Performance Contracting vs. Performance-Based Contracting in HVAC
August 4, 2008
Performance contracting (PC) has been around for many years. It has been defined as “A mechanism to implement resource efficiency improvements with minimal upfront costs. It uses savings resulting from the efficiency project to pay for the work over time.”
Performance-based contracting (PBC), or performance-based service contracting (PBSC), is quite different.
“I put the words ‘performance contracting’ in quotes, because I think that in terms of HVAC contracting, at least, it is not very well understood, and perhaps even willfully misinterpreted,” said Rob Falke, president of National Comfort Institute (NCI).
Given that PC and PBC or PBSC are often confused, Falke elaborated. “Taken at its best, performance contracting as defined by the Housing and Urban Development is ‘a mechanism to implement resource efficiency improvements with minimal upfront costs. It uses savings resulting from the efficiency project to pay for the work over a period of time.’ It can do a lot to save energy on a very large, national scale - perhaps most importantly in the residential sector, but certainly in commercial work as well.”
According to NCI’s definition, “PBC is all about accountability and delivering measured results. A performance-based contractor provides end users with proven, measured performance in all the systems he installs and services. He does this by measuring system performance both before and after he performs the work, and documents the results.”
From a similar perspective, PBC has been described as being “designed to ensure that contractors are given freedom to determine how to meet … performance objectives, that appropriate performance quality levels are achieved,” stated Deidre A. Lee, administrator of the Office of Management and Budget (OMB), in the “Guide to Best Practices for Performance-Based Service Contracting.”
“PBSC is a tool that offers improved contractor performance,” she wrote. Of course, the OMB’s use of PBSC has involved a very wide variety of projects, and payment is based largely on results, unlike residential HVAC PBSC. In this sense, the concepts are quite different.
In residential HVAC contracting, the most experience with PBSC- and PBC-type activities has come from forward-thinking contractors, such as those belonging to the Air Conditioning Contractors of America (ACCA) and the National Comfort Institute.
IT'S AN AIRFLOW THINGIn the world of HVAC, according to NCI’s Website, “Airflow is at the core of PBC, as most of our industry has never been taught how to quantify it, properly design for it, or how to ensure proper airflow to every room in a home or commercial building through air balancing.” Other dimensions include combustion efficiency and safety, refrigerant charging, and understanding how the HVAC system affects a building.
It speaks to the very heart of ACCA’s Quality Installation (QI) Specification, which is rapidly being adopted across the country.
“Good performing contractors follow industry-recognized standards and good practices,” said Glenn Hourahan, vice president of Research and Technology for ACCA, “to ensure that the HVAC system is properly designed, selected, installed, and serviced.”
DRIVERSThe movement to apply QI actions to system replacements and new installations is being driven in large part by rising energy costs, he said. “Increasing energy costs will make homeowners become more conscious of the systems that they are installing or operating. It’s a level of pain.
“This is likely to cause customers to be more receptive [to QI and PBC actions],” he said. “The financial pain will make customers more willing to listen to the energy proposals given by the contractor. It’s not just the box. It’s the system.”
The financial drivers may help offset the pain consumers are feeling from rising utility costs, making quality-based repairs and installations, those with measurable good performance, a kind of pain reliever.
The requirements of QI and PBC activities are not new, Hourahan pointed out. “Almost everything in the QI has been required by the OEMs for years, and in local jurisdictions. If it’s not being done, it’s because customers aren’t asking for it.” The catch, of course, is that customers need to be aware of what they should ask for.
He does not necessarily predict federal legislation to use QI methods, even though it might seem politically correct for the politicians themselves. “National legislation won’t make much difference,” he said. “SEER 13 makes no sense in New England. You have to be careful what you ask for from the federal government. I think the bigger driver will be energy costs.”
Residential energy consumption might be better addressed at the point of sale, he continued. It could be part of a necessity of the sale of a home, like a home inspection; the carrot would be more favorable mortgage rates for lower-consuming homes.
ACCA is trying to encourage such legislation in Washington. “When someone is buying a house, I would like to see a whole-house energy audit done,” Hourahan said. “At the time of sale, if you’re going to sell your house, a [favorable] energy audit would give your buyer a better interest rate for the loan.”
