Kurmit Rockwell: Hello. My name is Kurmit Rockwell. I'm the FEMP ESPC Program Lead.
The Just in Time training series is designed to give you timely information from program experts to help you award high-quality, on-time ESPC task orders. This is the third of three sessions in this series. In session one, we developed the task order request for proposal, conducted the IGA kickoff meeting, and set up expectations for success through frequent communications including bi-weekly ESCO-Agency meetings.
In session two, we focused on the technical review of the proposal your ESCO submitted, based on the results of the IGA.
In this session, number three of the series, we will be focusing on the review of the price proposal, and finally crossing the finish line to task order award.
Your instructors today are very experienced in ESPC. Doug Culbreth works for the Oak Ridge National Laboratory and is a FEMP Federal Project Executive. He’s worked more than 16 years in the field and has been involved in more than 100 ESPC projects. He helps agencies overcome barriers and award high-quality ESPC projects. Prior to FEMP, Doug was director of the North Carolina Energy Office.
Bob Slattery works for Oak Ridge National Laboratory as well, and he has many years' experience in the ESPC Program. He's a specialist in measurement and verification and supports FEMP's ESPC Life of Contract Program, where he helps to monitor annual savings achieved by ESPC projects.
Deb Kephart is a retired federal contracting officer with over 25 years' contracting experience, including over 13 years working with ESPCs. Deb previously worked at the Golden Field Office in Colorado where she was Contracting Officer for the DOE IDIQ master contract. Prior to that, she worked for the Navy as a contracting officer with responsibility for awarding and administration of multiple Navy and Marine Corps ESPC task orders. She now works for Allegheny Science and Technology to provide support to FEMP, assisting with the ESPC Program.
Lastly, I want to leave you with this: It's FEMP's goal to provide you with relevant, high-quality training to help you achieve your energy and sustainability goals. So to help serve you better, I'm asking you to please complete an evaluation form at the end of your session today.
Today, we’re going to talk about crossing the finish line to award and the following discussion topics: first, “The Financial Schedules in the ESCO’s Price Proposal.” This is the cut-to-the-chase project description of all costs that appear in the task order schedules. Then, “Reviewing and Evaluating Pricing and Financing.” Having an in-depth knowledge of the cost elements of ESPCs goes a long way toward developing a strategy to evaluate pricing and financing costs.
We’ll then move to “Getting to a Revised Proposal – Negotiating to Yes.” This will include the negotiation process and incorporating revisions. Then, we’ll move to “Awarding the Task Order.”
I'm now going to turn it over to our first speaker, Doug Culbreth, to get us started.
Doug Culbreth: Thank you, Kurmit. Today we’re going to focus on the final steps to a high quality, timely task order award. In particular, we’re going to look at the ESCO’s price proposal. I can’t help but think about a question I received one time after giving a presentation. And the base commander said, “Where’s the beef?” Well the beef—and the money—are in the task order financial schedules.
So we’re going to be looking at the pricing and financing, and how to review and evaluate those. And of course, as mentioned earlier, final negotiations to the task order award. I like to refer to the final negotiations as “closing the deal.” Of course, awarding the task order is “crossing the finish line.”
As you can see by our Milestones in the ESPC Process, we’re still dealing with Phase 3. And today we’ll be [looking] at the Proposal and the Task Order Award. Slide, please.
And to get you a larger picture of how this process will work during the IGA Proposal Review through Award, we did borrow a great graphic from the FEMP ESPC Project Development Guide. What you see in the circled area, we are going to cover this in the Just in Time 3 version today. Simply put, the agency’s responsibilities are in the top bar, beginning with the IGA/Proposal Review, which is a very formal process, and then the IGA/Proposal Comment Review Workshop, which you do in conjunction with the ESCO. From there on, there tends to be more of an intense Negotiation, back and forth. And of course, below all that, you can see the FEMP services that are provided to support you and your team during this process. Slide.
And you can see the ESPC Project Development Resource Guide here. This is an excellent, 74-page guide which you could download for free from the FEMP website. This guide charts the Federal Energy Management Program process for providing project development support to agencies developing energy savings performance contract projects, using the U.S. Department of Energy Indefinite Delivery, Indefinite Quantity ESPC. Within that process, the guide outlines the resources that project facilitators and Federal Project Executives are required to use in their lead role in the delivery of project development service. As you can see, we have Mr. Einstein there, and he strongly suggests that you should use the Resource Guide on your next project. Slide please.
Now we’re going to talk about the task order financial schedules. Because they’re extremely important and sometimes difficult to fully understand or interpret. We’re actually going to have a short tutorial today on the financial schedules, and Bob Slattery, who follows me, will be actually going over the financial schedules in more detail. It may be a little bit of a duplication in some areas, but we wanted to be sure that there’s a good understanding of the schedules because of their importance in the overall financial aspects of the project. Remember, all the costs appear in the task order schedules. And these final schedules are unlike the Preliminary Assessment schedules. The Preliminary Assessment schedules had 1 through 4 and did not have schedule 5. They were not guaranteed. The pricing was more based on previous experience or means cost, but not necessarily on competition from subcontractors and other means of pricing. So these schedules are the final schedules, and they are guaranteed. Slide please.
