This post talks about how to effectively pay for fiber construction by a service provider. In other words, you, the school are wanting high speed broadband, and the local commercial service provider delivers you high speed broadband by a fiber construction of e.g. 500 feet.
The traditional approach to purchase high speed broadband via E-rate has been you request a high speed broadband connection to your school premises (via the form 470 process). For example, you may specify you need a 1Gb/s connection to your High School. The local commercial service provider responds with an offer to provide you 1Gb/s over a fiber optic connection for $6,000/month, for a 5 year term. The commercial service provider explains that it will need to build 500 feet of fiber to your premises. You figure this is a pretty good deal, since you get 80% discount rate on E-rate, thus, each month you would only be responsible for 20% of $6,000, thus $1,200 per month. So you sign up. After 5 years, what typically happens. The service provider will probably not remind you that your term is up, and switch you to month to month billing, at the same rate, of $6,000 per month. You still have the 80% discount rate, so you’re still only paying $1,200 per month, and you and the service provider just carry on as before, and everybody is happy.
Now, you wonder, is there an alternative approach ? You know the service provider is constructing 500 feet of fiber to your premises. You wonder if you were to pay off the build in one lump sum, subsidized by E-rate, would this be a better deal for you. So you ask the provider to instead, quote a one time fee, plus monthly fee for the 1Gb/s service, instead of just a monthly fee.
The service provider comes back to you and quotes $60,000 for the one time fee, with a monthly fee of $4,500. The monthly fee has been reduced from $6,000 to $4,500, if you pay a one time fee of $60,000. Since you’re at an 80% discount, you would be responsible for 20% of the $60,000, meaning $12,000. So, now you have to come up with $12,000 for the one time fee and a monthly fee of $4,500 versus in the prior scenario, $0 one time with $6,000 monthly fee.
Although you see it would save money in the long run to pay the one time fee for the lower monthly payment, you just don’t have the funds to come up with the one time payment. So you settle for the option to pay $0 one time, with the $6,000 monthly fee.
For E-rate funding year 2016, a new rule has been introduced allowing you to pay your portion of special construction over a 4 year period. What this means is that you have the option to pay for the $12,000 over 4 years. Thus $250 per month, rather than $12,000.
But please note, if you want this option, you have to request this in the form 470. The service provider will then decide if they can offer you the option to pay over a time period up to 4 years. Note, that finance charges by the service provider are not E-rate reimbursable.
Knowing this rule puts you in a position of power with the service provider. I recommend you start having discussions with service providers telling them your intent so they can prepare. If you can, ensure multiple providers are aware of your intent so there is competition. If one provider thinks they will lose the business by not offering you the payment plan, then this is good. You want competition to give you the best deal. The service provider does benefit from this new rule by being paid for most of the construction within the first year, however, the service provider does lose from the lucrative monthly payments, that are given, month in, month out, by the school. To give you an idea of what I’m talking about, in the first scenario above, if the cost of the build was $50,000, then the service provider has this paid off in less then 3 years ($50,000 divided by $1,500 is 33.33. $1,500 is the additional cost the service provider added to account for the build). The remaining two years in the term is pure gravy for the service provider, and they are hoping you will just renew at the same rate for years 6 onwards, and you see how this becomes a great cash cow that is swimming in gravy !
With the new E-rate rules, and your knowledge and making clear to multiple service providers, thus helping competition in your area, you will most likely get a much better deal than in the past. And this is the whole reason for the E-rate rule change.
If you have any questions on this, don’t hesitate to send me an email.