Tips For Successful Performance Contracting
In these projects, there are lessons for facility executives who want to win approval for efficiency upgrades even while the recession has choked off normal funding streams.
To begin, don’t assume that any of these projects are unusual. Performance contracting is a technique that can apply to many buildings, experts say. “I wouldn’t say there were any buildings in Houston that were just huge energy hogs,” says Fulop. “Performance contracting can usually lower energy spending by 15 to 30 percent in most buildings. I don’t think there were any major outliers here.”
For that reason, performance contracting should be viewed as a business investment decision, says Schuur. “Energy efficiency is not something exotic that is done just to help the environment,” she says. “It makes real economic and business sense. In most buildings there is a good energy efficiency project that makes financial sense and is good for the environment.”
Getting that project accomplished, however, is another matter. Winning approval in city governments requires support from three key players, says Chad Nobles, energy and environmental services account executive for Siemens Building Technologies. The group includes the city’s finance director, the mayor or city manager, and the facility executive. “Those three individuals are critical,” says Nobles.
“If your sponsor is the CFO, you will probably get very clear financial requirements,” says Mike Taylor, Honeywell’s vice president of sales for CCI.
Not establishing the requirements of the finance team, mayor and facility team at the outset will almost certainly lead to project delays, Taylor says, especially once the city attorney gets involved in vetting documents.
Getting support from the financial team isn’t always easy because not everyone understands how performance contracting works. One way to make the case is to explain that the money will be spent on energy regardless. Performance contracting simply takes a portion of the energy budget and funds the upgrades over time, without any upfront cost.
“One of the reasons we got behind performance contracting is the guarantees the ESCOs offer,” says Schuur. “You can design a project with whatever payback the owner requires.”
Still, financing has been a challenge in the last year. But challenging doesn’t mean impossible. “Certainly debt is available for good projects,” says Walraven. “If it is well leased in a good market, it is finance-able.”
Think about financing up front, says Schuur. That includes asking ESCOs for financing recommendations.
“When we work with owners we put the project criteria up front,” Schuur says. “One of those is project size. Ask how much you can pay or borrow. That has to be done from the beginning, otherwise all you will end up doing is a lighting retrofit.”
The Future of Performance Contracting
From a broader perspective, the recession could turn out to be an asset to lowering carbon emissions. For years, one of the biggest stumbling blocks to employing performance contracting was that not many in commercial real estate were familiar with the concept, and it took a very long time to develop legal documents. Now BOMA’s BEPC has fixed that issue.
A second challenge was the dizzying rate at which companies would buy and sell their assets. This put enormous pressure on payback periods. Because it’s much harder to find financing (to say nothing of a buyer) for a building, companies today know they will own them longer.
“We work with several global portfolio owners whose timeframes and payback requirements have already doubled from 18 months to three or four years,” says Schuur. “They are already realizing they are going to be holding buildings for longer and have a longer term interest in them.”
The lesson for facility executives? If there is no upfront cost to fund the project, and the savings are guaranteed, in this environment, go as deep as possible with retrofits.
“I think the most important thing you can do is look at the building as a whole,” says White. “So many times people only look at one measure or another, especially in the private sector where they may want a one or two year payback. Look at the overall package and do as much as you can.
An extra incentive to consider performance contracting now: CCI has negotiated special volume purchases with companies that make building products designed to increase energy efficiency. Ask the team early to focus on specifying products that are discounted, where possible.
“Because each building retrofit is typically a customer engineered project, a lot depends on whether the supplier is on the list,” says Sam Choy, global marketing director, life cycle management for Siemens.