What is in this article?:
- Guaranteed Savings
- Potential savings
Performance contracting allows education institutions to improve facilities and immediately make use of new equipment.
Faced with shrinking budgets, expanding enrollment and pressure to improve academics, schools and universities often are forced to defer maintenance and equipment upgrades. However, schools do have an alternative. Performance contracting allows education institutions to improve facilities and immediately make use of new equipment.
Performance contracting is a funding method in which energy savings from utility expense reductions are used to pay for projects over several years. Utility savings are realized through various energy conservation measures (ECMs) that may include high-efficiency lighting retrofits; computer-controlled energy management; and the replacement and redesign of older, inefficient heating, ventilating and air-conditioning (HVAC) equipment and systems. A performance guarantee ensures annual savings. If a school does not achieve the guaranteed level of savings, the contractor will compensate for the difference.
In successful projects, a school or university saves money, and building occupants often benefit from improved comfort and productivity. To fully profit from these benefits, administrators and facility managers should carefully assess the impact of the contracting method they select and the reliability of the proposed savings projections.
The right approach
Three contracting methods are used by institutions seeking a performance contract: request for qualifications (RFQ), request for proposal (RFP) and negotiation. The selection method can affect the success of the project greatly.
Using the RFQ method, an institution issues a document that states its goals and objectives for the contract and describes the facilities involved, such as the number of buildings, location and square footage. Various energy services companies (ESCOs) respond with proposals detailing their capabilities. Administrators and facility staff evaluate the respondents and choose the best qualified ESCO to perform a detailed energy audit of the campus. Through the audit, the ESCO selects appropriate energy-conservation measures, determines the cost and the expected savings, and develops a proposal including the scope of work and all the financial details. Once the school is satisfied that the proposed ECMs will meet its infrastructure needs and financial objectives, the work begins.
The RFP method contains all the elements of the RFQ except that the competing ESCOs must complete a preliminary energy audit, including the scope of work, estimated project cost and the preliminary savings figures, before a company is selected. The institution evaluates the proposals and selects an ESCO based on the quality of the audit performed and the suitability of the proposed ECMs.
The negotiated approach to performance contracting can take many forms, but usually is very similar to the RFQ method. Typically, this approach applies only to private business or institutions that have no legal requirements for competitive bidding.
Each method offers its own advantages and disadvantages, but there are important points to consider. The cost of a preliminary energy analysis is substantial and increases the accuracy of the audit. When a project is bid as an RFQ, the ESCO is selected before the audit and is, therefore, more willing to dedicate resources to this costly analysis. On the other hand, if a project is bid as an RFP, each interested ESCO is required to commit its resources to performing an energy audit on a speculative basis. This forces ESCOs to either decrease the cost, and thus the accuracy of the audit, or bid on fewer projects, reducing the competition for a particular project. Using the negotiated method, there is no competition at all.
Therefore, the disadvantage of the RFP method vs. the RFQ method is that fewer companies may respond to a bid because of the cost involved. In addition, there is a strong inclination to select a company on the preliminary savings and project cost instead of focusing on the best project expertise. It also is important to take into account that some companies may adjust the preliminary numbers before the contract is finalized.
In contrast, with the RFQ method, the company is selected on expertise, credibility, quality of references and proven ability. This allows for greater competition and a more accurate audit, which can help assure the institution of the project's quality. After selection, the ESCO can work closely with the school to ensure the best possible selection of building improvements.