Step 12 Budget Estimates of Incremental Capital Cost

In the preliminary study phase, cost estimates will have been considered in order to screen and select several options from all possible choices. All cost components will have been developed as rough estimates, but at this point, it will be necessary to develop a firm set of installed costs for each measure still under consideration. Since the validity of the study depends as much on accurate implementation cost estimates as it does on accurate savings estimates, the preparation of budgets in the detailed study phase should be performed with the same rigor as savings estimating.

Preliminary conceptual drawings should be made for the various system options. These should include footprint and height requirements and anticipated layouts for piping, conduit, exhaust flues, pumps, and other auxiliaries. Clearances for maintenance access (e.g., pulling tubes) or code requirements (e.g., around electrical equipment) should be illustrated. Access locations for bringing in the equipment or disposing of existing equipment should be identified. Structural requirements should also be identified to ensure that the weight of the new equipment could be tolerated. Utility service availability and capacity should also be noted and included on the drawings.

In addition to the drawings, a comprehensive list of all known and potential cost line items should be made for each measure. In addition to the cost of all major and auxiliary components, this includes environmental compliance related equipment and procedures inclusive of permitting and testing costs. Asbestos and PCB removal and disposal costs should also be included. Examples of other costs include insurance, the cost of lost floor space, land acquisition, and facility construction. Applicable taxes, prevailing labor wage rates, and bonding requirements should also be considered. A separate list of potential scope items which may or may not have savings associated with them, but support the system and overall infrastructure improvements, should be included as well.

Once the master list is completed, budget pricing can be established based on detailed internal pricing procedures or through solicitation of contractor and vendor bids. This may be done through a formal RFP process or on a somewhat less formal basis. Regardless, it should be based on a bid package with a detailed SOW, supporting design documents, contract requirements and a bid form identifying line item cost. It should be facilitated with contractor walk-throughs of the facility. Following the contractors' site visit is a question and answer forum, which provides all bidders with follow-up information. If required, SOW addenda can be issued at this time.

In addition to the lump sum pricing required by the RFP, each prospective contractor should also submit the following items:

• Break out costs for each trade and/or task as outlined in the bid form.

• A brief summary of the sequence of construction, accompanied by a timeline for the proposed SOW.

• Identification of all subcontractors and either subcontractor pricing or an approximation of the percentage of work to be completed by subcontractors.

• The contractor's responsibilities and processes for commissioning should be outlined.

• All documents, including a Contractor Qualification Statement, in the bid package should be completed and signed.

After receiving bids, a series of clarifications will generally be necessary to ensure that all price items are covered. With this approach, pricing for all major items can then be based on actual quotations. These quotations will include all necessary equipment and service specifications and can then be used to confirm initial assumptions and estimates. For example, equipment weight and dimension data will confirm adequate access, space, and structural support where the equipment is to be installed; actual performance data will confirm assumptions used in the energy savings analysis. Bids must be carefully considered based on the quality and detail of the response, as well as the reputation and financial condition of the contractor/vendor. In addition, other bid evaluation considerations include their proposed timeline, bid exceptions, and value engineering opportunities. If one were to get a very low bid from one subcontractor and then, in turn, submit this as part of their own guaranteed firm fixed price offering, they would be exposed to liability if that contractor was unable or ultimately unwilling to execute the work at the stated price. Hence, adding in some cost contingency or using another higher bid price from a proven quality subcontractor might be a more prudent approach.

An alternative, or complimentary, step is conducting an internal pricing process, based on conventional pricing programs or reference sources such as R.S. Means. While some firms have the internal estimating capabilities to do so, others may use this only as a check on the bid pricing approach. Also, use of database information from previous jobs serves as a good reference for price checking, with the understanding that conditions will, of course, differ for each application and job site.

After the incremental project cost is totaled, any utility rebate and other type of available financial incentive will be subtracted to determine the net investment cost. Rebate potential will often depend on the specific equipment chosen. For example, there may be a dozen options for chiller makes and models. Each will have different efficiency and, therefore, may qualify for a different rebate.

Concurrent with the development of budget estimates is the establishment of an installation schedule. This can be included in the form of a Gantt chart. While this is important with all contract vehicles, it is particularly important with performance-based contracts since savings will not begin to accrue until the measure is commissioned and because construction financing typically is arranged with finance charges accruing on the money borrowed and expended as construction progresses. The timeline will be based on a critical path method wherein each construction element is identified and carefully planned for completion on the latest possible finish date to delay finance charges while still maintaining the construction schedule.

Once the budget estimates are completed, the final savings analysis can then be run for each measure alterna tive still under consideration. Certain attractive system alternatives or system enhancements may fail financial screening, but offer other qualitative benefits. These benefits will be identified so the options can be considered as alternates by the host facility. In cases where replaced existing equipment can be sold, its salvage value can be subtracted from the full cost of the new system. In cases where the existing equipment is in working order, but approaching the end of its useful life, considering the full cost of the new equipment would obscure the fact that replacement would be required at some point in the near future for reliable operation and, therefore, not reflect the full economic benefit of replacement. The decision to install new equipment immediately, as opposed to waiting until the end of the existing equipment's service life, will take into consideration the time-valued incremental investment cost associated with early retirement of the existing system, which will be less than the full project cost.

Thorough development of design concepts and installed cost estimates during the detailed study phase will generally reduce overall design costs and minimize instances where proposed system applications are later rejected by the design team, requiring re-analysis of system alternatives. Where appropriate, design engineers should be called upon to review preliminary design concepts to confirm logistical feasibility and identify any omitted cost factors. An example is review by a structural engineer of the weight-bearing potential of a particular location selected for the installation of heavy equipment. This review may show the location to be impractical on the basis of inadequate structural support or may identify structural reinforcement requirements that will be included in the budget estimate.

While these activities add to study costs, they often prove cost-effective as they can reduce design costs and minimize the need for subsequent follow-up studies. In cases where projects are proposed with firm or not-to-exceed pricing following the study phase, the involvement of professional design engineering and construction estimating in the process is considered essential. A turnkey design-build contractor or ESCo has the advantage of having all or most of the required expertise in-house, avoiding the need to subcontract design and construction review during this critical phase of the project.

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