So if we’re looking at the cost elements of ESPCs, I think most of you are familiar with these. But I’d like to go down through these and repeat where all the cost elements of ESPCs are. Obviously, first and foremost, are the energy survey and proposal costs, which we point out to you in the schedule. The energy conservation measures have the direct costs for design, installation, and construction. Then we have the overhead and profit costs, and then we have the financing procurement costs and interest. Certainly, but not least, is the performance period service, which includes operation and maintenance, repair and replacement, and measurement and verification. Slide please.
So we’re looking at the schedules. What we have here is just a general thought about who in your office, and who on your team—the acquisition team—that’s involved in the ESPC project would want to look at particular schedules. You see that on the right hand side of the screen there. From the top: lawyers, contracting, budget, finance, energy managers, and leadership, as they are beside the particular schedules they should be looking at. This is not necessarily to say that they look at other schedules.
I’d think we’d like to point out that probably lawyers and the contracting officers generally would like to see Task Order 1. Then your price analysts would like to look at Task Order 2. Certainly, schedule 3 is what I call the “snapshot”—the economic snapshot of any ESPC project. So you’ll have the budget, finance, and resource managers, and everyone else that would like to look at the overall cost aspects of the project looking at Schedule 3.
Task Order Schedule 4: This is where the energy managers, engineering, and facility managers would want to look at the first year cost savings. And finally, we have the Task Order Schedule 5 that was not in the Preliminary Assessment, but is in the Final Proposal. It is the annual cancellation ceiling, and I think your leadership—the same folks that look at Schedule 3—are also going to look at what potential costs might be incurred if a project is cancelled partially or fully for any reason. Slide please.
So if we’re really looking at an energy savings performance contract, one way to look at it would be that the government is buying a basket of savings. And where would you find those savings if you wanted to know what the cost savings and payments were? For an ESPC, you would look at Schedule 1. Then if you were trying to determine what the individual ECMs (energy conservation measures) are, you would look at Task Order 4 (or Schedule 4), which has the first-year energy and cost savings by ECM.
But remember—and this is extremely important—that the guarantee that’s shown in Schedule 1 is for one total amount of cost savings, not for individual energy conservation measures. [This] simply says that you could have a shortfall in one of your ECMs and make that up by having additional savings in another energy conservation measure, so that the aggregate savings meets the total amount of cost savings guaranteed. We see that quite often. Of course, the government is paying for these savings as they accrue. Next slide, please.
So finally, we’re looking at the actual Schedule 1, which is the guaranteed cost savings and contractor payments for the project. I’d like to point out to you that the first column there is the estimated cost savings by the ESCO, and column two is what they’re willing to guarantee. The ESCOs will generally guarantee 90 to 95 percent of the estimated cost savings. Now, sometimes that could be a little lower, sometimes it could be a little higher, but generally, we see something in that range. On the far right is the annual contractor payments. The savings guarantee has to be $1 more than the contractor payments. We see the $1 rule quite often. As you can see on this particular schedule, each guarantee exceeds the cost payments by $1 each year. And I would also like to point out, if you’ll notice the green information, one-time payments and construction-period savings will go under the Implementation Period at the top. And once again, you see the estimated cost savings, guaranteed cost savings, and, finally, what the contractor payment would be.
Also, we require a project facilitator for all DOE ESPC IDIQ contracts. There is a cost for the project facilitator, and there are various ways in which you can pay for those costs. You can pay for that up front, or you can defer that payment until after the project is constructed and accepted. And if that is the particular case, what we generally see is that the project facilitator cost is included in column (e) on Schedule 1 in the first year. There is a guarantee for that first year, but that cost is not financed over the life of the project. And there should be a footnote associated with that, that would show up at the bottom in relationship to where that additional cost is coming from. Next slide, please.
If you’re looking at the schedule, you’ll see on the far left “Tech Category,” then we have the “ECM No.,” the description, the “ECM Size,” and then we have measurement and verification. I want to point out that the measurement and verification is not part of that total cost, but it’s shown on Schedule 3 as part of the performance period expenses.
So you have the implementation direct cost, then we have the indirect cost, and the profit. So (a), (b), and (c) give you the full implementation price, which in this particular case is $7.5 million. Now, one thing about the numbers that you will see in the schedules: they should have trackability. So you should be able to find the implementation cost in a number of other places throughout the schedules. If you can’t find that number, if you don’t see that implementation price as the first cost number on Schedule 3, it doesn’t match up. There’s something wrong with the schedules. And that is true with a lot of the other data included in the financial schedules. Now, as you can see, there’s one number for Indirect and Profit. In order for you to determine what the percentage is for the indirect cost and profit for each ECM, you will have to do some calculations. And your contracting officer will look at those numbers and determine if they are reasonable given your past projects or what you have seen in this project. Slide, please.
