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Best-Practice Business Models

Learn what works in creating a thriving home performance company from the experience of nine successful energy efficiency programs from around the country.

September 03, 2010

The success of home energy retrofit programs relies on a thriving home retrofit industry that can deliver high-quality solutions and energy savings in efficient ways. Programs that can best facilitate industry growth will give the industry maximum flexibility to innovate and develop efficient business models; provide consistency and flexibility so businesses are not constantly forced to adapt their business practices to disparate program environments; and include provisions to help companies participate in a program and reduce barriers to entry.
 


Checking a soffit vent. (Efficiency First)
This article is based on one of a series of reports developed by the Best Practices Committee of the Home Performance Resource Center (HPRC) to aid program managers, program designers, and policy makers in the design and implementation of successful home energy retrofit programs. The series is based on nine case studies of state and local programs with analysis by four separate working groups composed of more than 50 home performance contractors and other industry supporters focused on financing and incentives, marketing, workforce development, and business models (the subject of this article). (For more, see “Best Practice Guides.”)

Growing the Industry

In order to grow the home performance workforce, we offer the following suggestions.

Foster predictability. To help companies prepare for program participation and adapt to changes in the regulatory environment, programs should clearly communicate goals and requirements, develop long-term structures to minimize shifts in program design, and announce scheduled changes well in advance. When changes are necessary, programs should institute a change notification period during which industry participants have an opportunity to comment on the proposed changes. Program notices and updates can be distributed easily and affordably via e-mail to participating contractors and auditors.

Coordinate with other programs. Many companies work inside, outside, and across programs; consistency among programs helps these companies to function more efficiently. In the Northeast, the New York and New Jersey Home Performance with Energy Star programs and Long Island Green Homes all use BPI as their standard for certification and accreditation.

Keep it simple. Unnecessarily complicated rules and procedures can inhibit efficient business operations.

Remove barriers to entry. Companies entering a program should not be burdened with unnecessary paperwork, or structural or manpower requirements. Programs should make possible the electronic processing of forms and should be made easy for contractors entering the market, while maintaining program standards.

Provide Incentives. Because contractors may not have the capital to expand rapidly enough to meet program goals, programs should provide subsidies as needed to help contractors get off the ground and start building their businesses. For example, the New York Home Performance with Energy Star program subsidizes contractor-run marketing, training, and equipment purchases for home performance uses. Contractors receiving these kinds of incentives and subsidies should be required to show that they are completing a minimum number of jobs, so program dollars are not wasted supporting companies that are not succeeding in the marketplace. The New Jersey Home Performance with Energy Star program requires that, after their first year of participation, companies must complete a minimum of ten jobs per year to qualify for business incentives and subsidies. Incentives for contractors should be structured to complement strong consumer incentives and financing programs that build market demand.

Best Practice Guides

The Home Performance Resource Center (HPRC) is a national 501(c)(3) nonprofit organization formed to conduct public policy and market research in support of the home performance industry. The center develops research materials for policymakers, energy program managers, and industry leaders to promote job creation, economic recovery, lower household energy bills, and deep reductions in residential carbon emissions through improved home energy efficiency. Efficiency First, BPI, and the Energy Foundation support the HPRC.

The Best Practices Committee is an official standing committee of the HPRC. The committee collected and reviewed data from the following state and local programs for the best practice guides:

  • Berkeley FIRST, Berkeley, California
  • Palm Desert Energy Independence Program, Palm Desert, California
  • Sonoma County Energy Independence Program, Sonoma County, California
  • ClimateSmart Residential Energy Action Program/ClimateSmart Loan Program, Boulder, Colorado
  • New Jersey Home Performance with Energy Star, New Jersey
  • New York Home Performance with Energy Star, New York
  • Long Island Green Homes, Babylon, New York
  • Clean Energy Works, Portland, Oregon
  • Austin Energy Residential Power Saver Program, Austin, Texas
Cover a portion of project costs up front. Small companies often need the most assistance to scale their businesses to meet program goals. On a typical home improvement job, customers provide a down payment, pay for a portion of the project as work begins, and cover ongoing materials costs. But in programs that pay rebates directly to participating contractors after the project is completed, companies without adequate cash reserves will have a hard time entering the market and scaling their businesses.

In Palm Desert, the program allows homeowners to request a progress payment of up to 50% of the loan amount, provided that at least 75% of the project materials have already been delivered. Programs can relieve some of this financial burden by paying qualified contractors a percentage of project costs in advance.

Allow companies to bring in their own leads. Some programs devote disproportionate resources to the direct generation of leads. While programs should work to generate leads for contractors, programs may choose to assist high-performing contractors by providing funds for companies’ own lead generation campaigns, as some programs have done through co-op marketing efforts. This allows programs to leverage contractor resources and expand program reach, and gives contractors the ability to develop their own brand identities and business models. As we said above, contractors should be required to meet certain thresholds for jobs completed in order to be eligible for subsidies.

