The Incentive Float Can Sink a Contractor

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raft of the medusaHome performance incentives sound like a great idea. And they can be. But designed or executed poorly they can scare contractors away. I talked earlier about the intended motivational consequences of how you incentivize efficiency, but I want to tackle it from a different angle this time.

Cash flow! A contracting business can’t survive without adequate cash flow. Payroll comes every Friday. Vendors need payments, sometimes even before projects are completed. Contractors need cash.

I’m defining “float” in the context of the efficiency incentive world as the time between when a service is purchased (which I’ll simplify further as when a measure is installed) and when a contractor gets paid.

Simple terms that are very common on “smaller” projects of several thousand dollars would be payment on completion. I install your furnace and replace your ducts, and as my guys are sweeping the driveway at the end of the job, you hand me a check. Payment in full. This generally allows contractors to pay staff, pay vendors, and keep the lights on with cash coming in in time to make payments.

Payment any later, and I’m carrying the cost of the project, for the homeowner, for the program, for both. The work is done, I’m on the hook, but I haven’t been paid yet. I’m floating the cost of the project.

Jump in a swimming pool. If you’re not carrying anything, you can float a long time. Let me hand you a ten pound weight, it’s harder to float now. Make it a 20 pound weight, and you’ll be struggling to keep your head above water. A hundred pounds? You’re sinking. This is important! Too often, programs ignore the importance of this float altogether.

A recent example includes a program that “launched”, encouraged contractors to start promoting the program and completing projects, but hadn’t determined how they would pay contractors! Contractors couldn’t collect from the customer, and they couldn’t even submit projects let alone collect payment from the program! Of course, this wasn’t made clear to the contractors who’d signed on. Who the heck would think that would be OK? It doesn’t even seem ethical. (I’m withholding the name of the program while contractors are still trying to start it out constructively.)

Perhaps the worst example I’ve ever seen was in New Jersey several years ago when there were contractors with hundreds or thousands of dollars in outstanding receivables from the program there. Some contractors had the equivalent of several months worth of receivables sitting unpaid by the program. A lot of it was simply because the steps were long and complicated, for both contractors and program staff alike. This literally put the contractors’ businesses at risk of going under, and since many small businesses operate with a line of credit on the owner’s home, they were actually putting their families at risk, too.

Ironically, the larger the incentives, the bigger the potential for problems. This extends all the way to financing, which while a very useful tool to land more and bigger projects. Where projects are 100% financed, work is often done, employees paid, and suppliers either paid or hounding the contractor for payment weeks—or months before the contractor receives any money for the work.

The threat of ruin is very real. It keeps contractors from participating in the first place. And it certainly keeps them from taking on all the work they could. I quote a frustrated contractor: “I can’t do any more of the Home Peformance with Energy Star work until I get paid for the last ten projects we did.”  (Contractors, take note–if the program can’t address this for you, think very hard about jeopardizing your business by participating.)

I heard a program implementor say, it’s just a problem for the smaller contractors. No it isn’t! Larger contractors have to pay their bills, too. And the problem grows with the amount of work you’re doing in the program.

Cash flow. A contracting business can’t survive without it. Payroll comes every Friday. Vendors need payments, sometimes even before projects are completed. Contractors need cash. Hold up their payments, and you will sink them and doom your program to mediocrity.

OK, I understand the need to prevent fraud and abuse. I don’t have a problem with inspections or an insistence of quality installations. At the same time, if programs want to encourage participation, convince contractors to invest in scaling, and avoid driving them to financial ruin, it’s important to address this float problem.

The solutions are multifold, and reflect several things I’ve already touched on in the last few weeks. There need to be very clear standards and mutual expectations. I am talking about things like installation standards, but I’m also talking about program turnaround, response, and payment standards. Responses like “Bill is out on vacation this week so we can’t process any completions for you” just doesn’t cut it with a multimillion dollar utility program riding on the backs of small businesses and the mortgages on the contractors’ homes. Processes need to be streamlined, simplified, and expedited. It you’re crazy enough to thing that nine post-completion inspections simple upgrade is reasonable, then you really ought to find a way to may those inspections happen quickly. There are also ways to make progress payments, or payments with a small holdback pending final inspections and paperwork. It can be fixed.

Whatever combination of approaches you use, there really is no way to avoid addressing the float problem if you want to fix more homes. You don’t achieve scale by sinking the contractors you need to deliver success.

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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+

Comments

  1. Carol Harley  September 26, 2013

    Your argument is clear and compelling. A good example of a contractor-friendly program might be ActOnEnergy’s where “To help customers save on energy efficient HVAC equipment and improve the comfort of their homes, Ameren Illinois provides financial incentives for the installation of new equipment, including central AC, air source and ground source heat pumps, and gas furnace and boiler installations. The incentives are based on the efficiency levels of the new equipment. To help offset the cost to the customer, incentives are paid directly to the contractor and passed on to the customer as a reduction on the contractor invoice.” (See http://www.csgrp.com/new-hvac-equipment-program-actonenergy-ameren-illinois)

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