As I’m sure most of you know if you read my blog regularly, compelling (and accurate) financial analysis is a key component in selling efficiency effectively. So, what exactly is financial analysis? Most people would probably agree that it’s the accurate cost/benefit analysis of a proposed investment. Before you can have accuracy in this analysis, you have to actually ask yourself, “Where do the costs and the benefits come from?” Today, we’ll discuss the costs that should be included in the financial summary of any efficiency project.
Local labor and materials figures: Are you estimating the cost of labor and materials based on the national average or are you taking into consideration the actual costs based on the location of the project?
Prevailing wage considerations: If it’s a government job, did you remember to incorporate the proper assumptions regarding prevailing wage?
Demolition, recycling, and disposal costs: These are often overlooked in financial summaries. Don’t forget to include them, because they can have a significant impact on the cost of the project.
Soft costs: Did you remember to include any potential soft costs, such as architectural, engineering and consulting fees?
Contingency: I've been in this business for over 25 years and I don’t think I can remember a time when a vendor included contingency in the financial summary. Why? Perhaps because they're worried about doing a limbo dance under the simple payback period “maximum threshold” that the customer told them about, and they don’t want to risk any cost increase. That really doesn't do any justice to the customer in the end, so be sure to disclose a contingency amount upfront.
Rebates and incentives: Rebates and incentives have a tendency to reduce first cost, so any savvy sales professional would be sure to include estimates for these in the analysis.
Tax benefits: Be sure to separate these from the rebates and incentives. Rebates and incentives can be before-tax or after-tax and so can tax benefits (think “tax deduction” versus “tax credit”). It bothers me when someone says, “You’re going to save a thousand dollars per year in energy bills, and in addition to that, you're going to get a five-hundred-dollar tax credit.” Think about that. If you save a thousand dollars in energy bills, assuming that you're a business and you can write that energy off as a cost, you’re really not saving that whole thousand dollars. Rather, on an after-tax basis you're saving a thousand dollars multiplied by “one minus your marginal tax rate.” So be careful how you present rebates, incentives, and tax benefits in your analysis.
Payment: Who is actually going to be paying for the first cost of the project? We talked about this in the blogs that addressed doing upgrades in landlord/tenant settings. It’s important for you to know who is paying and to demonstrate how this impacts the project’s financials.