Getting the Most from Your Energy Savings Performance Contract

from MOASBO Journal Mar/Apr 2010

According to the Energy Services Coalition (www.energyservicescoalition.org), “Energy savings performance contracting enables building owners to use future energy savings to pay for up-front costs of energy saving projects, eliminating the need to dip into capital budgets.”  It has become more common to use performance contracting for projects that also include non-energy savings improvements, and those for which the Owner has the capacity to finance the project on their own. With this expansion of performance contracting, it’s important to understand its application as well as its potential shortcomings. It can be a viable option for an Owner IF you 1) understand it and 2) manage it closely.

When considering performance contracting delivery, ask yourself these questions:

  • Do we need the Energy Services Company (ESCO) to provide the up-front financing?
  • Over what period do we want the energy savings to pay back the cost of improvements – 5, 10, 15 or 20?
  • Do we have non-energy savings improvements that we would like to include in the project?
  • Do we have the project delivery expertise in place to closely oversee the contracting, design and construction?

Depending on the answers to these questions, you can determine whether or not performance contracting is your most cost-effective option.

Most construction projects use a delivery method that has checks and balances built into the process by the existence of three legs on the construction stool: Owner, designer and constructor. In the case of performance contracting, the delivery is design-build, meaning the ESCO is responsible for both design and construction. It is critical that you understand this dynamic, for you will need to provide 100% of the oversight and checks and balances.

If you decide on performance contracting for your project, you should customize the process to maximize the value delivered. Customizing will help you get the maximum scope of work at the highest quality, and at a competitive price.

Performance Contracting can be a cost-effective and viable option IF you have the expertise on your side to understand it and manage it closely. In Part 1, we covered how to decide whether Performance Contracting is your best delivery option, and the importance of understanding the dynamics of the two-legged stool (no checks and balances between design and construction).

“High” Performance Contracting – Part 2: Customizing and Managing the Process. Once you’ve determined Performance Contracting is the best way to deliver your project, it’s time to customize the process to maximize the value delivered. Your goal in customizing is to help you get the maximum scope of work at the highest quality, and at a competitive price.

Here are some tips to maximize the value you receive:

  • Make the selection process competitive – both in terms of qualifications and price.
  • Make sure you have apples-to-apples proposals.
  • Negotiate a contract that is fair to both parties, and requires open book compensation to allow review of fees, allowances, contingencies, etc.
  • Match the Energy Services Company’s (ESCO) fees and contingencies to the risk taken on by the ESCO. Areas of risk may include: financing, guaranteed payback from energy savings, guaranteed maximum price, and typical construction risk.
  • Make sure the bidding of the construction work is competitive and open. Have the ESCO prequalify bidders as necessary.
  • Have the expertise in place to oversee and review energy savings calculations, design, bidding and construction (remember, you are 100% of the checks and balances).

Summary: Performance Contracting can be a viable and cost-effective delivery option IF you have the expertise in place to understand and manage it.

Doug Sitton is President of Sitton Construction Group and can be contacted at: dsitton@sittoncg.com, 314/412-5677 or 618/406-0993. Sitton Construction Group (www.ConstructionSavings.com).