This is TO Schedule 3, “Post-Acceptance Performance Period Cash Flow.” This is a snapshot, the best snapshot of your project. I like to say, if your management would like to have a presentation or an overview of the economics of an ESPC project, this is where you should go: to Schedule 3, “Post-Acceptance Performance Period Cash Flow.” Now, Bob Slattery is going to go into a lot of depth about this, but just let me point out a couple things. Once again, if you look up in the top left, this Implementation Price: that should match up with what was on Schedule 2. Next, you have the Finance Procurement Cost: A lot of people ask about that, and Bob’s going to talk about it, but it’s the cost of financing and bonds and capitalized construction period interest. In fact, capitalized construction period interest is the major portion of that cost.
And then once again, you have the Implementation Period Payments. You saw those on Schedule 1. They would be construction period savings or one-time savings period payments that you might be making towards the project. And remember once again, you have the total financed amount there. In this particular case, $7,750,000. And next to that, you’re going to see the interest rate information, and Bob is going to talk to you about how interest rates are competed. There are actually two components to the interest rates: There’s the index, and there’s also the added premium. And those two make up the total interest rate.
And from there, we go down to the Debt Service, which is the principal and the interest, and it shows you a total cash flow there, the total debt service. Then we go to the performance period expenses. I won’t go through all of those, but certainly it will be repair and replacement, measurement and verification, property taxes, and other types of things. I would remind you that everything in the performance period expenses are negotiable, especially the indirect and profit portion down at the bottom of Schedule 3. Also, I’d like to point out to you, once again, if you were looking at Schedule 1, the total payments on Schedule 1 in the far right hand column at the bottom should also be the same number that you see, Total Annual Contractor Payments, at the bottom of Schedule 3.
As I said, Bob is going to talk more about the competition of the interest rates, but I’d like to point out to you: competition in the interest rates has been very effective, and provided much lower interest rates for the ESPC projects. And also, I can’t help but point out that the single most influential component of an ESPC project is going to be the interest rate. Currently, the interest rates are the lowest we’ve seen in many, many years, so it’s a great opportunity for you to move forward with an energy savings performance contract and get the maximum amount of scope for your project. Next slide, please.
This is Schedule 4, which breaks out our estimated savings. I think you want to see a breakout of the actual savings in the current year, by energy conservation measure, and also a total cost savings. Once again, you get the Implementation Price, and you’re going to get Simple Payback from these ECMs (energy conservation measures) on the far right-hand column. I’m not going to go through Schedule 4 in any more detail, but Bob will go through it in a little more detail. Next slide, please.
Schedule TO-5, Annual Cancellation Ceiling, is required by regulation for multi-year contracts, including ESPCs, and it establishes the maximum termination liability for each year of the contract. The ESCO can show the cancellation ceilings by month in a supplemental schedule, as necessary. The cancellation ceiling is negotiated between the agency and the ESCO as a not-to-exceed amount. The cancellation ceiling is relevant in the event of a cancellation as defined in general statute 52.217-2 (a), or termination under FAR part 52.249-2. And also included in those numbers will be a penalty cost for early termination, which is included by the financier. The typical penalty we see for that is approximately 3 percent.
If you have questions about Schedule 5 and the termination language, please contact your Federal Project Executive or our Golden Field Office for more information on cancellation and termination conditions and terms.
I should point out that our Golden Field Office has also issued some guidance on annual cancellation ceiling terminology. You will find that on the FEMP website. I should also point out that Schedule 5 is not in the Preliminary Assessment, but is required by regulation to be in the Investment Grade Audit. Next slide, please.
Schedule 5 itself, as you see right there, Annual Cancellation Ceiling Schedule, is a relatively simple slide, but an important one in case there is a termination—partial or full termination—of a project, and I’ll talk more about what can cause that to happen in just a little bit. If you’re looking at the schedule, you’ll see the years and the actual cancellation ceiling by year. However, most of the ESCOs also have a 5a Schedule, which is a monthly cancellation ceiling, and these cancellation ceilings are maximums subject to negotiation.
And talking about termination, there are a variety of things that could cause termination. You could be a BRAC in the case of a military base where the entire project has to be terminated for convenience. And then we have partial termination for convenience in situations where buildings may have been torn down. So this is very, very important to the financiers, because it has an impact on what would be paid in situations where there is some degree of termination. Next slide, please.
At this time, I’d like to turn it over to Bob Slattery to do the reviewing and evaluating of pricing and financing. Bob?
Bob Slattery: Okay, thank you, Doug. So, Doug went over the content of all the financial schedules. Now we’re going to talk about how to use those schedules and other materials that FEMP makes available to you in your review of the pricing and financing. So let’s go to our first slide.
And so, let’s get started first with a review of how ESPCs work: where the money comes from and where it goes. The ESPC deal—or the Task Order that you sign—shows a firm, fixed price and a schedule of payments for the term of the contract. It also shows the guaranteed cost savings, which always has to be greater than the payments, as Doug mentioned. This is an important point. So, each year’s payments are always less than the guaranteed cost savings for that given year. Now, the ESCO, or the energy service company, acquires the financing and uses that private financing to install the energy conservation measures at your site. Note that the financing agreement is between the ESCO and the financier, not the agency and the financier. So the agency is not party to the financing deal, although as the organization having to make the payments, it’s certainly an important player and has an interest in that agreement.
