Digital Equipment Lease Review and Audit
A client had intended to release their existing equipment so they could take advantage of the IRS Section 179 Tax deduction prior to the end of 2013. We suggested that it was appropriate to do a review and audit of their digital equipment leases for usage and contract compliance prior to releasing the equipment.
Upon reading and auditing the existing lease contract, it was discovered that the client was being charged an annual 15% increase for maintenance on its entire lease payment. This included the principal payments and interest for the equipment in addition to the maintenance portion. The client was under the impression they were only paying the increases on the maintenance portion.
We then reconciled the monthly invoices for over/under usage. It was at this point that we discovered that the client in the past quarter had increased the color imprint usage by 110% over the prior 10 quarters – meaning they had 6,200 color imprints for 28 months and in 3 months during the September 2013 quarter they had 6,700 imprints costing them a $430.00 additional expense above their allotted 1650 imprints. In a review of best practices for this client, they did not have any mechanism to monitor their daily usage to determine if there was normal usage on a daily, weekly or monthly basis. A best practice review system is now in place.
Next, this client was 4 months from completing their 36-month lease. The total payments for this first lease were $14,567 and there would be a fair market value purchase at the end that was just less than $2,500. The new proposal from their existing vendor was for a $1 buyout lease for the existing equipment costing them $18,371 over the next 36-months. Because the client valued the existing vendor relationship we first approached them to discuss their proposal and to understand the pricing. After our negotiations, they proposed a new flat pricing option dropping the cost to $14,580 over the 36-month lease. This would save the client just over $105/month or $3,791 over the lease term. Keeping in mind that this was for existing equipment that was 31 months old.
After a discussion with the client, it was determined that we should go to the market for some competitive pricing for new replacement equipment. We were able to secure new equipment from a different vendor providing the same functions and quality imprint solutions for $14,220 for a 36-month $1 buyout lease. In addition, the new vendor agreed to buy-out the remaining portion of the existing lease and return the equipment to the leasing company. This new agreement also included full installation with network interface installation to each user.
This allowed the client to also take advantage of the Section 179 deduction in year 2013. Additionally, the maintenance and consumables for over usage were priced less than the proposal from the existing vendor. It is hard to determine the exact savings for the consumables and maintenance unless usage is 100% similar to the past. If the usage is similar, the client will save an additional $6,012 ($501/quarter) over the new 36-month lease to own solution.
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