Home Efficiency Measure Pricing – How Should Programs Weigh In?

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A conversation that comes up frequently with efficiency programs is with respect to pricing. It sometimes sounds like this (an actual quote):

“We watch those contractors because some want to charge too much.”

I understand and support the desire to protect consumers. But I often see programs objections to pricing without a full understanding of costs, the interaction between the two, or what it takes to sustain a contracting business, or to get contractors to “transform” their businesses. (See this discussion about the pitfalls of programs talking pricing from a few years ago, including the comments.)

I’ve asked program implementor audiences on several occasions what a fair net profit for contractors would be. The majority of responses fall in the range of 20-30%. I’ve heard 40% or higher.  How does that line up with the profits contractors make? Industry surveys and my observations over a large group of contractors are very few make even 10%. In fact 10% is seen by most as the elusive Holy Grail. (I can count those contractors I’ve met who maintain 20% net profit on one hand.) Most contractors struggle to hit even the low single digits, less than 5%. And too many contractors would be considered to be operating at a loss under fair accounting, sustaining their businesses only by working very long hours that they don’t pay themselves for. And these are the contractors that are sometimes accused of pricing too high. They’re generally not pricing high enough!

When programs step into the pricing conversation, I see it usually falling into one of these reasons.

Consumer Protection

Sorry, but some form of consumer protection needs to be built in because it’s public money”.  Yes! I agree. I’m in favor of consumer protection. And count me all-in for the fair and effective use of rate payer or tax payer dollars!

Unfortunately, many efficiency programs don’t do a good job of that. Protection should be more about quality, value, and results, not price. Let people know clearly about quality, value, and results, and they make the price comparison (including as trade-offs, if they’re willing to pay less for lower quality or different results.) And yet many programs won’t publish any sort of quality or customer service rankings for contractors. They don’t rank the contractors based on the promises they made versus the results they actually deliver.

(Other markets are finding ways to do this. For example, BMW is using QMerit as a platform to vet and onboard charging station contractors, connect them with customers, and maintain contractor ranking in real time. Interestingly, I understand a couple of programs are piloting this platform. I’ll be very interested in the results in the not-so-distant future.)

Many do put price pressure on contractors, though, even rejecting some contractors’ pricing without understand contractors’ cost.

That doesn’t help. It doesn’t help consumers. And it doesn’t create a thriving infrastructure that can actually deliver quality results.

Cost-effectiveness

The argument goes that as prices increase, cost-effectiveness decreases. Yes! Absolutely. I’d argue that we should use real numbers if we’re looking at cost-effectiveness.

One huge challenge here, though, that many have discussed for decades, is that there are a host of non-energy benefits that are realized that we generally don’t account for when looking at cost-effectiveness. How much is a life saved by preventing carbon monoxide poisoning worth? How much is avoiding 3 trips to the emergency room because of a child’s asthma attack? How much is is worth to avoid having to repair/replace a roof that no longer has severe ice-damming issues? How much is it worth for a person to be comfortable in their home?

Now, I don’t think utilities–really, rate payers, should pay for those benefits. The rate payer dollars it should only pay for savings. If a customer install windows that cost $1,300 an opening, because of code requirements, zoning requirements, or purely aesthetic reasons, and another customer installs windows with the same energy performance  for $475 an opening, it doesn’t mean the contractor on the more expensive project is doing anything wrong or inferior or not delivering value to the customer. If a customer installs a multistage furnace rather than a single stage of the same efficiency for comfort reasons–or speaking in hyperbole, even because the like the color of the more expensive furnace–that isn’t a problem, it doesn’t point to a problem with the contractor.

If a program focuses on quality, satisfaction, and delivered savings, a consumer can decide how much they want to pay for the myriad of other benefits they want.

(How programs are looking at this is starting to change. And that’s good news! See this recent work support by E4TheFuture, for example. Even this, though, doesn’t eliminate the impact of pricing on measuring cost effectiveness. That doesn’t change my argument above.)

Social Justice and Equity

“But what about low-income customers?”

I’m really impressed with the work Marti Frank has done looking at inequities in how program benefits make it out to the population. The very short version: program participants skew heavily toward white, upper income, college educated populations. (Her blog post is a good start, but her full paper is worth a read.)

This is a real challenge, and I think we’ve need to make some major adjustments here. I’m 100% on board with the social justice aims of reaching people who might not be able to afford the work needed to make their homes more energy-efficient. And thinking about this effectively, we might even be able to solve some of the parallel challenges of free ridership and even total savings in program environments.

But, is the best way to achieve the social justice goals but insisting on too-low pricing? I don’t think so.

Depressing pricing to serve those who couldn’t otherwise afford the improvements puts the cost of achieving the social justice goals all on the backs of the contractors. Shouldn’t the cost be place on society?

How can a contractor afford to pay her employee $20/hour (or $25/hr or $30/hr…) to crawl on their belly in a hot attic, air-sealing and insulating (and complying with OSHA confined spaces rules) when programs point to pricing that doesn’t support even a $14/hour wage? If a contractor gives her employees paid holidays and paid time off (benefits than many program staff enjoy), should she be penalized by the program because her pricing is necessarily higher than a different contractor who offers no paid time off, not for holiday, not for sick leave. I’ll suggest there is a strong social justice component to paying people in a the trades a fair wage with reasonable benefits for the hard work they do! And maybe if we paid workers more–something possible only if we charge customers more–we would be able to attract more people to the trades (something most contractors are struggling with right now).

The market will put downward pressure on pricing, the program doesn’t have to.

Smart contractors will also put together projects that factor in affordability to each particular customer. If prices are still out of range, programs can have tiered income-based incentives, more to help lower-income families proceed, and less for those of us who can afford to pay for the improvement. (As per the discussion above, energy incentive commensurate with the energy savings, not with the cost of the project.)

Should a contractor who embraces a program and spends money marketing and education consumers to drive increased participation, thus increasing costs and putting upward pressure on pricing, be penalized because another contractor doesn’t (and perhaps doesn’t fix many homes either)? Should a contractor who invests in good scheduling systems and staff and thus actually shows on on time rather than weeks late be penalized by the program for reflecting the cost of this in their pricing?

A program emphasis on pushing prices down is a focus on the wrong lever.

As with most complex problems, there aren’t easy answers. But I do think programs need to be very, very careful when they consider weighing on in what contractors should be charging.

For more things to think about when trying to engage contractors in energy-efficiency programs, see this series on program design considerations.

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About the Author:

Mike Rogers is the President of OmStout Consulting. A nationally recognized expert in residential energy-efficiency, he works with contractors and programs to scale sustainable market approaches to improving homes. More on Google+

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