Federal ESPC Process Phase 5: Post-Acceptance Performance

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During phase 5 of the energy savings performance contract (ESPC) process, the energy service company (ESCO) delivers the savings and equipment performance, as contracted, and conducts the annual measurement and verification (M&V) activities described in the M&V plan. The agency administers the ESPC, ensures that guarantees are met, and performs the services specified in the contract.

After project acceptance, agencies (or agency contracting officers) tend to modify the task order award to obligate the first year’s funding and to set up the payment stream to the ESCO.

Agency responsibilities for the ESPC are most important during the performance period. Finishing construction and paying the invoices are not enough in federal ESPCs. The agency is responsible for the government’s compliance with its contractual instruments and ensuring that guaranteed savings are achieved. Agencies can expect to be held accountable for these responsibilities.

Phase 5 at a Glance
Step 1: ESCO Submits Invoices and Agency Makes Payments
Step 2: Operations and Maintenance and Repair and Replacement Tasks Performed as Assigned in the Task Order
Step 3: ESCO Conducts Annual Measurement and Verification Activities
Step 4: Agency Witnesses Measurement and Verification
Step 5: Agency Reviews Annual Measurement and Verification Reports
Step 6: Agency Maintains Contract Administration and Contract Modifications
Step 7: FEMP Provides Life-of-Contract Services
Step 8: Agency Completes Task Order Closeout at End of Contract Term
Phase 5 FEMP Assistance and Resources

Step 1: ESCO Submits Invoices and Agency Makes Payments

Written notification from the agency to the ESCO confirming that the installation complies with the terms of the contract and has been accepted marks the point where the ESCO may submit invoices to the agency.
 
Invoicing and payments can be done monthly, annually, or at other negotiated intervals. However, they are usually done annually, at the beginning of the contract year, to reduce interest costs. The agency is responsible for verifying that invoices contain any required documentation of services before paying.

The DOE IDIQ ESPC sample contract covers invoicing in section G.3.

Step 2: Operations and Maintenance and Repair and Replacement Tasks Performed as Assigned in the Task Order

The guaranteed performance of ECMs to the standards of service specified in the contract is critical to the guarantee of cost savings. The ESCO is responsible for operations and maintenance (O&M), repair and replacement (R&R), and guaranteed standards of service. However, performance of O&M or R&R tasks may be assigned to ESCO, to the agency, or shared. If the agency does not meet its O&M or R&R obligations, the guarantee may be compromised. See DOE IDIQ ESPC sample contract sections C.3, C.6, C.7, C.9 and C.10.

Where Operations and Maintenance and Repair and Replacement Responsibilities are Specified

Allocation of responsibility for performance of O&M and R&R tasks between the agency and the ESCO is summarized in the risk, responsibility, and performance matrix. Details of each party’s responsibilities can be specified in the management approach in the final proposal, in the M&V plan, and in O&M training and procedures materials the ESCO is required to provide. See DOE IDIQ ESPC sample contract sections C.3, C.6, C.7, C.9 and C.10.

For each ECM, the task order should specify:

  • Who will carry out O&M and R&R tasks
  • How performance will be verified
  • What to do if tasks are not performed (often in section 1 of the contract).

When Government is Responsible for Operations and Maintenance and Repair and Replacement Tasks

Although responsibility for maintenance and repairs is the ESCO’s, performance of O&M and R&R tasks is negotiable. When the government agrees to perform O&M and R&R of installed equipment, the tasks and records to be maintained by the agency will be specified in the task order:

  • Performance requirements (what and when)
  • Requirements for agency recordkeeping
  • Provisions for ESCO to monitor and document agency performance. 

The ESCO is responsible for: 

  • Providing manuals defining O&M procedures
  • Providing training to agency about O&M
  • Notifying site of deficiencies in O&M and R&R.

Remedies for Inadequate Performance of Operations and Maintenance and Repair and Replacement

The risk of inadequate ESCO performance of O&M and R&R is mitigated by the ESCO’s motivation to fulfill the performance and savings guarantees and by the clear responsibilities spelled out in the IDIQ contract. Government witnessing of ESCO M&V activities can assure the agency that the ESCO is performing the required O&M and R&R tasks. Moreover, competent review of M&V reports should reveal any lapses in ESCO O&M and R&R, which should be addressed immediately.

As the ESCO is ultimately responsible for equipment performance and O&M and R&R, when the government has agreed to perform O&M and R&R, there will be provisions for the ESCO to verify agency performance to accurately report equipment status in the annual M&V report.

The task order may provide for the ESCO to take over government performance of O&M or R&R responsibilities if these contractual obligations are not met and equipment performance is compromised. This could include criteria for the ESCO to take over operations or maintenance before equipment fails.

As a practical matter, site access may be limited, and no method for paying the ESCO for these tasks would be set up in the contract, so further discussions would be necessary.