The facility improvements then generate the guaranteed cost savings. Since the agency’s costs are lower, there’s money available to make the payments over the term of the contract. The money to pay the ESCO comes from your normal appropriations for utility bills and related operation and maintenance and the cost savings created by the ESPC. That’s why we say that ESPCs are budget neutral. Alright, let’s go on to the next slide.
So, let’s talk a little bit about what’s in the payments. So, the ESCO is using the payments from the agency for three purposes: first, to pay the interest on the loan that the ESCO took out to install the equipment at your site; second, to pay the principal on the loan (and these two, the principal and the interest, are called the debt service); and then they also pay for performance-period services, such as measurement and verification of savings as required for each one of these contracts, and any operations and maintenance or repair and replacement that the ESCO is performing for your agency.
And it’s important, too, to note that performance-period services are not financed. So that’s a pass-through from the ESCO to the agency. In essence, these are annual expenses that are paid as they occur each year. They’re pre-determined at the beginning of the contract, but not financed like the capital equipment costs. Okay, let’s go to the next slide.
So how do the payments break down, what is the makeup of our projects on average? So this slide demonstrates how the costs stack up for the average ESPC, showing the cost elements by percentage of total payments over the contract term. So here what we describe as a typical project is one of about $20 million in investment size, has a contract term of approximately 18 years, and in this case an interest rate of 4.25%. So of course all these averages depend on the particular interest rate of your project and the amount of O&M that you’re requiring the ESCO to do. But I think it’s important to know what these relative proportions are.
So generally, about 54% here in this case is project investment, so the cost of the equipment being installed at the site is being represented by the bottom two bars. You may make some up-front payments. Those generally run about 5% of the total cost, and then in this case about 49% of the payment is project investment that is financed. Thirty-four percent would then be financing-related costs, either interest payments or construction interest. And then we’re left with about 12% covering period of performance services, such as O&M, R&R, measurement and verification. Alright, let’s move to our next slide.
So, this repeats a slide that Doug presented, but I kind of like this, because you can use it as a map or a guide to what you need to do in your pricing review. So, you’re going to see the project development costs; that’s going to be on Schedule 2. You’re going to need to review that price that the ESCO is charging you for the ECMs—for the design, installation, and construction of those measures at your site. You’re going to want to look at the indirect costs and profit that’s also shown on Schedule TO-2. You’ll also then want to review the financing that’s on Schedule 3, as Doug had mentioned. And then, finally, the performance period services, which is also on Schedule 3, by year. I guess the trend here is that everything you need to know is on the TO schedules. And those schedules are really invaluable to you in terms of the amount of time they save in setting up your review. So let’s go into it in greater detail: we’ll move on to our next slide.
So, it is the agency’s responsibility to do a price reasonableness determination. I want to say that at the outset, because sometimes there’s a little confusion on this, but yes, you must do a price reasonableness determination. The federal ESPC regulations stress life cycle cost effectiveness, but this doesn’t exempt agencies from making sure that they’re getting reasonable prices on their projects. The DOE rule that established regulations for ESPCs does waive the requirement for certified cost data, but agencies can and should still request from the ESCO all the information they need to determine whether prices are reasonable. The DOE rule doesn’t specify how price reasonableness of ESPCs should be determined, so we go back to the Federal Acquisition Regulation. So FAR 15.404 is sort of the basis document for price reasonableness determinations of any kind of contract, both appropriations-funded and ESPC-funded. So all of what we’re saying here is consistent with FAR 15.404. Alright so let’s move to our next slide.
And now, in your task order request for proposal, the TO RFP, you’ll want to request the level of detail that you want to see. So you can ask to see the components of the ESCO’s project development costs, what their site surveys cost, what proposal development costs, etc. You can ask to see how they developed their construction cost estimates and thus have an understanding of the costs to implement the ECMs. Also, you can ask to see what goes into the performance-period expenses: what they’re charging for the M&V services and what they’re charging for O&M activities that you want them to do. Now, ESCOs generally compete their subcontractors. In fact, I think most of them do for these projects. So there is competition there, just like in government contracting. You can ask to see that information. You can ask to see the bids on that competition, and how they made the decision to choose the lowest bidder. In general, our advice here is to ask the ESCO; they’re usually—they’ll provide whatever you want to see. They want this deal to go through just as much as you do, and they’ll be happy to provide any information that you want. Alright, we’ll move to our next slide.
So, as part of your review strategy, always begin with the TO schedules. You can ask for as much backup information as you require to make your price determination, but that information should always tie back to the TO schedules, which are your contract documents. As Doug said in the beginning, these schedules really are the “beef” of the deal. You can go a long way toward doing your price reasonableness determination just with the TO schedules. I think the most important are the TO-2 schedule that provides ECM prices, and the TO-3 schedule that provides information on the performance-period expenses and the financing. So look for reasonableness, consistency, and backup documentation on all these prices. Make sure that the total price is complete and reflects the appropriate implementation costs. And check the math. Don’t assume that the ESCO has rolled up everything correctly. As projects are negotiated and scope is coming or going from a project, numbers can get mixed up. We’ve seen it happen. And then make sure that the performance-period services are consistent with the Risk, Responsibility and Performance Matrix, which was mentioned earlier in Doug’s section. Alright, we’ll move to our next slide.
