Tips make performance contracting work

Performance contracting, by which lighting and/or HVAC system upgrades are paid for from savings in energy costs, is gaining broad acceptance in the municipal and county government markets because it hurdles the issue of tight budgets and offers significant long-term cost reduction. Advances in technology make it possible to reduce energy costs in most facilities from 30 percent to 50 percent. And payout periods, more often than not, can be as short as three years to five years. Indeed, it is not uncommon for a $1 million lighting system upgrade to pay out in three years or less.

The potential savings can be determined in advance by a thorough energy audit. And, to achieve maximum benefit from performance contracting, knowledge and planning are essential.

Performance contracting proposals today often come in very appealing, very complete packages that include third-party financing. What the proposals often lack is a comprehensive strategy to maximize the opportunities offered by performance contracting.

In most cases proposals come from manufacturers of lighting and/or HVAC equipment who agree to do the initial audit, arrange the financing and actually handle the upgrade installation.

Several questions should immediately be asked of such proposals. Can the equipment manufacturer really be expected to objectively select the best equipment for the job? Is the financing package better than what could be arranged by the customer? Does the proposal make an effort to hold down costs by using the customer’s existing in-house capabilities? Often, customers have some of the capabilities necessary for the system upgrades — project management, procurement and access to financing.

Those in-house capabilities should be tapped in an effort to contain costs.

But the most important question is: Does the performance contracting proposal take full advantage of the opportunity presented by the anticipated energy savings?

Cream skimming, a common practice in the marketing of performance contracting, occurs when the contractor proposes a quick and easy upgrade that may focus solely on lighting and pay out in a year or two. It is very simple, very clean and honest as far as it goes. But it ignores opportunities that would substantially benefit the customer. The proposal could be expanded to include upgrades and remodeling that do not save energy and do not have a payout. For example, difficult-to-finance ADA modifications could be added and funded with the energy savings from the lighting upgrade, thus extending the payout to five years or seven years.

In commercial buildings, long-term payouts are not very appealing to owners. But for government buildings that may be in use for 50 years or more, long-term payouts have few disadvantages.

Performance contracting should be viewed as a funding opportunity. Energy system upgrade projects can and should be managed like any other construction project. A preliminary examination of the facility’s energy consumption history and the condition and age of its lighting/HVAC equipment should be made. Local utilities can often be of assistance in this process.

If the facility has a lighting system that is more than five years old or an HVAC system that is more than 10 years old, the preliminary audit will probably justify proceeding to the next step: a detailed energy audit of the facility by an experienced team directed by a consulting engineer familiar with energy upgrades and analysis procedures. The audit should reveal the total energy savings potential and precise expenditures required to complete the project. It should also specify the work to be done and the equipment to be purchased while also providing a work schedule that fully recognizes the operation/use pattern of the buildings(s). Facility audits of this type usually cost between 10 cents or 20 cents per square foot, depending on the size and number of buildings and their complexity and locations.

Some contractors will offer free audits. Such proposals should be examined carefully.

Questions should be asked, including:

* If, after receiving the audit, another contractor is hired to do the work, can the free audit still be used?; and

* Will the free audit be formatted in some traditional way or will it be prepared so that it can be used only by the contractor who produced it?

Only with a detailed audit document in hand is the customer in a position to begin the bid process and/or intelligently evaluate performance contracting proposals from manufacturers.

Consideration should be given to a total facility audit rather than just an energy audit. A complete audit can usually be conducted for about 30 percent more than an energy audit and offers a complete picture of the maintenance and upgrade needs of a facility, rather than just the energy upgrade needs/opportunities.