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Simple Payback is Thinking Too Simply
April 28, 2015 - Contact FacilitiesNet Editorial Staff »
Simple payback may be the simplest way to gauge whether energy efficiency projects will be approved or not. That's because, what's simpler than if a project pays back in three years or fewer (or whatever an organization’s threshold might be), it's approved? But more and more, experts are suggesting that using simple payback as your justification metric for high-performance or energy efficiency projects may be counterproductive. Indeed, it may be akin to stamping an L on your forehead, says Alan Whitson, a facilities financial guru.
Using simple payback as part of your big pitch shows a lack of understanding of the nuances of accounting, and truly illustrates you don’t know how to put yourself in your financial folks' shoes when trying to justify projects, say experts. That may sound harsh, but it's the truth.
So what's the solution? Invert simple payback and use the actual financial metric of return on investment. Here's why: A three-year simple payback is a 33 percent return on investment. If an organization has a no-wiggle-room, written-in-stone three-year payback rule on energy efficiency projects, ask if any of the CFO's investments are getting a 33 percent return. It's pretty likely the answer is "no." So why should facility projects be held to the same ridiculous standard?
Of course, there are many extenuating circumstances, and no meeting with the CFO ever goes that quickly. But using return on investment, eschewing simple payback, and most importantly, understanding why, is increasingly a must for facility managers to justify project successfully.