What to Expect from Performance Contracting
December 9, 2014
Do you ever end a construction project feeling unsatisfied? Have you ever been told you will save money and energy with no concrete guarantees? It’s time to consider the higher expectations of performance contracting with Performance Services.
This turnkey procurement method provides public schools and municipalities a financial solution to upgrade mechanical system, improve the learning/working environment, and save money through guaranteed savings. The procurement process actually enables building owners to monetize future guaranteed energy savings to finance facility improvements.
Often used interchangeably with Guaranteed Energy Savings (GES) projects, performance contracting was approved by state legislatures as an energy-saving financial solution for public entities. It also presents itself as a direct alternative to the traditional “low-bid” plan/spec delivery method. As expected, adoption of guaranteed savings contracts among schools was slow at first but has since become a preferred delivery method for many education and municipal renovations.
One of the misunderstandings of performance contracting is that it is not competitive like traditional plan/spec/low-bid projects. The performance contracting procurement method is a competitive bidding method. Those who are not supportive of performance contracting claim that performance contracting companies just set their own prices, which is simply not true. Statutes include assurances that competitive pricing is part of the process. One key advantage to owners is that the performance contractor is obtaining competitive prices from contractors rather than the owner. This feature is very important because it results in not only competitive pricing but much more control over who does the work. And as mentioned before, it allows an owner to pay a premium to get a preferred contractor.
IN MY EXPERIENCE
I was introduced to this method in the late 1990’s, which was still considered the “early years” for performance contracting. I was the superintendent of a multi-building school corporation, and we were facing major issues with our mechanical systems. The newly opened middle school was already experiencing mechanical issues. We also needed to replace nearly 100 failing electric heat pumps in our elementary schools. When I was approached with the idea of performance contracting, I was asked a very simple question: “How much is it costing to heat, cool, and light your buildings annually per square foot?” That question struck a chord with me as our school district was in serious need of energy and mechanical help.
After learning that performance contracting provides a financing option from the guaranteed energy savings, it seemed like a no-brainer. Very early in the conversation, we could see, but hardly believe, the obvious differences between traditional methods and this new procurement method. We did not know what to expect. After just one project, the school board and I were sold on the clear advantages of performance contracting with Performance Services, and we knew it would continue to be a strong fit for our schools. Over the next five years, we undertook four major HVAC renovations using the GES procurement method.
EXPECT REAL PERFORMANCE
However, the strongest feature of the method was the fact that we were buying performance and not just parts and pieces. As a school Superintendent, I had limited knowledge of the various types of boilers, air-handlers, variable speed vs. constant volume, or digital/pneumatic controls. Most of our board members were in the same boat, but there was one thing everyone understood: performance. We were less interested in hearing about parts and more interested in having assurances that our mechanical systems would work properly, provide an optimal learning environment, and save us money. The energy guarantees in place throughout the projects created a reassurance that plan/spec jobs cannot provide. And most importantly, we wanted to know “who fixes the system if we have problems?”
GES contracts include measurement and verification as well as monitoring of energy savings that result from the project. Energy savings vary greatly from building to building, so accurate verification and reporting of real savings is a very important feature of this method. It is one thing to hear that you will save energy; it is quite another to understand how it works and to see the measurable results. One of the goals stemming from monitoring and reporting the energy savings is achieving Energy Star certification. Through performance contracts I began as the Superintendent, my former school district has three Energy Star certified schools.
EXPECT OWNER CONTROL
In addition to our overall mechanical system’s needs within the school district, we had recently completed a traditional construction project, and we’re now dealing with many unpleasant issues. Most of our time was being spent trying to find out who was responsible for fixing things that didn’t work due to a lack of detailed design or workmanship.
The main factor we were missing during the traditional building project was control. We wanted control over who did our work, and we did not necessarily want it to be the contractor with the lowest price. It was frustrating that we couldn’t use trusted contractors who worked with us in the past because traditional construction and renovation projects required “low-bid”. Another issue with plan/spec construction jobs was the number of change orders. Thankfully performance contracting with Performance Services addressed these concerns. As an owner, we felt we had control over the cost of our project.
The performance contracting statute allows the qualified provider to obtain their own pricing that’s included in their lump sum project cost. This was a major departure from conventional construction, as it allowed us the flexibility of paying for select contractors with whom we had previous successes. At the end of the day, the original price we were quoted was the total cost of the project. There were no change orders. Like any construction project, there were issues, but we didn’t pay for them. With a performance contract, you should expect detailed engineering design and no change orders for engineering oversights.
Another expectation of performance contracting is single source accountability. Unlike traditional construction, the building owner has one direct connection with the designer, engineer, and project manager for the job through one company. Without this sole contact, owners will often times hire a construction manager to balance all the interactions with architects, general contractors, and sub-contractors. Accountability in one company made any issue easy to address, and it greatly minimized the stress on our administration and staff.
Performance contracting has many advantages over traditional methods of procuring mechanical renovations. Hundreds of schools have saved significant energy dollars through performance contracting, but the greatest advantages are getting systems that work well over time and provide excellent learning/working environments. It’s time to expect the performance. That starts with requiring detailed engineering design before signing a contract, a no change orders guarantee, and real energy savings results.