Best Practices for Agency Performance of Operations and Maintenance and Repair and Replacement

Agencies should be aware of their responsibilities listed in the task order for the performance period. This means ensuring that the risk, responsibility, and performance matrix defines the general O&M and R&R approach, that procedures for the agency have been identified in the task order and training or equipment manuals, and that the agency has received the necessary training on all installed equipment. 

Although the ESCO is responsible for providing manuals and training, the frequency and format of training are negotiable. Agencies should actively participate to ensure that operations, preventive maintenance, and R&R are performed according to the contract terms. Records should also be maintained to document performance.

Step 3: ESCO Conducts Annual Measurement and Verification Activities

Annual M&V of savings is legally and contractually required for ESPCs. At least annually, the ESCO must carry out the activities specified in the M&V plan. The agency facilitates and coordinates M&V activities with the ESCO and witnesses M&V activities. The ESCO produces the M&V report. The agency reviews the report, and the ESCO revises it, if necessary, until the agency approves the report. The agency and ESCO then resolve performance or savings issues, as needed. See section C.4 of the DOE IDIQ ESPC contract.

ESCO Performs Measurement and Verification Activities, Facilitated by the Agency

The ESCO carries out the M&V activities specified in the M&V plan. The agency:

  • Provides to ESCO, as needed:
    • Access, data, escort 
    • Records, such as utility bills, maintenance, and occupancy
  • Coordinates meeting to plan ESCO site visit
  • Schedules M&V inspections and data collection during actual operating conditions 

Step 4: Agency Witnesses Measurement and Verification

Government witnessing is the agency’s observation and understanding of M&V procedures, tests, and calculations. See Guide to Government Witnessing and Review of Measurement and Verification Activities and section C.4.6 of the DOE IDIQ ESPC sample contract.

The intent of government witnessing is to facilitate active observation of ESCO M&V activities by designated agency personnel to expedite the process of ESCO conduct of M&V and agency review of the resulting reports and to prevent disputes about performance. 

Government witnessing is recommended to:

  • Ensure that the agency and the ESCO communicate clearly and fully understand the M&V of savings that justify payments to the ESCO
  • Provide increased confidence for the agency that expected savings are being achieved.

Further benefits of the agency witnessing M&V activities are:

  • Gaining independent confirmation of ECM performance (and savings) 
  • Being prepared for future audits
  • Fulfilling ESPC administration responsibility
  • Promoting mutual understanding and ownership in agency-ESCO partnership.

Responsibilities of Agency Contracting Officer Technical Representative/Designated Witness

Agency responsibilities for witnessing and reviewing M&V reports include:

  • Communicating with ESCO about M&V needs
  • Coordinating a meeting between the ESCO and the agency witness or contracting officer technical reviewer (COTR) to plan an ESCO site visit
  • Scheduling M&V inspections and data collection
  • Reviewing pertinent records and providing the ESCO
  • Providing escort besides witness or COTR, if necessary. 

A Graded Approach to Government Witnessing

For many agencies, resources for government witnessing may be limited. In this case, a graded approach may be considered. The Federal Energy Management Program’s (FEMP) Reviewing Post-Installation and Annual Reports for Federal ESPC Projects recommends prioritizing the ECMs that account for the greatest share of the savings. 

Recommended steps for facilitating and witnessing the M&V inspection:

  1. Conduct a meeting with agency COTR or witness and ESCO personnel to review the schedule, access requirements, tests, and monitoring that the ESCO intends to perform. This will ensure the inspection goes smoothly and that both parties understand how the performance of ECMs is to be tested and what constitutes performance that meets the terms of the contract. Any participation by agency personnel to facilitate M&V tests and monitoring either during or after the visit should be agreed upon.

  2. Provide any utility, occupancy, or O&M data or records needed by the ESCO that could not be provided in advance. 

  3. Escort ESCO personnel, observe tests or observations performed, record test or measurement equipment used, record results if available on site, and obtain any needed clarification of how tests are being performed. Ensure that all needed access is provided and that all agreed-upon tests are performed, and record any anomalies that affect M&V. Record any observed malfunctions of ECMs or monitoring equipment. Sign the data collection forms that record these observations.

  4. Ensure that facility operating staff inform the ESCO of any problems they experienced with ECM performance.

For inspections of initial post-installation M&V or commissioning, agency witnessing should include critical ECMs confirmation that the equipment installed was specified and that it was properly installed and operating in accordance with applicable M&V and commissioning plans.

Step 5: Agency Reviews Annual Measurement and Verification Reports

Agencies should complete timely reviews of M&V reports. Ideally, a review of the report verifies that:

  • The M&V plan was followed
  • Guaranteed energy and cost savings were met
  • Equipment is performing at agreed to levels
  • O&M and R&R satisfy performance criteria to verify the potential of the ECMs to save in the future
  • Performance or savings issues for resolution are identified.