CONTRACTOR INTERESTEven though many residential contractors still hesitate to offer performance solutions to their customers, from the often-mistaken belief that these customers would not be interested in paying for the service, the concept of performance-based contracting is catching on, thanks to the QI initiative and education from groups like NCI.
“In this tighter economy, contractors are looking for an advantage they can show their customers over their competitors,” said Falke. “Just selling more high-efficiency boxes doesn’t cut it anymore.”
Mike Graham, of Mike Graham Air Conditioning and Heating, Burkburnett, Texas, is one contractor who is very pleased with what his company has been able to accomplish through PBC. “It’s a mindset,” he said.
The company was founded in April, 1994. At first, Burnett said, “I thought a blower door was the holy grail of HVAC.” But, it was heavy, hard work, and good results weren’t always the result. “In 1995, I hired my first salesman. He ran the load calcs wrong and undersized geothermal systems. It was expensive to fix.”
In 2002, he attended an air balance class that “changed my life.” After a CO class, he realized, “We’re HVAC contractors and we’re not doing our job.”
One of the keys, he said, is to understand how other trades affect your job performance. Electricians, framers, plumbers; all can affect the home’s performance. “Become an expert in every other trade,” he advised. The other keys are:
• Training your people.
• Teaching them the right way to construct and install a duct system.
• Teaching them how to use the tools of the PBC trade (flow hood, static pressure analyzers.)
• Making sure your people are on the same page.
• Following through on checking their work, verifying and confirming performance, and “not just by testing,” he said; “you need to look at the work.
“Don’t be afraid to make them redo the work right,” he added. “Yes, we have done this. It is important that they understand what you stand for. It is equally important that they know what you won’t stand for.”
Techs “are the image of the company,” Burnett said. “They are the ones that set the tone. They’ve got to be on the same page.” Installers also are recognized as being critical to the process. “Our installers get paid more than our technicians.”
Doing PBC work has become an extremely successful lead source of motivated customers. “We don’t advertise,” said Burnett. “Our business comes strictly from referrals. And these referrals spend more.”
PBC APPLIEDBurnett describes it as a two-step sales process, though it should be noted that each of the two steps has multiple sub-steps.
Step one includes:
• Gathering info.
• Building rapport (relationship, teach and train).
• Not overwhelming customer with a bunch of tools.
• Asking questions. (“This sets in motion what testing needs to be done based on the answers/reactions to your questions.”)
• Looking around and make observations - window units, fans, dusty grilles.
• Measuring the house.
• Looking in the attic. “You’ll be the only one. We’ve made more sales because of this.”
• Checking takeoffs.
• Measuring insulation depth and values.
• Looking for thermal bypasses/knee walls.
• Summarizing what you have found.
• Explaining that you will need to go back to the shop, compile the info you have gathered, and design the best solution. “We’re designing a comfort system for you.”
• Setting the return appointment.
Step two includes:
• Running room-by-room load calculations.
• Selecting equipment options.
• Designing new duct layout or duct repairs. “On nine out of 10 projects, we design a new duct system.”
• Building the quote like a menu, with lots of options and different configurations.
• Returning and letting the customer choose. “They will ask, ‘What would you do,’ ” Burnett said. “That’s when we’ve got ‘em.”
• Finally, you sell the job, do the work, and test what you did. “This is where you shine; this is where performance-based contracting starts.”
Contractors who are best suited to this type of work, said Falke, are “big, small, rich, or poor. All it takes is the training and instruments to accurately diagnose the problems and the integrity to solve the problem.
“As energy costs take another jump … the trend is finding real solutions that will save real dollars,” Falke said. “Good performance-based contractors measure system performance. The measurements pinpoint the system defects and then they’re easy to fix. Consumers are way smarter these days.”
How long does it take a contractor to see a payback for his/her initial investment in PBC equipment and training?
“We hear reports of paybacks in as short as 90 days for the training and the instruments,” said Falke. “But I figure a good solid year is reasonable.
“The new performance-based contracting isn’t just for energy service companies or huge companies anymore. It’s a way of approaching every one of your customer’s problems and offering the solution.”
Publication date: 08/04/2008