Performance Based

This contracting method places much of the financial risk of a successful project on the contractor. In this case, the contractor typically finances the implementation of a project, sometimes with little or no upfront cost to the owner. The contractor commonly retains ownership of (or at least some responsibility for) the equipment or systems for a specified period of time, and the cost of the project is repaid, over the contract term, usually by proof of operation, provision of a commodity, or generation of savings.

Sometimes the projects will be paid for following completion and verification of performance. More commonly, however, projects are financed so that the owner can acquire goods and services without the capital usually required, and instead budget the payment to the contractor as an operating cost rather than an upfront capital expenditure. Projects are considered to be self-funding when the savings achieved are sufficient to make the annual finance and long-term operations, maintenance, and repair (OM&R) payments required. If project performance is guaranteed by the contractor, the owner may be able to recognize the transaction as off-balance sheet financing.

This contracting method is most commonly undertaken with an ESCo that specializes in performance-based contracting and has both the technical and financial capability to provide sufficient guarantees. The method for verifying performance or savings must also be clearly specified and understood by all parties, as this is the largest risk for both parties. Third-party financial institutions that may be providing the project capital to the contractor will also require surety of a clear method to verify payment requests.

Performance-based contractors will also commonly assume some or all of the OM&R of the installed equipment or systems during the contract term. This has several benefits, including a reduction of the owner's routine OM&R duties, as well as confirmation for the contractor that the equipment will remain in good working order during the contract term. This ensures that the contractor will continue to receive payment for the work until the project cost has been fully amortized and/or the contract term has expired.

Performance based contracts need not be used only for integrated energy projects and may be used in cases where there are no (or little) savings being generated to fund the project. In such cases the performance element is used as a criteria to measure and ensure that the desired outcome is achieved, such as processing a certain number of units of product in a specified period of time at a specified quality.

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