Schools Turn To Performance Contracting For Help (March 2001)
Or worse, they may have hopped on the bandwagon too soon with a financially unstable service provider and been burned in the process. It cannot be stated strongly enough that if a school is going to enter into a performance contract, extensive research must first be done. Schools must make sure that the provider is financially stable, that they have a good track record, and that they have the technical ability to do what they say they’ll do. That takes a lot of legwork.
But the benefits are obvious when a school takes the time to research an entity and procure a performance contract: Energy and operational dollars can be taken and used to make much-needed capital improvements in buildings. The key is for the right school and the right provider to find each other and enter into a mutually beneficial agreement.
One-Stop ShoppingA performance contract in a school works similarly to the way it would work anywhere else; that is, the school district would first evaluate its facilities for potential efficiency improvements. If it seems there are sufficient improvements that could be made, the district would prepare a Request for Qualifications (RFQ). The goal of the district is to pique the interest of at least two performance contract providers (manufacturers, energy service companies [ESCOs], utilities, et al.), who will then perform a cursory examination of the facilities to determine whether or not enough energy and operational savings can be obtained to warrant entering into a performance contract.
If the performance contract entities agree with the district that a performance contract makes sense, a Request for Proposal (RFP) is drawn up, and the selected providers then perform an energy analysis and prepare a proposal for the school(s) in question. Based on the proposal, which addresses what types of changes will be made and how much energy can be saved, the school chooses a provider, and the energy contract commences.
The provider is responsible for all efficiency improvements made to the facility – that includes selecting, installing, and commissioning the improvements. The provider may also provide maintenance and repairs as part of the contract, although that varies based on the project and the specific needs of the district. And when construction is completed, the provider monitors the school(s) to ensure that energy efficiencies are achieved.
This type of one-stop shopping is very appealing to many schools that lack the manpower to solicit and review bids. In fact, Barbara Morecz, director of education sales for Johnson Controls (Milwaukee) believes that is one of the main benefits of a performance contract.
“Schools are limited in their resources, and that can be money, manpower, or time. Many districts don’t have the in-house staff or often the capabilities to get these types of projects implemented. In addition, they don’t have enough time. Districts have an advantage of looking at Johnson Controls, Inc., a $16 billion organization, that has extensive project management experience, is held accountable for a successful implementation, guarantees the outcome, and has the financial stability and track record to deliver,” says Morecz.
David Rowland, P.E., senior vice president, regional manager, Mid-Atlantic, NORESCO (Philadelphia), says that being a one-stop shop is a substantial benefit that’s worth pointing out. “We’re responsible for the performance of the system, and we’re responsible for making sure it goes in smoothly. In many cases it’s a substantial undertaking that the school couldn’t do with existing staff and so that’s the real expertise the ESCO provides.”
That can also be a drawback to some schools that are used to doing everything themselves. Dan Fortier, mechanical engineer, Pittsburgh Public Schools, has been involved in performance contracts for about three years. The hardest thing he had to learn about the process was how to give up control.
“We’re used to having more control over our work than you get with performance contracting,” says Fortier. “With the traditional plans and specs going out to bid and the low bid contractor wins the contract, everything’s pretty much spelled out to the last detail on the drawings and the specs. With performance contracting, you could insist on that, but that would probably dilute some of the reason for going with a performance contractor. We just have not had as much control as we’re used to over these construction projects.”
But Fortier’s been happy with his performance contracts so far. The school district has conducted two pilot programs under performance contracts: One set of four buildings was lighting only and the other set of four buildings was for comprehensive services, which included lighting as well as mechanical retrofits. The successful pilots led to Phase II, which included 22 buildings obtaining new lighting under performance contracting. A third phase is scheduled to get underway soon.
What Schools Should Look ForEven though a performance contract provider usually acts as a one-stop shop, the school district should still do the research necessary to determine if the provider is reliable. As Fortier notes, references are extremely important, as well as how a provider structures the energy savings a school can expect to see.
“Beyond that, look at the provider’s team. When performance contracting first started many years ago, a lot of the firms doing it had a lot of their own people in terms of their own fitters and technicians and people who actually did the work. Now it’s mostly subcontracting, so you have to look hard at the project management team. Some performance contractors will deliver a proposal that identifies the project team as consisting of an attorney and a clerk. Work doesn’t get done properly just because a contractor writes a contract for a subcontractor,” says Fortier.
John Longo, of South Brunswick (NJ) Public Schools, says that the major factor in choosing a provider is trust. “You have to trust and be honest, candid, and careful with whomever you select as consultant.”
Longo has been involved in several performance contracts over the last eight years. The first involved an elementary school, in which all the ballasts and light tubes were replaced and all the fixtures were cleaned. The project cost about $50,000 and was paid off in less than three years.
