Thoughts on Performance Contracting

Portolan Associates, Inc has no relationships with any company providing performance contracting.  We do not provide performance contracting, but have observed numerous such efforts over the years we have worked with school districts.  The following represents our perspective on issues/strengths related to performance contracting efforts.

Performance contracting is a joint effort where a firm provides controls/retrofits/upgrades related to HVAC, lighting and other energy systems to districts that contract with them for the same.  Often these contracts are long-term in scope.  Districts often obtain the controls through private lending or through the performance contracting firm, with the utility savings resulting from improvements paying for their cost.  Once the cost of the improvements is paid off, the district realizes the full cost-avoidance brought about by the retrofits/improvements.

Agreements for the provision of these controls/retrofits are usually long-term in nature, ten years being typical.  Performance contracting companies will “guarantee” that the benefits gained from the improvements will more than pay for their cost.  Districts may borrow the funds for the improvements privately, as part of a bond program or from the vendor. 

Strengths of such arrangements include the following:

  • The district receives upgrades in controls and systems for no or little up front costs.

  • This helps a district in times when funds are tight.

  • The vendor costs into the overall program the expenses for ongoing system/control maintenance.

  • The vendor guarantees the proforma/costing as long as certain qualifiers are met.

  • Once the contract term is completed, the district owns the controls/equipment outright.  From that point on, all savings accrue to the district.

Caveats related to such arrangements include the following:

  • Vendors build in many qualifiers to the agreement related to savings/costs.  Some of these, such as degree days, are outside the control of the district.

  • Vendors typically require that they alone provide preventive and/or corrective maintenance during the tenure of the contract.  This is a revenue source for the vendor and in essence gives them an exclusive right for equipment maintenance.  District maintenance workers may not be able to service the equipment/controls.

  • A ten year agreement is a long agreement given the political nature of the school district world environment.  If there are issues during the life of the agreement, the original district proponents may be long gone. 

  • Districts may fail to include the long-term cost of money and repayment (if obtained privately) into the costs of the overall program.  This may inflate the nature of savings.

  • Qualifiers to the guarantee may be so elaborate and/or complicated that the district ends up with no control or legal issues should the savings be inadequate to compensate for the costs.

Suggestions related to performance contracting:

  • Include all costs of money in any proforma/financial comparison used to calculate cost/benefit.

  • Work with vendor to reduce qualifiers down to only those over which the district has control.

  • Include the costs of all equipment preventive maintenance into the proforma.

  • Clarify who will perform corrective maintenance (district personnel, third party technicians, or the vendor) and the impact of the same on the agreement.

  • Wherever possible, pay for controls/retrofits up front.  Use district personnel or approved technicians for repair.  This gives the district greater control and ultimately more of the savings.

  • Use a Request for Performance format to encourage vendor competition.  Don’t use the RFP provided by a vendor who is driving the process.  Carefully examine all proposals for differences/similarities.  Require vendors to provide references of districts in your geographical area who have successful completed (not merely implemented) such contractual relationships.  Talk with your peers regarding issues they have experienced.

  • Keep careful documentation related to all commitments and discussions with vendors.  It is our experience that sometime during the life of the agreement there will be disagreements.  Pass along complete documentation to district successors.

  • Borrow the money (if necessary) for the controls through the district’s borrowing sources.  Track costs (interest and payback) together with vendor costs to calculate savings.

  • Make sure district personnel understand costs for preventive and corrective maintenance if provided by vendor. 

  • Establish an independent baseline for utility consumption using district resources.  Don’t let the vendor inform the district as to its costs.

  • Assign an experienced manager/supervisor to oversee the performance contract.  He or she should be involved in all details of the relationship, especially tracking the results.

  • Clarify throughout the process the difference between cost savings and cost avoidance. 

  • Make sure the school board has a clear understanding of the expected results from the agreement. 

Portolan Associates, Inc is the nation’s premier provider of school district physical plant operations consulting.  Please feel free to contact us at 1-706-569-9669