Kurmit Rockwell:
Your instructors today are very experienced in ESPC. Doug Culbress has been involved in ESPC as a Federal financial specialist for about 13 years and has been involved with more than 100 ESPC projects. He's also one of our instructors for our comprehensive ESPC course. Prior to FEMP, he was director of the North Carolina State Energy Office. 

Michella Hill is one of two contracting offices that work to administer ESPCs for them. Michella has been with the Department of Energy for two years and works at the Golden Office. Her position facilitates contract decision, changes, compliance with the laws, regulations, and statutes at the contract level, as well as helping assist Federal agencies and ESCO contractors as they work toward award of ESPCs.

Wayne Latham is our other contracting officer and he's been involved in contracting for about six years. Prior to coming to the EOE, he worked in the construction, manufacturing, and telecommunication industries for about 29 years, where he provided project engineering and construction management.

John Shonder manages support for the FEMP program at Oakridge National Laboratory. He's been involved with FEMP's ESPC program since its inception in 1998, has experience in all aspects of project development. 

John keeps track of the wealth of data that the project generates, and he and his team are the source of many of the statistics analysis pieces and web tools that FEMP makes available for ESPC. John is also one of the trainers for our ESPC comprehensive workshop.

So I encourage you to take advantage of your instructors and ask all the questions you have, no matter how small, during this webinar.

Lastly, FEMP's goal to provide you with a relevant high-quality training to help you achieve your energy and sustainability goals.  To help us better serve you, I ask that you please complete an evaluation form at the end of today's session.

I'm now gonna turn things over to Doug Culbress to get us started.

Doug Culbress:
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Thank you, Kurmit. Today we are going to focus on the final steps to a high-quality, timely task order award. In particular we're going to look at the ESCO's price proposal. As I would like to say in reference and experience I had one time about financial schedules, a base commander said, "Where's the beef?"  The beef and the money are in the financial schedule, so we're also going to be looking at the pricing and financing, and how to review and evaluate that. 

And of course, as mentioned earlier, final negotiations to the task order award. I like to refer to the final negotiations as closing the deal. Of course, awarding the task order is crossing the finish line.

You've seen our milestones before. Obviously we're still dealing with phase three, and today we're going to be looking at the proposal and the task order award.

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Now we're going to talk about the task order financial schedules, because they're extremely important, and sometimes a little bit difficult to fully understand or interpret. We're actually going to have a short tutorial today on the financial schedules and John Shonder, who follows me, will be actually going over the financial schedules in more detail.

It may be a little bit of duplication in some cases, but we wanted to be sure that there's a good understanding of the schedules because of their importance in the overall financial aspects of the project.

Remember, all the cost appear in the task order schedules, that which is - and these final schedules are unlike the PA. The preliminary assessment has schedules one through four and did not have schedule five, and they were not guaranteed. The pricing was more of a cost based on previous experience or means cost, but not necessarily on competition for subcontractors and other means of pricing. So these schedules are the final schedules and they are guaranteed.

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So if we're looking at the cost elements of ESPCs - I think most of you are familiar with it, but I'd like to kind of go down through here and repeat where all the cost elements of ESPCs are.  Obviously first and foremost are the energy survey and the proposal cost, which we'll point out to you where it is in the schedule.

The energy conservation measures, as the direct cost for the design and installation and construction. Then we have the overhead and profit cost. Then we have the financing - financing procurement cost and the interest. Certainly, last but not least, is the performance period service, which includes O&M - operation and maintenance - repair and replacement, and measurement and verification.

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So if we're looking at the schedules, what we have here is just a general thought about who in your office or who that's on your team that's involved - the acquisition team that's involved in this ESPC effort - would want to look at particular schedules. 

This is not necessarily to say that they couldn't look at other schedules, but I think we'd like to point out that probably lawyers and the contracting officers generally would like to see Task Order One. Then you have your price analysis would like to look at Task Order Two. Certainly Schedule Three is what I call the snapshot, the economic snapshot of any ESPC project.

So you'll have the budget, the finance, the resource managers, and everyone else that would like to look at the overall cost aspect of the project. 

Task Order Four, this is where the energy managers, engineering and facility managers would want to look at the first year cost savings. 