Recognize the variety of tasks performed. Some programs have applied work rules to weatherization that were originally designed for large commercial projects. Such rules ignore the multifaceted nature of weatherization work, which typically involves one or two people working in cramped crawlspaces or attics, and the application of insulation materials wherever needed, including pipes, ducts, and structural elements of the home. For home weatherization, it isn’t practical to employ separately trained professionals for each surface (sheet metal, pipes) that is touched by insulation or sealing materials, and it is difficult to document the exact amount of time spent working with each building material. Thus labor guidelines for home energy retrofits should be more flexible than those for commercial weatherization projects.

Create prevailing-wage categories for each worker. There are currently instances, such as American Recovery and Reinvestment Act-funded programs in Washington State, where work performed by a single worker during a day on the job must be divided into various state prevailing-wage categories. This can create significant confusion, especially when vastly different wage rates apply to different phases of a single task.

Home performance companies know the importance of paying workers fairly. However, subdividing work performed by a single worker into separate categories creates problems on the jobsite, where workers must understand the fine distinction between closely related job categories and can end up completing tasks that carry pay wages three times higher than wages for tasks requiring identical effort and skill. Employers must carefully avoid abuse or errors, and workers must deal with paychecks that vary unpredictably from job to job and from week to week. The burden of paperwork and fear of liability for inevitable errors prevents industry growth, and inefficient processes threaten to increase costs to homeowners.

Federal prevailing-wage guidelines have been crafted to ensure that a single wage applies to all sealing and insulation work done by a typical weatherization worker. In locations where state and local prevailing-wage laws apply to weatherization work, regulatory agencies should ensure that the applicable wage categories can be practically applied to a small crew weatherizing a home. Ideally, a single wage category should apply for all home weatherization work.

Owner and Employee Relations

The best home performance companies have highly motivated workers and engage in the kind of responsible contracting practices that lead to a well-trained, well-compensated, and healthy workforce. Owners and employees of these companies are proud of the culture and proactive working relationships they have created within their respective organizations. Programs should leave internal working relationships up to the discretion of each company and its employees.

Some programs are considering hiring restrictions that would require workers to belong to a union or incentives that establish a preference for work performed by union labor. Other programs have considered granting certification authority to unions that also represent and train workers. This results in a clear conflict of interest that would undermine the integrity of the third-party certification system that the home performance industry has already established.


A contractor examines attic insulation near a kneewall. (Efficiency First)

Setting Industry Standards

To ensure uniform quality standards of home performance work, we offer the following recommendations. These recommendations follow in line with the Federal Home Star program’s Gold Star standard.

Develop clear pathways to certification. Confusion about program requirements can lead to decreased contractor participation. Programs should clearly outline the steps companies are required to take to get certified and allow all contractors and auditors who meet those requirements to join the program.

Require appropriate certification and accreditation, and strict quality control. Programs should require auditors and key contractor personnel to be certified according to the principles put forth by BPI and adopt national certification and accreditation guidelines that follow standards as dictated by organizations like BPI. There are not enough accredited contractors in many parts of the country, but the long-term goal should be to require accreditation for all participating contractors. Furthermore, rigorous quality control mechanisms should be put in place to ensure that work is performed to high standards.

Require test-outs for all jobs, with deeper inspections on a percentage of jobs. All projects should include a test-out conducted by either the contractor or a third-party auditor. If routine test-outs are performed by the contractors who complete the work (as is required by many industry-accepted certifications), programs should implement third-party oversight that includes random field testing on a percentage of all completed retrofits. Many programs provide a job completion and reporting incentive (for example, 5% of the job cost up to $500) to the contractor or auditor who performs the test-out.

Programs might consider conducting random field tests at a level that can be adjusted based on the level of the incentive (that is, a minimum 5% test rate for average incentives up to $500; 10% for average incentives up to $2,000; and so on). Inspectors should tell contractors when inspections will occur, so contractors can keep customers informed and can promptly correct any problems that the inspectors find.

Train city and county building inspectors. Some building inspectors are not fully aware of new building and remodeling techniques that incorporate building science and whole-house thinking. Building inspectors should receive comprehensive training in home performance so they understand new techniques in building science and can apply that knowledge when inspecting jobs.


Blower door test in progress. (Efficiency First)

The Auditor-Contractor Relationship

Of the programs studied for this report, one program uses independent auditors; two require all audits to be performed by the contractor who completes the work; and three allow either model. The relationship between contractors and auditors has been the subject of much discussion and debate. While some program leaders prefer to require independent third-party auditors to ensure the integrity of retrofit recommendations, others believe that audits should be performed by contractors, in order to make the audit-to-retrofit process as efficient as possible and increase audit-to-retrofit conversion rates. This aspect of program design ultimately depends on local program goals, so our consideration of the auditor-contractor relationship includes both specific recommendations and general considerations that programs should take into account regarding the auditing process.

