A Simple Example to Introduce the Basic Financial Arrangements 91project as “complete” once it is in the ground. Customers often think
the ESCO is in business to sell equipment. ESCOs typically lose money
during equipment installation but make up for it through the service
and savings over the life of the contract. A good project manager is an
incredibly valuable part of the ESCOs project delivery during the project
implementation and in all the contract years.
When ESCOs have completed a thorough risk assessment and
determined the procedures needed to manage those risks, they then
discount the savings to adjust for risk exposure. In other words, they
never guarantee 100 percent of the expected savings.
PERFORMANCE CONTRACTING:
A FINANCIAL TRANSACTION
Risk is managed through the financial structure. The ESCOs invest-
ment grade audit will provide the information necessary to establish
how much can be guaranteed and how much must be held back as a
risk cushion. The financial structure has essentially three components:
- the guarantee, which covers design, acquisition, installation and
the cost of money; - the ESCO fee for services performed;
- the positive cash flow (the savings in excess of the guarantee and
ESCO fee).
The size of the ESCO fee will vary with the services provided and
the risks perceived and assumed by the ESCOs. Some ESCOs put their
fee in the guarantee package, others take it off the top of any savings
that exceed the guaranteed amount, and still others do some of each.
Owners should realize that an ESCO that offers the customer “all of the
positive cash flow” has all its fee imbedded in the guarantee package.
In such cases, the customer will pay finance charges and interest on the
ESCO fees for the life of the project.
Performance contracting has had its problems. Many of them in
recent years, however, can be traced to the assumption by fledgling
ESCOs and customers alike, that performance contracting is a technical