And finally we have Task Order Five that was not in the preliminary assessment, but is in the proposal. It is the annual cancellation ceiling and I think your leadership, the same folks that look at Schedule Three, are also going to look at what potential costs might be if a project is cancelled partially or fully for any reason.

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So if we're really looking at an ESPC, one way to look at it would be that the government is buying a basket of savings, and where would you find those savings if you wanted to know what the cost savings and the payments were? You would look in Schedule One.  Then if you were trying to determine what the individual ECMs - energy conservation measures - are, you would look at Task Order Four, which has the first-year energy and cost savings by ECM.

But remember, and this is extremely important, that the guarantee that's shown in Schedule One is for one total amount of cost savings, not for individual energy conservation measures, which simply says that you could have a shortfall in one of your ECMs and make that up by having additional savings in another ECM, so that the aggregate savings meets the total amount of cost savings guaranteed. We could do that quite often. Of course the government is paying for these savings as they accrue.

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So finally, we're looking at Schedule One, which is the guaranteed cost savings and contractor payments for the project. I think I'd like to point out to you that the first column there is the estimated cost savings by the ESCO. That's column one.

And column two is what they are willing to guarantee. I think you probably heard yesterday from Mike Holda that the ESCOs generally will guarantee 90 to 95 percent of the estimated cost savings. Now, sometimes that could be a little lower or sometimes it could be a little higher, but generally we see that figure.

On the far right is the annual contractor payment. Generally, the savings guarantee has to be $1.00 more than the contractor payments. We see that quite often, and you will see on the second line there that the annual cost savings is $816,211.00 and that the payment is $816,210.07. It's a little close there.

But in any case, also I'd like to point out, if you'll notice the green information, one-time payment and construction period savings will go under implementation period. Once again you'll see estimated cost savings, guaranteed cost savings, and finally, what the contractor payment would be.

Also, we require a project facilitator for all DOE ESPC IDIQ contracts. There is a cost for the investment grade audit phase of the project to the agency. There are various ways that you can pay for that. You can pay for that upfront, or you can defer that payment until after the project is constructed and accepted.

And if that is the particular case, what we generally see is that the project facilitator's cost is included in Column E. There is a guarantee for the first year, but it is not financed over the life of the project.

Okay, going to Schedule Two. This is where we're going to see the total direct and indirect cost and profit by each energy conservation measure.

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If you're looking at the schedule, you'll sense on the far left is the tech category, and we have the ECM number, the descriptions, ECM size, then we have the measurement and verification.

I want to point out that measurement and verification is not part of that total cost there, but is shown on Schedule Three as part of performance period expenses.

So we have the implementation cost direct, and then we have the indirect cost overhead, cost, and the profit. So it's a combination of A, B, and C gives you full implementation price.

Now, one thing about the numbers that you will see in the schedules, they should have trackability. So you should be able to find the implementation cost in a number of other places throughout the schedules. If you can't find that number - if you don't see that implementation price as the first-cost number on Schedule Three, it doesn't match up. There's something wrong with the schedules, and that is true with a lot of the other data included in the financial schedules.

Now, in order for you to determine what the percentage is for the indirect cost and profit, you will have to do some calculations to determine that, and your contracting officer will look at those and determine if they're reasonable, given your past projects or what you've seen there.

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Three - this is the snapshot. I like to say if your management would like to have a presentation or an overview of the economics of an ESPC project; this is where you should go, to Schedule Three - Supposed Acceptance Performance Period Cash Flow. 

John Shonder's gonna go into a lot of depth about this, but let me just point out a couple of things. Once again, if you're looking up there, that implementation price should match up with what was on Schedule Two. You have the finance procurement cost. A lot of people ask about that. John's gonna talk about it, but its cost of financing and bonds, construction period interest capitalization, those types of things.

And then once again you have the implementation period payments. You saw those on Schedule One. They would be construction period savings. One-time savings payments that you might be making towards the project. Once again, you have the total financed amount there.

And next to that you're going to see the interest rate information.  John is going to talk to you about how interest rates are competed.  There are two components to that, and that's the index and another component there, added premium, make up the total interest rate, the overall interest rate, which you see at the bottom there.

