The M Files

PA Secretary of Education Ron Tomalis speaking at the Tamaqua Area School District.

In my last post I shared the remarkable energy results we achieved through a unique geothermal HVAC application. This week I’ll share some perspectives on how similar results can be expected by employing performance-based contracts.

But first, some reinforcement of the energy results from the school is in order.

Measurement and verification reports at the 40-year-old Tamaqua High School confirmed that trimming energy use by more than 50% resulted in a $250,000 reduction in 2010 utility costs. Capital costs for the upgrade were partially reimbursed through a $149,354 PPL electric utility rebate. The school district secured very low-cost financing for installing the efficiency measures, which was only made possible by their lender through a Guaranteed Energy Savings contract.

In the words of school superintendent Carol Makuta, “This project gives us money that otherwise would have been spent in energy costs to use for educational programs.” The success of the program prompted a visit from PA Secretary of Education Ron Tomalis. In a prepared speech he stated, “We talk a lot about what we as public officials and as government officials feel about the tax burden. We are always looking to get that extra drop from that dollar. We will be using this initiative as an example to other school districts.”

I contend that clear, tangible financial and environmental benefits of this program were achieved because we employed a performance-based, rather than a traditional, multiple price,and prescriptive-basedcontract. The contractor (McClure Company) and owner (Tamaqua Area School District) agreed to very distinct, measurable, outcome-based objectives. Our marching orders were clear.

How did this performance-based contract differ from a traditional, low-bid prescriptive contract? In three ways:

1. Penalty for non-performance. Since predicted energy savings were guaranteed by contract, we (as the performance contractor) will have to pay the difference between the guaranteed and actual savings if real-life performance falls short of expectations. We would owe that differential in each year of our multiple-year contract. Twentyyears in this case.
2. Fixed price tied to performance. The fixed price of the contract is tied directly to energy performance, with annual lease payments from capital upgrades being offset by budgeted energy savings. Since those savings have to be guaranteed and later verified, there’s inherent downward price pressure on the proposed upgrades.*
3. Nobody to blame except ourselves.As engineer, constructor, and commissioning agent ,there was no convenient way of escaping design, construction, or performance issues. We couldn’t blame cost or operational issues on someone else. We had no latitude for issuing change orders or assessing blame for construction delays.

From a technical perspective, this project was the first of its kind. The equipment manufacturer had never attempted our energy saving operational strategy. Getting the system running properly took a lot of patience, requiring months of tweaking and countless hours communicating with the factory. It was the contractually obligated performance goal that kept us engaged. Now, after cutting our teeth and carrying those initial lessons forward, we’ve adjusted our approach and have successfully implemented the concept in four additional facilities. Performance-based contracting has revealed our biggest asset-engineering innovation with an endgame of guaranteed energy savings.

Would we have had comparable financial and environmental results if we would have divided the engineering from multiple construction contracts, and enlisted the help of a third party commissioning agent? What do you think?

*The turn-key price for the complete geothermal HVAC retrofit amounted to $28.11 per square foot.