Reducing Risk and Increasing Value through Performance Contracting

Reducing Risk and Increasing Value through Performance Contracting

Performance contracting is a construction delivery method option for public sector entities that has been available in many states for more than 25 years and provides tremendous benefits to those who use it. However, the benefits are typically discussed as savings to utilities and maintenance budgets. They are reviewed in technical terms only, not financial ones. But what are the financial benefits of performance contracting? More than a technical solution, performance contracting stands as a strong financial and economic solution for public sector entities in need of facility improvements. This article looks at how performance contracting reduces risks and increases value for owners.

Reduced Risk

Reduced risk of change orders and disruptions to school year

Performance contracting ensures that one firm is solely accountable for the project at all times. Unlike traditional construction, owners who use performance contracting have one direct connection through a single company with the project’s designer, engineer, and project manager. In this way, owners retain control over their project. Before quoting a project, the performance contractor ensures that they know the project in thorough detail. A “no change orders” guarantee eliminates the risk of going over budget which can be disruptive, cause unnecessary delays, and lead to high profile and potentially embarrassing outcomes.

Performance contracting is an integrated project delivery solution that provides a link between the project’s design and implementation to ensure buildings work properly and communication flows smoothly. This is especially convenient for schools whose window of opportunity for construction projects is a narrow three summer months. Collaboration between the owner and performance contractor means that fewer items slip through the cracks and projects can be completed more quickly and efficiently.

Reduced risk of poor or costly building performance

Every year, K-12 schools spend more on energy than on computers and textbooks combined. For many school districts, utility costs are the second largest budget expenditure behind salaries. Often, owners are unaware of how much they’re overspending on their buildings because of energy inefficiencies. Performance contracting can reveal these costs. It requires measurement and verification of energy savings after installation with a hard guarantee for efficient outcomes. Providers must cut a check if their systems do not perform the way owners expect, reducing the risk of inefficient and poorly performing buildings.

Reduced risk of hidden costs and paying more than you should

When using performance contracting, qualified providers must go through a competitive selection process over which owners have complete control. Open book, competitive pricing takes the guesswork out of how much a project costs and reveals any unexpected costs that might pop up along the way. Performance contractors that use transparent, open book pricing ensures that owners see exactly what is being purchased and spent, where it is spent and how much is being allocated without markup to each sub-contractor.

Reduced risk of equipment going bad and running inefficiently

Performance contracting targets large mechanical and electrical equipment, ensuring its proper operation and improving its longevity. Evaluations and upgrades often expose operational issues that may lead to premature equipment failure. The performance contractor can then find solutions to resolve those issues. Additionally, through the assurance portion of a performance contract, automated building controls will alert owners of any future equipment issues.

Increased Value: The Benefits Of Performance Contracting

High-efficiency equipment and high-performing buildings with positive cash flow

One way to look at performance contracting is that it is a low risk, high reward investment. With actual performance guarantees made at the outset, schools that use performance contracting then see positive cash flow from the guaranteed energy and operational savings. These savings are extremely valuable to schools in tight financial situations that are looking for ways to free up dollars in the general fund.

Improved learning environment

There has been much research on the impact of the school environment on student performance. Learning environments require optimal levels of humidity, air circulation, lighting, air ventilation, and noise. One of the benefits of performance contracting is that it improves the learning environment for students and faculty as they achieve the mission of public schools: to educate all students and promote student achievement.

Knowledge of building systems and overall efficiency

Many times, owners are unaware of how their district buildings’ energy systems are performing in relation to districts of similar size. Since energy assessments are part of the performance contracting process, the performance contractor can give a detailed overview of school buildings and their energy performance. Experienced performance contractors can also inform the district about how it compares in energy usage. This knowledge is an added value to owners and can inform decisions about facility projects in the future.

Energy Star® eligibility

Achieving Energy Star means that a school building uses less energy, costs less to operate, and provides an optimal learning environment. By undergoing a performance contracting project, schools can often earn the Energy Star label simply through the energy conservation measures implemented from the project. This is another way that performance contracting adds value to a school community.

Using performance contracting to complete facility renovations and energy efficiency improvements is a wise choice from a financial and economic perspective and owner expectations for project outcomes should be understood before committing to any project. Do you know of any other ways in which performance contracting reduces risk and increases value for building owners? Start a conversation with me today!

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