And from there, we go down to the debt service, which is the principle and interest - shows you a total cash flow there, the total debt service. Then we go to the performance period expenses.  I won't go through all of those, but certainly it'll be repair and replacement, measurement and verification, property taxes, other types of things.

I would remind you that everything in the performance period expenses are negotiable, especially the indirect and profit portion down at the bottom of Schedule Three.

Also I'd like to point out to you that the - once again if you were looking at Schedule One, the total payments on Schedule One, far righthand column at the bottom, should also be the same number that you see, total annual contractor payments at the bottom of Schedule Three.

As I said, John is going to talk more about the competition. But I would like to point out to you that competition in the interest rates has been very effective and I'm sure John will address how much it has saved for the projects.

I can't help but point out to you that the single most influential component of an ESPC project is going to be the interest rate, and I would like to remind everyone that - and I'm sure John will too as well - that interest rates have gone up recently. That doesn't mean you have to rush to close the project, but even a ten basis point increase in an interest rate can have a tremendous impact on the overall cost of a project. 

In some cases I've seen, where projects had to be de-scoped in order for the project to be economical because the interest rates had increased. We've actually experienced an ESPC project that interest rates went up and the overall increased cost of the project was $5 million. So it really does have a significant impact on the overall economics of an ESPC project. Certainly there are other things that impacted sub costs and those subcontractor costs and other things as well.

Looking at Schedule Four, we see here the breakout of the estimated savings. I'm trying to find Schedule Four as hard as I can.  But in any case, if you want to go through
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Schedule Four, I think you want to see a breakout of the actual savings for the current year by ECM, a total cost there. Once again, you get the implementation price and you're going to get the simple payback for these ECMs on the far righthand column. I'm not going to go through Schedule Four in any more detail, but John will go through it a little more.

It brings us to Schedule Five. Schedule Five is not in the preliminary assessment, but is required by the ESPC legislation. It shows the outstanding liability for each year of the term. Now, the ESCOs in generally will also include the principle balance of the loan by month to expedite the loan payoff in the event of a termination for convenience. So not only will you see an annual, but you'll see a monthly termination schedule as well.

And included in those numbers will be a penalty cost for early termination, which is included by the financier. The typical penalty for that we see is somewhere between three and ten percent. It is negotiable. I have seen it as low as three. Generally it's around five percent.

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Let's look at Schedule Five.

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You see one column there. It does not show a monthly amount, but I would want to point out to you that these numbers are maximum termination liability amounts for the time period and they are subject to negotiation between the ESCO and the agency.

There have been occasions when some of the financiers would like to have these be a firm, fixed price, but our recommendation is that they continue to be maximum continuation schedule.  In the event of a task order cancellation or termination for convenience, I would point out that 452217 will apply. 

And talking about termination, there are a variety of things that could cause termination. It could be brack in the case of a military base, where the entire project has to be terminated for convenience.  And then we have partial termination for convenience in situations where buildings may have been torn down. 

We do terminations for convenience for those ECMs and take those out of the contract. So there are a variety of reasons that you might be interested in Task Order Five.

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Okay, John, I would like to turn it over to you, and for more details on the financial schedules.

John Shonder:
Okay, thank you, Doug. The purpose of this session is to review your responsibilities with respect to review of pricing and financing. Let me see if I can get the next slide to come up.

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There we go. To talk about some of the resources available to you to complete you're review.

Doug went over the content over most of the schedules - all the schedules, actually. Now we're gonna talk about how to use those schedules and other materials that FEMP makes available to you in your review of the pricing and financing.

To begin, let's review how ESPCs work, where the money comes from and where it goes. The ESPC deal, or the task order that you sign, shows a firm, fixed price and a schedule of payments for the term of the contract. It also shows guaranteed cost savings, which always has to be greater than the payments. I think that's an important point to make, is that the payments are always less than the guaranteed cost savings.

Now the ESCO or energy services company acquires the financing and uses that private financing to install the energy conservation measures at your site. Note that the financing agreement is between the ESCO and the financier, not the agency and the financier. So the agency is not a party to the financing deal, although as the organization has to make the payments, it's certainly an important player and has an interest in that agreement.

The facility improvements then generate the guaranteed cost savings. Since the agency costs are lower, there's money available to make the payments over the term of the contract. The money to pay the ESCO comes from your normal appropriations for utility bills and related operations and maintenance, and the cost savings created by the ESPC. That's why we say that the ESPCs are budget neutral.

