Update on Eligibility of Basic Maintenance
Message Posted February 14, 2011
~ This pertains to maintenance of equipment only - does not apply to Priority 1 services ~
In past years, the Priority 2 E-rate category of basic maintenance encompassed two major kinds of service contracts. 1) Applicants would contract with a vendor for a fixed price contract to perform repair and upkeep services. Some of these fixed price contracts may have included the cost to replace broken equipment. 2) The other kind of typical maintenance contract, for E-rate purposes, was an extended warranty, which was usually a one-time fee paid like insurance, and would pay for replacement equipment in the event of an equipment failure.
Over the years, the costs of maintenance service have climbed steadily and led the FCC to question whether these services are cost-effective. The FCC was troubled by the fact that by funding fixed price contracts, E-rate paid for maintenance whether or not services were actually performed. These concerns led the FCC to revamp and restrict the definition of eligible maintenance. Beginning in FY 2011, separately priced warranties are no longer eligible for funding. Fixed price maintenance contracts remain eligible, but will no longer be paid out automatically. Payments will be disbursed only if there is proof that the applicant actually used the maintenance services during the funding year.
As a result, many manufacturers, including Cisco, have revamped their warranty offerings to provide bundled manufacturer warranties with the price of the product, to break out the cost of software/patches, and to break out the cost of advanced replacement warranties. Cisco Smartnet is no longer E-rate eligible. On January 27, USAC sent a special NewsBrief to E-rate applicants that outlined many of these changes and it is available at: http://www.usac.org/sl/tools/news-briefs/preview.aspx?id=344.
The following questions and answers provide additional clarification.
Q1. What is meant by an unbundled warranty?
This means a separately priced contract to pay for broken equipment to be fixed or, in the event that the problem is beyond repair, replaced. The warranty may be sold at the same time equipment is purchased or may be sold at a later date to extend the original warranty. The key features of an unbundled warranty are: (a) the warranty has a separate price and is not included as part of the purchase price of equipment and (b) the fee is incurred regardless of whether the equipment breaks and need to be replaced during the contract term.
Q2. Are unbundled warranties eligible for E-rate in FY 2011?
No. Beginning in FY 2011, they are no longer eligible. The FCC implicitly has concluded that unbundled warranties are not cost-effective.
Q3. What is a bundled warranty?
When the manufacturer of equipment includes a warranty for a certain number of years as part of the cost of the equipment, this is called a bundled warranty. The key feature of a bundled warranty is that there is not a separate price for the warranty—it’s just part of the equipment cost.
Q4. Are bundled warranties eligible for E-rate in FY 2011?
Yes. E-rate will pay for equipment that includes a three year warranty that is included as part of the equipment cost at no extra charge. Some manufacturers may offer a longer standard bundled warranty. While the FCC Orders don’t explicitly address this situation, it seems logical that if it can be shown that the longer bundled warranty is offered to all customers (not limited to E-rate customers) and that this has been the manufacturer’s longstanding business practice, the longer warranty should be acceptable. Be sure to ask the vendor who offers a bundled warranty of more than three years whether the warranty is bundled for all customers (not just E-rate customers) and whether the longer bundled warranty was in effect prior to October of 2010 – when the FCC announced these new rules.
Q5. How will other fixed price maintenance contracts be treated in FY 2011?
Fixed price contracts will continue to be eligible for funding, but only for work that is actually performed under the contract. Funds will be paid only when repairs or other maintenance is performed and invoices for the actual repairs are submitted to USAC. In the event that the maintenance services are not needed during the funding year and no work is performed under the contract, E-rate will not release any funds for that contract. And, you cannot get around these rules by submitting an invoice a single repair at a rate for the entire price of the fixed maintenance contract. In general you should expect PIA to engage in a very detailed review of these kinds of funding requests on your form 471 and for related invoice payment requests. Since you cannot predict the future and whether you will actually use the maintenance service in the coming year, the bottom line is that applicants need to be prepared to pay the entire cost of a flat fee maintenance contract without any E-rate support.
Q6. How are the costs of ongoing updates to and technical support equipment treated for E-rate?
Software upgrades and patches, including bug fixes and security patches, online and telephone-based technical assistance and tools are eligible as part of basic maintenance. The service can be paid for as a one-time charge and there is no requirement to prove you actually used the service.
Cisco offers this kind of service, called Cisco Base. This service is fully eligible for E-rate. Cisco’s Smartnet service is no longer eligible for E-rate. Applicants can apply for Cisco Base and then develop a contract for the estimated cost of repairing equipment.
Q7. Are warranties that include eligible and ineligible maintenance features OK?
For E-rate purposes, the maintenance contract must be limited to eligible maintenance features only. If the contract includes ineligible maintenance, the entire contract is invalid. E-rate rules don’t allow for cost allocation of maintenance service contracts. Since Smartnet has both eligible and ineligible features, the service is fully ineligible.
Julie Tritt Schell
PA E-rate Coordinator
717-730-7133 - o
717-730-9060 - f
jtschell@comcast.net
www.e-ratepa.org
Penn*link
| 
Back to 2011 Archives Main