So we’ll take a look at the TO-2 schedule again, now with an eye towards reviewing the pricing. So let’s look specifically at ECM 5.1, the lighting improvements. The lighting improvements that they’re installing here cover 1.5 million square feet and have a direct cost of $2.3 million. Now, some ESCOs will black out the Indirect and Profit values for individual ECMs on TO-2; however, the Implementation Price by ECM will also show up on TO-4. Now, we have some price benchmark tools, which I’m going to talk about in a few slides. You can use those to draw some conclusions on pricing for ECMs like lighting, water, and chillers, where there’s good correlation between the cost of the ECM and let’s say the kilowatt-hours, or the gallons saved, or the tons of cooling installed. The data in the center column there, ECM Size, can be very helpful in making your price reasonableness determination. So you look at the price, you look at the size, and that’s how you begin to make that determination.
Now, notice the M&V Expense. What you’ll see here on this schedule is that M&V equipment installed at the time the ECMs were installed. So this is not the price of the M&V service during the performance period; those appear on TO Schedule 3. Rather, this is things like data loggers, measurement equipment, and any M&V activity used to establish baselines and post-retrofit validation. Alright, we’ll move to our next slide.
Now, Schedule TO-3 is a comprehensive summary of the project cash flow showing all of the financing rates and costs, and how much of your payments go to interest and principal. TO-3 also breaks down the details of the performance-period service cost. Notice that the Implementation Price from TO-2 is shown at the top left, and in the same column, it shows the Implementation Price plus Financing Procurement Price less Implementation Period Payments, and then the amount financed. So the lower section is where you want to concentrate when you’re doing your price reasonableness determination on the performance-period services. Look at what the ESCO is charging you for maintenance and repair, repair and replacement, and measurement and verification for each year of the contract.
At the DOE program, we see that performance-period expenses average approximately 3 percent of the total annual payment. But in general, you’ll know what your site was originally paying for operation and maintenance on the equipment that’s being replaced, so that’s one point of comparison. Alright, we’ll move to our next slide.
So you’ll want to start your pricing review by assessing the information that the ESCO has provided you. Ask yourself, do you have everything you need to assess the pricing? The ECMs have to be clearly described in the proposal, including the quantity to be installed. So, for example, if the project includes ground source heat pumps or chillers, you need to know how many are being installed and what the total capacity is. As I said, that information should be entered under the ECM Size column on Schedule TO-2. Now, we recommend that agencies use the price benchmarks that FEMP has made available, as much as possible. We have benchmarks available for lighting, water, chillers, variable frequency drives, and ground source heat pumps. We’ll have a website that I’ll give you, and a link, a little bit later.
But what you see when you use these benchmarks is where your project winds up with all the previously awarded projects that include that ECM type. So we’d like to think that these benchmarks save you time. If you know that the price you’re offered is comparable with prices received on similar ECMs from other projects, you don’t need to spend a lot of time analyzing the price. Now, the benchmarks don’t work for all ECMs. A good example is combined heat and power plants. Each CHP project is unique, so it’s not possible to develop a benchmark. In this case, you may have to call people with technical expertise, either with the technology or price estimation or both, to help you make the price reasonableness determination. So, let’s go to our next slide.
So, for less common ECMs, we recommend that your agency perform a price reasonableness as it would with any other project. So one way you can do that is to compare ECM price with your agency’s historical data or estimating tools that you may have, such as the Means Handbook. You can also take a look at the prime contractor analysis of the subcontract pricing. It’s a term right out of the FAR. You can also perform cost analysis of the ESCO’s pricing data, digging into the details of their cost analysis. One thing that you can’t do under an ESPC is request certified cost or pricing data, but certainly ask for support from your ESCO to determine that things are fair and reasonable. Let’s move to our next slide.
So here’s how you access the ECM benchmarks tool that I spoke of earlier. There’s our website, at hyperion.ornl.gov/espc. When you go there, you won’t be able to do anything immediately. What you’ll do is request a sign-on. When you do that, you’ll include your email and set a password. That email gets routed to our IT site manager. We review each request and grant access only to those that we can determine to be federal agencies, so be sure to use your agency email. And as a note, ESCOs do not have access to this tool. So, as we say, they make quick work of some of the major ECMs, and that frees up time to analyze the prices of the more difficult ECMs where there is no price comparison data available. Alright, let’s go on to our next slide.
