Experts Advise on How to Negotiate Energy Performance-Based Contracts
Originally published by: Architect Magazine — February 10, 2015
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Energy efficiency is a factor in nearly every building project these days, but most contracts still focus largely on budgets and deadlines. That may change, however, as more clients are expected to pursue performance-based contracts that make energy efficiency a priority and offer financial incentives to teams that achieve predetermined energy use outcomes. While the exact terms can vary and may include financing and operating components, one thing is certain—navigating the intricacies of this emerging contracting method requires a new way of thinking.
Understand the Client
Annika Moman, Arlington, Va.–based associate vice president of energy at AECOM, says that firms must meet with clients and other project stakeholders to understand their energy use goals, hash out concerns, and develop a plan that aligns the client’s logistical needs with its energy use targets. “The most common pitfall is not investing the time upfront to establish the relationship with the client and … the stakeholders so that everybody is invested as [the project] goes forward,” says Moman, whose firm has completed numerous performance-based contracts. “If you don’t do that, there’s a lot of finger pointing during and after construction, if something doesn’t work out right.”
Establish the Ground Rules
Once architects understand the client’s goals, they must work with the client and building operator to catalog the project specifications. Todd Stine, AIA, a partner in the Seattle office of ZGF Architects, says that performance-based contracts should state not only the energy use target but also factors that could impact efficiency, such as how many people will use the building, how many hours the building will operate every day, and extreme weather events. “You need to come to agreement on what is going to be measured, how it’s going to be measured, and what pieces are beyond the design team’s or contractor’s control,” Stine says.
Performance-based contracts motivate project teams to achieve or exceed the predetermined energy use criteria through bonuses, delayed profits, or even penalties that teams must pay if criteria aren’t met. The award or penalty follows verification of the building’s performance, typically a year or two after completion. Sometimes the client dictates the terms, but project teams can also negotiate the financial incentive with the client. Stine says that his firm requests a bonus whenever possible. “It’s great having that feeling that if the building performs over and above what we said it was going to do, then we’re going to get additional acknowledgment,” Stine says.
Performance-based contracts often use design/build teams because members must collaborate closely throughout the entire project to achieve the energy use goals. Rives Taylor, FAIA, principal and regional sustainability leader in Gensler’s Houston office, says that architects are particularly well positioned to facilitate communication between the project team and the client. “If there is a contractual component for success, [we can promote communication] … because we often have a long-term relationship with the client,” says Taylor, whose firm has engaged in performance-based contracts with several federal government agencies.
Know the Market
The public sector issues most of the nation’s performance-based contracts, mostly for building retrofits but also, to a limited extent, for new construction. The majority of private owners continue to pursue other paths to energy efficiency. “Private-sector customers use certification programs like Energy Star and LEED certification to demonstrate their efforts toward energy conservation,” says Brian Floyd, vice president of business development at Seattle-based full-service firm McKinstry.