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May 31, 2011 -
Today's tip from Building Operating Management: Putting energy savings in terms of ROI instead of payback can help win top management approval for facility efficiency projects.
All too often, senior managers think of payback periods when they are evaluating proposals for energy efficiency upgrades. That’s not surprising. Payback measures how long it takes for savings from a retrofit to cover the costs involved. That's a very simple metric that provides a comfort level for financially oriented managers who don’t really understand the facility technologies involved.
But the use of payback makes it easy to set tougher requirements for energy projects than exist for other corporate initiatives. It's not uncommon to hear that organizations won’t consider energy efficiency upgrades if the payback is longer than two years or even 18 months.
One way a to avoid that problem is to get top management to think in terms of return on investment, or ROI, rather than payback. Like payback, ROI is a simple measure. In fact, it’s simply the inverse of payback. But the impact of switching from payback to ROI can be significant. A five-year payback sounds like a long time, but the return on investment is a solid 20 percent. A project with a four-year payback has an ROI of 25 percent. A three-year payback equates to an outstanding 33 percent ROI.
ROI is clearly a powerful tool for selling energy efficiency upgrades. How many corporate projects have an ROI of 50 percent? Yet that's exactly what a two-year payback requires. And an 18 month payback demands a whopping 67 percent ROI.
ROI isn't a perfect measure of the value of energy upgrades, but it's certainly better than payback.