There are a lot of other resources you can draw on for pricing review. You can ask for supporting information supplied by the ESCO, and as we said, you can look at their subcontract pricing, get the copies of all their quotes, and make sure that they chose the lowest one. We have a guidance document called Determining Price Reasonableness in Federal ESPCs. This is available on the FEMP ESPC Resources page. Talk to your Project Facilitator—they’re a good source of pricing information as well. Your agency or your site may have price estimators available, or technical experts in certain technologies. Your Project Facilitator will also make national laboratory experts available to you. So for example, if you have a renewable ECM such as wind, they’ll make experts available to you from NREL. And as we said, finally, we have these price benchmark tools available from FEMP. Let’s go to our next slide.
Okay, so that’s pricing review. Now we’ll turn to financing. Now, financing is something you likely haven’t run into with federal contracting, unless you’ve worked specifically with ESPCs or UESCs before. So I said in the beginning, the ESCO obtains private financing to purchase and install the equipment at your site, then it repays the financing out of the payments you make from the savings. Now, interest rates are probably one of the most important elements of the project, and we can’t control these rates. Nobody really can. They vary according to the conditions in the credit markets.
Now, in ESPCs, it’s the federal government paying back the financing. And that’s good, because the government is seen as a good credit risk. The financing rates that ESCOs obtain on these ESPCs are generally tied to the U.S. Treasury rates. But the projects are not without risks. So there is a premium associated with them. There’s an adder to the Treasury rate. Think of the general rule of thumb: You can look at a 20-year U.S. Treasury note as the benchmark for an ESPC project. So if you look at what the 20-year Treasury notes are selling for right now, in terms of interest rate, and then add about 1.2% to that, that’s a rough, general idea of what the interest rate is going to be on your project. That’s the premium on average right now in our DOE program, about 1.2%, or 120 basis points, as they say. So that’s on Schedule TO-3 on our next slide.
In this case, they’re indicating that the project has a 16-year performance period term, as indicated in the top center of the schedule. The ESCO will then present their overall project finance rate as a premium applied to an index. In this case, they are listing a 4% index rate tied to U.S. Treasury notes. You’ll see that in this project, they’ve added a premium of 2%, which for today’s environment would be high. As I mentioned earlier, the average is 1.2%. In this case, we would want to ask the ESCO for more details on why the premium is as high as it is. You can ask to see the financing offers that the ESCO obtained. Some projects see premiums that are under the average, and some can be over that, depending on the perceived risk of the project. But in this case, if you add those two up, 4% and 2%, you get a project interest rate of 6%. Again, this is just an example. As of the recording of this webinar, overall finance rates are in the area of 3.25%, a historical low, so it’s a great time to award a project. Alright, let’s move to our next slide.
I mentioned earlier that you can ask to see the financing offers that the ESCO obtained. And this is possible because the ESCOs are required to compete the financing. It’s right there in the IDIQ contract, so the ESCOs have to solicit multiple bids for the financing. They produce a document that’s called the Investor Deal Summary. That’s something they send out to the financiers, and it provides the same information so that all the financiers wishing to bid on the project financing are receiving the same information in the same manner. The financiers then respond with a document called the SFO, the Standard Finance Offer, and the ESCO selects the SFO with the best financial terms.
Now, it wasn’t always this way in ESPC. Competition has been very beneficial to the government. On average, competition has taken about 130 basis points off the premium. So we’re at about 1.2% right now, or 120 basis points. Prior to competition requirement, we were at about 250 basis points, or 2.5%, so it really helped out and really saved the government a lot of money. It’s important to note on this slide that the finance costs are a pass-through, so there’s no markup or profit on those finance costs. Alright, let’s go to our next slide.
So the ESCO is not just financing the cost of the ECM equipment and its installation. There’s also the cost of the project development that is comprised of items such as surveys, studies, design, etc. Plus, the ESCO’s indirect costs and profit, as well as the Financing Procurement Price. We’re going to talk about that in the next slide. And just like a mortgage on your home, you can apply a one-time, up-front payment that will reduce the amount that you’re financing. So let’s move to our next slide.
So the Financing Procurement Price is something of a misnomer. It’s not just the cost to get financing. It’s actually mostly capitalized construction period interest. Since the ESCO doesn’t really receive any payments from the government until the equipment is constructed and accepted by the government, they are carrying the interest on the money borrowed to construct the project. Now, there are exceptions to that. There may be some construction period payments or implementation period payments, but generally, those are very small. So the ESCO, even though it’s borrowed this money from the private financier, is not getting any money from the government yet in order to pay that financier back the interest that is owed. As a general rule of thumb, you can take the financed amount and multiply that by the interest rate and by a construction period length in years, and that should be roughly equal to your Finance Procurement Price. Now, there are some other things in there: There may be performance bonds, sometimes you see hedges to lock in rates, but those are very, very small in comparison to this capitalized construction period interest. Alright, let’s move to our last slide.
So we’ll recap some best practices in the area of financing review. So, first off, the FEMP ESPC team is available to review interest rates for agency projects. If you’re uncertain as to whether the rate being proposed by the ESCO is competitive, you can reach out to your Project Facilitator or Federal Project Executive for assistance. Remember that the ESCOs are directed to compete the financing. In a sense, the ESCO is picking the best financial terms for the project, but you have a right to see that. You can ask the ESCO to see those bids, and to see what they’ve received to make sure you’re getting the best financial deal.
