contain Eligible and Ineligible Components posted in the Reference Area of this web site provides additional information.

Example 5: A service provider offers a discount for prompt payment.

Assume that an arrangement between a service provider and an applicant is for a service with a cost of $1,000, but that the service provider offers a 10% discount if the applicant portion is paid within 30 days. The amount eligible for funding in this case is the net cost to the applicant for payment within 30 days, or $900. Applicants must choose the most cost-effective solution, and have certified to the SLD that funds are on hand to pay the applicant share. Therefore, applicants are expected to take advantage of payment discounts, when offered, and must seek funding only toward the actual costs expected to be paid.

Example 6: The applicant uses funds or a credit received from an equipment trade-in to pay for the applicant portion of a Funding Request. The trade-in amount is in excess of fair market value.

Assume that an applicant that qualifies for an 80% discount seeks an eligible technology upgrade that costs $100,000. Therefore the applicant share for this upgrade is $20,000. The applicant intends to pay $5,000 for its share, plus receive a $15,000 trade-in from the service provider for components owned by the applicant that will not be needed once the upgrade is complete. The components have a fair market value of $7,000.

The effect of this arrangement is that the applicant obtains a larger discount than that to which it is entitled; that is, it would pay or transfer property with a combined value of $12,000, which is less than what is appropriate for the applicantís 20% share of the total cost. Therefore, the Funding Request is in violation of program rules and would be denied.

As a more general matter regarding trade-in allowances, if the components involved with the trade-in were obtained using discounts through the Schools and Libraries Support Mechanism, the funds or credit from the trade-in can only be used to reduce the pre-discount cost of new components to be obtained through this Mechanism.

The only way that a trade-in can be used to reduce the applicant share is if (1) the components involved in the trade-in were not originally obtained with discounts through the Schools and Libraries Support Mechanism, and (2) the amount for the trade-in is clearly based on fair market value. If the trade-in amount is above fair market value, then the pre-discount cost must be reduced by the portion of the trade-in allowance that is in excess of fair market value.

Example 7: A service provider donates funds to a grant organization, earmarked for an applicant for which it is providing services.

Assume that an applicant that qualifies for an 80% discount seeks an eligible technology upgrade that costs $100,000. The service provider donates $10,000 to a grant organization, with a stipulation for how the funds are to be disbursed in a way that violates program rules. For example, the stipulation could indicate that funds are to be disbursed to a particular school that has a Funding Request under the Schools and Libraries Support Mechanism that cites that service provider.

Because of the additional transaction involving the grant, the cost of the service is not truly $100,000. A Funding Request for the full $100,000 pre-discount cost is in violation of program rules.

Program rules do not restrict applicants from accepting grants from bona fide organizations, nor do they restrict service providers from attempting to help applicants obtain grants from such organizations, so long as the grants or organizations are independent of the service provider.

Additional requirements and restrictions

The examples provided in this Advisory are representative. Similar arrangements that fall into the prohibitions given in the first paragraph of this document would also be violations of program rules.

Any party with a potential financial interest in the Schools and Libraries Support Mechanism is subject to the guidance provided in this Advisory. For example, a subcontractor to a service provider may not engage in the prohibited activities described in this document.

Applicants are required to maintain records of the competitive bidding process, including all bids obtained and the factors used in evaluating the responses and making the determination of the winning bidder. These records must be provided to SLD on request.

  Content Last Modified: January 4, 2002