Allow contractors to perform audits and energy retrofit work. Many homeowners prefer to hire one company to conduct the audit and to complete the retrofit, which can simplify the overall retrofit experience. In addition, some contractors refund all or part of the cost of the audit to customers who hire them to complete a retrofit, reducing the overall cost to the homeowner. Several programs that require audits, including New York and New Jersey Home Performance with Energy Star, Long Island Green Homes, and Clean Energy Works Portland, have had strong audit-to-retrofit conversion rates using companies that provide the audit and go on to complete the retrofit work. The HPRC believes that an all-in-one approach to home retrofits can increase the audit-to-retrofit conversion rate.

Make the services of independent auditors available to customers. Some homeowners are less likely to trust an audit if it is done by the same contractor who will complete the retrofit. These customers should be allowed to contract with an independent auditor. If an independent auditor performs the audit, programs should work to ensure effective communication between the auditor and the contractor.

Implement mechanisms to ensure customer trust. Programs that promote or allow the industry-accepted all-in-one model should take steps to maintain a high level of consumer trust. For example, many programs employ energy advisors who work with customers and advocate for their needs. These advisors may be present at the time of the audit or when the work is being done, although this approach is costly. Other programs require contractors to perform comprehensive analysis and reporting on every audit, with a percentage of all contractor audits randomly field-checked by third-party auditors. This approach allows for fewer quality assurance auditors while maintaining the high standards that the home performance industry supports.

Either way, public outreach is essential. Customers have the highest level of confidence in auditors and contractors if they have been informed about the quality control mechanisms that are in place, and about certification and accreditation requirements for program-approved contractors.

Third-party verification. Third-party verification of work done is particularly important in programs where auditing and retrofit implementation are provided by a single contractor. Austin’s Home Performance with Energy Star program conducts inspections on every job, while other programs, such as New Jersey Home Performance with Energy Star, conduct third-party inspections on a percentage of each company’s jobs.

Design pathways for a wide variety of contractors. Guidelines that require contractors to have auditors on staff can dissuade some companies from joining the industry. For example, a company with an HVAC background but no auditor on staff would be excluded from transitioning into comprehensive home performance retrofit work. Programs using the all-in-one model should consider allowing such companies to partner with or subcontract with program-approved independent auditors. In addition, programs should not limit contractors’ ability to provide comprehensive home performance solutions, and therefore should always allow the lead contractor on a project to create partnerships or subcontract work as necessary to meet these goals.

Ensure that audits produce actionable work scopes for contractors. When audits are performed by independent auditors, contractors often complain of having to redo their audits because the auditor didn’t give them the information they needed. With effective systems of communication in place, including data transfer mechanisms and data protocols, contractors will have access to this information and can better use it to bid for and complete retrofits. Furthermore, if independent auditors and contractors work together more effectively, the audit-to-retrofit conversion rate is likely to increase.

Programs should work with local contractors and auditors to design standard elements within audit reports that are easy for auditors to generate and useful for contractors when developing bids and conducting retrofits. For example, the New Jersey Home Performance with Energy Star program requires auditors to enter data that (minus any bid information) are then accessible to any other contractor from whom the customer requests a bid.

Provide additional training to independent auditors. To avoid situations where inadequate third-party audit reports force contractors to perform secondary audits, program-
approved auditors should receive additional training to produce actionable work scopes (including detailed photographs) that go beyond what might be included in a standard audit report. With these detailed work scopes in hand, homeowners can obtain bids with fewer or no site visits from contractors. This saves everyone time and money, which can be important when the work is being done on a tight budget.

Protect contractors from liability for independent audit errors, and vice versa. Some contractors participating in the New York Home Performance with Energy Star program routinely conduct secondary audits of homes that have already been audited by third-party auditors, because contractors are liable for any mistakes made by the original auditor. Programs should explore ways to solve this liability issue, as the additional cost of secondary audits limits profitability and growth potential in the industry.

Creating a Thriving Home Performance Community

The ambitious job creation and energy reduction goals that are driving the creation of home energy retrofit programs can only be met if programs are structured to facilitate a thriving, efficient, and trustworthy home performance industry. Programs should set stable and consistent guidelines and rules that give companies as much predictability and flexibility as possible, and cooperate with other programs to ensure that companies can easily work inside, outside, and across programs. Effective programs will help companies to expand and will include features that remove barriers to enter the program. Finally, programs should give companies the leeway to test and create innovative business models, so the industry can operate at maximum efficiency and continue to provide the highest level of quality to American homeowners.

 

For more information:

The full report on Best-Practice Business Models and additional documents in the HPRC Best Practices for Energy Retrofit Program Design series are available online at www.hprcenter.org.

Home Performance Resource Center
P.O. Box 55587
Washington, DC 20040-5587
Tel: (415)728-9775
Fax:(415)520-5662



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