FAR 52.207-5—Option to Purchase Equipment.
Plain-English Summary
FAR 52.207-5, Option to Purchase Equipment, gives the Government a contractual right to convert leased or rented equipment into a purchase during the contract period. The clause explains when and how the Contracting Officer may exercise the option, the fact that the exercise is unilateral, how the effective purchase date is set, and what happens to lease or rental charges once the purchase date takes effect. It also establishes how to calculate the purchase conversion cost, including the use of the contract’s purchase price and accumulated purchase option credits. In addition, it addresses whether credits from prior Government contracts can be counted when the equipment has been continuously leased or rented, and it defines movement of equipment between sites as continuous rental. In practice, this clause protects the Government’s flexibility to buy equipment it has been leasing, while giving both parties a clear method for ending rental charges and determining the final purchase price.
Key Rules
Government purchase right
The Government may buy equipment that is being provided on a lease or rental basis under the contract. This is an option reserved to the Government, not an obligation to purchase.
Unilateral exercise only
The Contracting Officer may exercise the purchase option only by issuing a unilateral modification to the Contractor. No bilateral agreement is required to trigger the purchase.
Effective date controls
The unilateral modification must specify the effective date of purchase, and that date may be any time during the contract period, including any extensions. The effective date is the key date for stopping rental charges and calculating the conversion price.
Rental charges stop before purchase
Except for final payment and transfer of title, the lease or rental portion of the contract is complete on the day immediately before the effective purchase date. Lease or rental charges must be discontinued as of that day.
Conversion cost calculation
The purchase conversion cost is calculated as of the effective purchase date using the contract purchase price minus the total accumulated purchase option credits. The credits are determined under the formula elsewhere in the contract.
Prior credits may carry over
If the equipment has been on continuous lease or rental, accumulated purchase option credits from a previous Government contract may also be counted. Moving the equipment from one site to another is treated as continuous rental for this purpose.
Responsibilities
Contracting Officer
Decide whether to exercise the purchase option, issue the unilateral modification, specify the effective purchase date, and ensure the conversion cost is determined using the contract terms and accumulated credits.
Contractor
Accept the unilateral modification as the contractual mechanism for purchase, stop billing lease or rental charges after the day before the effective date, and support final payment and transfer of title in accordance with the contract.
Government
Use the option only when it wants to convert leased or rented equipment to ownership, and ensure the purchase is made consistent with the contract’s pricing and credit provisions.
Contract Administration/Finance Personnel
Verify the calculation of purchase conversion cost, confirm accumulated credits, process final payment, and coordinate title transfer and billing cutoff dates.
Practical Implications
This clause gives the Government a straightforward way to turn a rental arrangement into a purchase without renegotiating the contract.
The effective date matters a great deal: it determines when rental charges stop and when the purchase price is fixed, so errors in the modification date can create billing disputes.
Contractors should track purchase option credits carefully, including credits from prior continuous rentals, because those credits directly reduce the conversion cost.
The clause treats movement of equipment between sites as continuous rental, which can preserve credit accumulation and avoid gaps that might otherwise reduce the purchase benefit.
A common pitfall is continuing to bill lease or rental charges after the day before the effective purchase date; that is inconsistent with the clause and can lead to overpayment or audit findings.
Official Regulatory Text
As prescribed in 7.404 , insert a clause substantially the same as the following: Option to Purchase Equipment (Feb 1995) (a) The Government may purchase the equipment provided on a lease or rental basis under this contract. The Contracting Officer may exercise this option only by providing a unilateral modification to the Contractor. The effective date of the purchase will be specified in the unilateral modification and may be any time during the period of the contract, including any extensions thereto. (b) Except for final payment and transfer of title to the Government, the lease or rental portion of the contract becomes complete and lease or rental charges shall be discontinued on the day immediately preceding the effective date of purchase specified in the unilateral modification required in paragraph (a) of this clause. (c) The purchase conversion cost of the equipment shall be computed as of the effective date specified in the unilateral modification required in paragraph (a) of this clause, on the basis of the purchase price set forth in the contract, minus the total purchase option credits accumulated during the period of lease or rental, calculated by the formula contained elsewhere in this contract. (d) The accumulated purchase option credits available to determine the purchase conversion cost will also include any credits accrued during a period of lease or rental of the equipment under any previous Government contract if the equipment has been on continuous lease or rental. The movement of equipment from one site to another site shall be "continuous rental." (End of clause)