Good checklists for review of M&V reports ask users to ensure that:

  • The report provides all required information
  • The report is in the correct format (see Post-Installation Report Outline and Annual Report Outline)
  • Field-measured values were carried over to the report
  • Factors held constant for calculations are per the task order
  • Calculations are correct and follow the M&V plan
  • Utility and escalation rates used to calculate cost savings are consistent with the contract
  • Agency is performing O&M and R&R as applicable
  • Useful feedback on the performance of each measure is provided.

When applicable, the report should explain the differences between estimated and reported savings and contain information about the corrective actions that will or should be taken and by whom. Any required action should be taken on the key issues identified in the report or agency review.

After agency technical review of the M&V report, review results should be provided to the agency contracting officer. Any shortfalls, exceptions, or discrepancies should be discussed with the ESCO. ESCOs should also be notified if M&V report revisions are required. Once the report is finalized and accepted by the agency, a copy should be added to the contract file. Some agencies document M&V report acceptance through a contract modification.

Savings Shortfalls

If the actual annual savings, as determined by M&V, are lower than the annual guaranteed savings amount, the ESCO must correct or resolve the situation or negotiate a change. The process for resolving disputes is specified in section G.5 of the DOE IDIQ ESPC sample contract. Any dispute between the agency and ESCO must be resolved in a manner consistent with the contract. Language on dispute resolution may be found in standard clauses included in the contract by reference, in the M&V plan, or in the task order request for proposal.

If the M&V report shows a savings shortfall, the ESCO is responsible for resolving ECM performance issues and proposing remediation options. Normally, the agency withholds a part of the ESPC payment equal to the shortfall and restores payments after issues are resolved. Any withheld payments should be proportional to the perceived savings discrepancy or performance shortfall. If the agency is contractually responsible for the shortfall, payments per the task order schedules would continue.

Step 6: Agency Maintains Contract Administration and Contract Modifications

The average term of an ESPC task order is 17 years. The most common challenge during the post-acceptance performance period is personnel turnover, which leads to breaks in effective administration of the contract. Consistency in contract administration is required to keep the contract current.

A contract management plan (required for ESPCs by some agencies, including DOE) is essential for maintaining continuity of ESPC administration.

Modifications after acceptance are often required for administrative purposes, such as to obligate the first year’s funding and set up the payment stream to the ESCO, change the contracting officer or COTR, document M&V report acceptance, or to document changed conditions. 

Contract modifications will be necessary in case of changed conditions, such as equipment removal, replacements, and demolitions. Any changes to contractual performance or savings parameters should be incorporated into the task order.

Partial or Complete Termination

ESPCs are subject to Federal Acquisition Regulation Part 49, Termination of Contracts. Schedule Task Order 5, Annual Cancellation Ceiling Schedule, is a requirement of the IDIQ contract. This schedule shows the not-to-exceed termination liability for each year of the post acceptance period. The ESCO may also list the ceiling amount for each month. Partial termination can occur when buildings are being shut down or when excess savings allow for a buyout of certain ECMs. Complete termination is necessary in case a site shuts down.

Step 7: FEMP Provides Life-of-Contract Services

FEMP provides support to all sites having DOE IDIQ ESPC projects in the performance period. Life-of-contract (LOC) services support agencies with M&V and with managing changes during the contract term. These services are intended to ensure that the guaranteed savings are realized and that the ESCO and agency comply with their contractual obligations throughout the contract term. LOC services address ESPC quality goals:

  • Guaranteed savings are delivered
  • Equipment maintained and operated correctly
  • The ESCO is performing M&V according to plan and schedule
  • The site performs M&V witnessing and M&V report review
  • Throughout the post-acceptance performance period the site maintains continuity of awareness of ESPC and records and key documents
  • The site has access to latest FEMP tools and guidance.

Step 8: Agency Completes Task Order Closeout at End of Contract Term

At the end of the contract term, the agency notifies the ESCO by letter that the performance period is over, payments will cease, and closing documentation is due.

The title may be held by the agency or the ESCO during the contract term, depending on the most economically advantageous option. Taxation, agency policies regarding real property holdings, or other factors may influence this decision. At acceptance of the installation or at the end of the contract term, a title for all installed equipment will be transferred to the agency. See section H.2 of the DOE IDIQ ESPC sample contract.

If the transfer occurs at the end of the contract term, it becomes part of the closeout process. Most agencies transfer title at acceptance of the installation and post-installation M&V report. At the end of the contract term the agency also submits the final past performance evaluation to the Past Performance Information Retrieval System, the mandatory performance reporting system for all federal agencies.

Phase 5 FEMP Assistance and Resources

FEMP's roles in phase 5 of the ESPC procurement process include:

  • Reviewing annual M&V reports
  • Sending reminders and facilitating the M&V process (one call before M&V, one call after M&V)
  • Assisting with contract modifications
  • Providing technical assistance with performance issues
  • Tracking the responsible contracting officer, COTR, and technical staff
  • Keeping backup copies of key documentation
  • Promoting staff awareness of FEMP training and guidance.

FEMP also provides resources to help agencies complete phase 5 of the ESPC process.