Again, we think you should review the details of your financial schedules, especially Task Order Schedule 3, to understand all of the components of the offer. Require justification for any differences between the financier’s offer and the ESCO’s offer to the government. You shouldn’t see any difference between what’s on that Standard Financing Offer, the SFO, and what’s on the TO-3 schedules. Also, FEMP will provide a backstop for you. The Golden Field Office, with support from our office at the Oak Ridge National Laboratory, will examine proposed financing rates and notify agencies when a rate seems unusually high to the moving program average. And lastly, make sure you understand the components of the Financing Procurement Price. The ESCO can detail these out for you so that you can see exactly how they arrived at the value found on TO-3.
So that’s about it, and now I’m going to turn it over to Deb Kephart for our next topic.
Deb Kephart: Thank you, Bob. Good afternoon. I’m Deb Kephart, and will be presenting information on finalizing your ESPC award. I should clarify that this is from the perspective of the federal agency. Next slide, please.
Let’s talk for a minute about what the typical ESPC task order looks like. Usually, it incorporates three components as shown. There can be some variations among agencies and offices, but this is the typical structure for a task order. First, there’s the Department of Energy’s IDIQ, or the master contract, for the overall terms and conditions. This also provides the format for the required schedules and attachments.
Next is the agency task order request for proposal, or TO RFP, and it includes the agency-specific requirements, specifications, and clauses, and becomes the body of the task order when negotiated. The TO RFP should be updated to reflect changes during negotiations when it’s incorporated into the contract.
And the ESCO’s proposal is the third component of most task orders. It includes a proposed fixed price, scope of work, guaranteed energy savings, and other terms and conditions that are desired by the ESCO. The proposal is based on the results of the investment grade audit, and typically incorporates all the baseline and energy savings computations, as well as assumptions that were used in the IGA. Some agencies choose not to incorporate the ESCO’s proposal, and instead they reference it or cut and paste only certain areas. When this is done, agencies should be careful to ensure that they include sufficient information in the task order to enforce the performance guarantees.
Typically, all technical issues should be resolved and incorporated into a revised proposal prior to final negotiations. It’s a good idea to picture the final contract document to identify the areas where you need to focus your time, and to determine what you need to do to get a scope, including the energy savings; a price; a period of performance; and other terms and conditions that are mutually agreeable. Next slide, please.
Next, consider who needs to be involved in the final steps. What resources are needed, and what are the critical milestone dates? The team should establish what their review process will be, as well as the review schedule, and discuss the schedule with the ESCO so that they can plan their time accordingly. Usually, the agency evaluation team is established well in advance, and includes members with different specialties. Sections of the proposal should be assigned so they’re evaluated by the team members within their areas of expertise. It’s important to set aside sufficient review time to accomplish the task, and to make the evaluation a priority.
Use your Project Facilitator and other FEMP resources. The Project Facilitator can help review engineering calculations, the Federal Project Executive can help you compare financing rates, and Department of Energy’s Golden, CO, contracting shop can help with your contractual questions. And there are others, such as national laboratory experts who can help with specific topics.
And lastly, think ahead to the next step. For example, if you know who the reviewers will be, such as legal, acquisition review boards, headquarters: Communicate! Start briefing them in advance to get them up to speed. Educate them on the ESPC process and what the project will deliver. Determine if you need to get on their review calendar in advance to keep the process moving forward. Thinking ahead helps to prevent delays. Next slide.
Negotiations are defined in the FAR, and are exchanges and discussions. They’re bargaining and give-and-take, covering a wide variety of topics. The primary objective is to enhance materially the proposal’s potential for award, and lead to a proposal that provides the best value to the government. Agency contracting officers should negotiate as necessary to ensure that any resulting contract award meets or exceeds agency objectives at a fair and reasonable price. Now, “fair and reasonable” is not defined in the FAR, but it has been defined elsewhere, such as in court cases. It is the price that a prudent business person would pay for an item or service under competitive market conditions. The government is not trying to secure the lowest price for the lowest price’s sake, but rather the best price at which the government and the contractor will mutually benefit. Next slide, please.
Some best practices for final negotiations and award are shown. Update project milestone schedules to detail the final steps required before TO award. Be sure to allow adequate time for the ESCO to obtain financing updates that reflect the best interest rates you can get. All pages of the ESCO’s proposal should be reviewed by the contracting officer and the technical representative, including revisions, to ensure that there’s a good understanding of what is included, and that nothing has changed since the last review. Usually, all technical issues are resolved, so the only area left is price and finance issues. Plan on negotiating to obtain agreement between the agency and the ESCO on all the terms and conditions, as well as price. And keep in mind that no action is an action. Silence means agreement, so if there’s something within the proposal that the agency’s not comfortable with, it should be addressed before award. Next slide.