After the success at the elementary school, they decided to complete the rest of the buildings that would benefit from this kind of retrofit. This included the high school, middle school, elementary schools, and the administration building, for a total of nine buildings. There was an immediate savings in electricity, because the district changed from the old standard fixtures to those containing T-8 tubes and reducing the number of tubes per fixture.
“By reducing the wattage and not sacrificing the lighting quality, we have been able to hold the line for energy for the past four years. We have been able to budget the same amount each year in the energy code and apply the savings to pay off the loans. All of this has been done via our [performance contract] consultants,” says Longo.
The last performance contract Longo was involved in included changing over from electric resistance heat to hot water boiler units at two elementary schools.
This program has a 10-year payback with no upfront costs from the taxpayers. “We have been paying for the project from the savings out of our energy account and once again have not increased the amount of money budgeted for electricity and natural gas for heating, ventilation, and air conditioning,” says Longo.
Longo recommends performance contracts but he warns that schools must be careful. “There are groups out there that do nothing with your equipment, charge you for what they call ‘changing staff behavior,’ and they take a percentage of the so-called savings. When we enter into a performance contract, we want to see hard evidence that when the project is complete, new equipment has been installed and technologically, the equipment will be monitored and controlled with the best available energy management systems,” says Longo.
Financial stability is also very important for a performance contract provider. Obviously, a school should make sure that a provider will be around to deliver on its financial promises. Track record is another important piece of the puzzle. For example, schools should ask a provider how long they’ve been providing performance contracts, what kinds of guarantees they have in place, what kinds of references they have, and whether or not they’ve delivered what they’ve promised.
“Schools need to make sure a provider can deliver what they say they’re going to deliver,” says Morecz. “Johnson Controls suggests the district evaluate the financial stability, track record, and technical ability of all providers being considered. All these things can help a school district sort through the maze of providers.”
Risk Is SpreadSchools aren’t the only ones who have to be careful about entering into a performance contract. Providers must be just as careful when they select who they will offer a contract to. For that reason, many providers spend thousands of dollars to ensure the proposed retrofits will result in energy savings.
Rowland says he’s spent anywhere from $3,000 or $4,000 to $150,000 evaluating a district for potential savings opportunity prior to having a contract. “Whether we accept them or they accept us, we absorb that cost. It’s a very serious marketing expense. It’s hard to convince a school board to enter into a 10-year contract with a company without giving them a specific offering that applies to their district. And it costs time and money to develop that information.”
But this also helps school districts go out and find the right performance contract provider. If a school district puts an RFP out to 10 or 15 companies for their district, then they’re inviting 10 to 15 companies to make a potentially significant investment when only one’s going to get the project.
Rowland strongly encourages a district to do a qualification phase where they narrow the field from 10 or 15 to three, then they can do a proposal phase where each of the three proposers are actually making the investment.
“It’s a more efficient use of the district’s time, because they have to invest time in explaining their systems to each company. It also saves the industry as a whole a lot of money,” says Rowland.
Another area of concern for providers is maintenance and repairs. Many providers make that part of the package, spelling out that they will handle all maintenance and repairs, rather than the existing staff (if there is one). The fear here is that all the money will be spent to put in new equipment and then inadequate maintenance will be performed, jeopardizing the savings spelled out in the contract.
“A critical component of the performance contract is the support services, ” says Morecz. “Performance assurances and preventive and predictive maintenance services protect the integrity of the new equipment that has been installed and maximizes the investment for the district. Johnson Controls believes support services are the key to a successful partnership.”
Then there are times when an extensive study has been done, and the proper maintenance has been performed, and the energy savings just don’t come through. “If the systems aren’t capable of performing as expected, then it’s a financial obligation for NORESCO. If we say that a project will save 50% of their lighting bill and at the end of the day it only saves 40%, then we’re going to be writing them a check. We have done that. So on an annual basis, we will true up the savings and make sure that they’re there. If, on the other hand, there is a savings shortfall because of an operating change (e.g., the district never had a night school program before and now it does), then the district and NORESCO will negotiate an equitable solution,” says Rowland.
NORESCO monitors its performance contracts in a variety of ways, as many providers do. They review utility bills monthly, quarterly, or annually, depending on the contract, and in some instances, they are tied into a school’s energy management system to check on operations. What they don’t want to be seen as is a “Big Brother” looking over the shoulders of their clients. That just doesn’t work, says Rowland.
In the end, a relationship between a performance contractor and a school is like a marriage: Both sides need to know a lot about the other and be comfortable with each other if it’s going to be successful. It can definitely happen, as evidenced by the many schools who have taken advantage of performance contracts – the key is to do the necessary research before signing on the dotted line. ES