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Protecting the Parish Interests in Shared Savings Agreements and Performance Contracting

by Andrew Rudin of the Interfaith Coalition on Energy
August 6, 1996

Last April, I spoke at a national Catholic conference on "Construction, Maintenance and Real Estate" in Baltimore.  I asked one of the conference organizers his opinion about shared savings agreements in which energy efficient equipment is installed without cost to the parish. 

Instead, the contractor is paid from a share of the energy savings.  He said that almost all the people running parishes avoid that type of agreement.  I agree with him that they should be avoided.  When they come knocking on your rectory door, here are the things to bear in mind:

a. The savings estimates can be influenced by changes in occupancy, use patterns, and climate.  Arguments can develop over the share of the savings due to the retrofit, versus the savings due to other factors.  Therefore, the methodology for determining the estimates must be clearly described and should take into account the changes in use, occupancy and climate.

b. If the parish does any other retrofits after the shared savings agreement is signed, a new agreement about the savings must be re-negotiated, allowing for loopholes in the previous agreement(s) to be recalculated in the contractor's favor. Therefore, each new agreement must be done separately to reflect a different baseline resulting from previous improvements in energy efficiency.

c. The warranties on equipment become unclear if there are multiple firms working on the same systems.  For example, if a boiler is installed on a shared savings agreement with one contractor, and a controls system with another contractor, the boundary between the two projects can be unclear.  Therefore, the responsibilities of various contractors should be specified clearly.

d. A performance contractor who successfully bids on a shared savings agreement may have an advantage in subsequent bidding, in the same way that change orders cannot be subject to competitive bidding after a construction contract has been signed. In any subsequent bids for shared savings agreements, the bid documents should have sufficient information about the projects to present a level playing field for all bidders.

e. If energy prices escalate, the performance contractor may make seemingly unfair profits.  If the savings are based on average energy prices, or agreed-upon fixed prices rather than current prices, the share of savings may be more fair.

f. The installed equipment may become quickly obsolete.  For example, if a building owner made an agreement for compact fluorescent inserts in exit signs two years ago with a five-year payout on the contract, they may not be able to consider the much more efficient light emitting diode inserts available more recently.  A shared savings contract should allow for upgrades.

g. The contract should be written so that the contractor bears the full responsibility if the equipment fails prematurely due to poor maintenance.