Negotiations and the resolution process: There’s very little difference between this process and other negotiated contracts. The agency contracting officer has the authority to bind the government, and leads the agency negotiating team. The evaluation team will review the proposal and determine the topics that are subject to negotiation. Look for redundancies in cost, any areas that appear to be unreasonable or unrealistic, and other topics that have not already been resolved. Sometimes, you don’t have price reductions, and instead you obtain additional stuff. For example, if the interest rate goes down at the last minute, additional rooms or buildings for the same ECMs may be added.
Any changes resulting from negotiations should be reflected in a revised proposal, and as applicable, a revised task order request for proposal, to capture all of the agreed-upon changes. As noted in the slide, the ESCO should highlight all changes via an agreed-upon methodology, such as tracked changes in the revised proposal. And it’s a good idea to incorporate the list of all comments, responses, and resolutions into the contract, either as part of the ESCO’s proposal or as an attachment to the task order contract. This is because, five to ten years out, people don’t remember the topics discussed or the resolution process, so this helps to document the details. Next slide, please.
We’ve attempted to summarize the critical areas for agreement on this one slide. Each project will have unique critical topics, but the ones listed tend to be universal. The first two bullets, they relate to energy savings. Basically, ask yourself, are all the baselines, parameters, computations, and assumptions behind the savings guarantee sound? The purpose of an ESPC is to achieve energy savings, so this area needs a thorough analysis, discussion, and then mutual agreement for the contract to work.
Bullet 3 relates to the M&V Plan. Ensure that the level of M&V is proportional to the ECM savings and the performance risk. If the M&V Plan is weak, the guarantee may be met only on paper. And then there’s the Risk, Responsibility and Performance Matrix, which we discussed in more detail during the Just in Time 2 webinar. The RRPM ensures that important risks are addressed and responsibilities assigned. And agencies should not take on a responsibility that the organization can’t handle well.
For example, if the agency has agreed to perform the routine maintenance on installed equipment, make sure it has the people, experience, and resources to do the work consistent with what’s required in the contract. Both parties, the ESCO and agency, as well as all stakeholders within the agency, should understand the details of the contract. The ESCO is required to design, implement, and perform, and the agency is required to adhere to its part of the contract. So the agency needs to ensure that the resources that are necessary for a successful contract are committed.
And finally, the government is required to pay a fair and reasonable price for all of its ESPCs, and the contracting officer is required to make this assessment and include documentation supporting the determination in the contract file. Next slide, please.
Finally, negotiations are complete, and it’s time for the final steps. Next slide.
Have the pre-award requirements been met? You should have all of the attachments required by the IDIQ, such as the subcontracting plan, the financing certification, etc. Some agencies require bonding documents in advance. Ask yourself: Did you get all the documents necessary to finalize the contract and complete the file documentation?
Agency contracting officers need to contact the Department of Energy’s IDIQ Contracting Officer—and currently, that’s Wayne Latham—to obtain a memorandum authorizing task order award. This process has not delayed the projects, and ensures that agency task orders are consistent with the IDIQ requirements, while helping FEMP to track critical ESPC data. Complete your business clearance or post-negotiation documentation and obtain traditional contract approval in accordance with your agency procedures, and then complete the contract file documentation to prepare for the administrative phase of the contract. Next slide.
Finally, agreement is reached, all the t’s are crossed and the i’s are dotted, and the task order contract is signed by the authorized ESCO representative and agency contracting officer. You’ve worked long and hard to get the job done and do it right. A well-written contract with a mutual understanding of the task ahead sets the stage for a successful project. It’s time to celebrate your success! Next slide.
There are many resources available to help with the ESPC process. First and foremost is your Federal Project Executive, such as Doug or his coworkers, Tom Hattery or Scott Wolf. In addition, all DOE task orders must have an approved Project Facilitator. They’re very experienced and knowledgeable about all phases of the ESPC. And additionally, there’s a whole team available to assist you, such as national laboratory experts, the Golden Field Office [contracting shop], just to name a few. And then the ESPC resources [on the FEMP] website, they’re displayed here. But you can always Google “FEMP ESPC” and find what you need. Next slide.
Contact information for each of the Federal Project Executives is shown for each of the areas on this slide. As you can see, Doug Culbreth has responsibility for the Southeast Region, which includes Europe and the Western Hemisphere. His phone number and email are listed. He has two other coworkers, Tom Hattery, who covers the Northeast Region, plus he has all of the State Department. And there in the Western Region, Scott Wolf can help you. He has all of the Western states as well as the Pacific and Near East regions. Phone numbers and email addresses are shown for both.
If you want to get a copy of this map on our website, you can see the URL at the bottom. And with that, I’ll turn over the closing remarks.
Kurmit Rockwell: Thank you, Deb, Doug, and Bob, for providing Session 3: Crossing the Finish Line to Award. And thank you, listeners, for joining us today. I also invite you, if you haven’t seen Session 1: Managing the Investment Grade Audit or Session 2: The Critical Path to Success, to view them at our FEMP Training website. You can also obtain a certificate of completion by clicking the link in the dialogue box directly below your video, and you’ll be asked to fill out a few short questions on how the course was. And I would really appreciate it if you’d take the time to fill out that evaluation, because we use these to make our training sessions better and more productive. Thank you very much, and have a great day.