The ESCO using the payments from the agency for three purposes: to pay interest on the loan that the ESCO took out to install the equipment at your site; to pay the principle on that loan - and these two, the principle and the interest, are called the debt service; and then also to pay for performance period services, such as measurement and verification of savings that's required in each one of these contracts, and any operations and maintenance, or repair and replacement that the ESCO is performing for the agency.

That's important to note too that the performance period services are not financed, okay? So that's a pass through from the ESCO to the agency.

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So the next slide provides some program-wide averages. Of course all of these averages depend on the particular interest rate of your project, the amount of O&M that you're requiring the ESCO to do, but I think it's important to know what these relative proportions are.

So, generally about 43 percent is project investment, okay. So the cost of the equipment being installed at the site. That's the bottom two bars. You may make some upfront payments. Those generally run about 1 percent of the total cost, and then 42 percent of the payment is project investment.

Forty-two percent then is financing-related costs: interest payments and the financing procurement price, which we're going to get into in a second. Then about 15 percent of that is performance period services: O&M, repair and replacement, and the measurement and verification costs.

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Okay, the next slide. Now, this repeats one that Doug presented, but I kind of like this slide because you can use this as a map or a guide to what you need to review in your pricing review, okay. So you're gonna see the project development costs. That's gonna be on Schedule TO2.

You're gonna need to review the price that the ESCO is charging you for the ECMs for the design installation and construction of those measures at your site. You're gonna want to look at the indirect cost and profit. That's also on the Schedule TO2.

You're gonna also want to review the financing. That's on Schedule TO3. Then finally, the performance period services, which is also on Schedule TO3. I guess the trend here is that everything you need to know is in the TO schedules, and those schedules are just really invaluable to you in terms of the amount of time they save. 

If you ever - I have - tried to review projects where these schedules didn't exist and you have to hunt down numbers through the whole document, and some of these proposals are rather large - so you don't have to do that in our program. All the information is there in the TO schedules.

So it's the agency's responsibility to do a price reasonableness determination. I want to say that at the outset, because sometimes there's a little confusion on this, but yes, you must do a price reasonableness determination. And always, always begin with the TO schedules.

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You can ask for as much backup information as you require to make your price determination, but that information should always tie back to the TO schedules, which are contract documents.

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Okay, the Federal ESPC regulations stress life cycle cost effectiveness. All the ECMs of the project itself has to be life cycle cost effective, but that doesn't exempt you from making sure that you're getting a reasonable price on all the ECMs and all the services that are included in your project.

The DOE rule that established regulations for ESPCs does waive the requirement for certified cost data, but agencies can and should still request from the ESCO all the information that they think is necessary to determine whether the prices are reasonable.

The ESPC rule doesn't specify how that price reasonableness should be determined. But if you go back to the Federal acquisition regulations, they apply, okay? So Far 15404 is sort of the basis document for price reasonableness determinations in any kind of a contract, both appropriations funded and ESPC funded. All of what we're saying here is consistent with Far 15404.

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Now, in your TORFP, you will want to request the level of detail that you need to see. So you can ask to see the components of the ESCO's project development costs, what their site surveys cost, what proposal development costs, et cetera. You can ask to see how they develop their construction cost estimates - so what does into those prices. 

Also you can ask to see what goes into their performance period expenses, what they're charging for the M&V services and what they're charging for any O&M activities that you want them to do.

Now, ESCOs generally compete their subcontractors. In fact, I think most of them do on these projects, so there's competition there, just like in government contracting. You can ask to see that information. You can ask to see the bids on that competition and how they made the decision to choose the lowest bidder.

In general, our advice here is to ask the ESCO. They'll usually provide whatever you want to see. They want this deal to go through as much as you do, and they'll be happy to provide any information that you want.

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So to reiterate, once again we recommend that you begin with the TO schedules. As Doug said, these schedules really are the beef of the deal. I was going to say the heart of the deal, but you can go a long way toward doing your price reasonableness determination with just the TO schedules. 

I think the most important are the TO2 schedules that provide the ECM prices, and the TO3 schedules that provide information on the performance period expenses and the financing.

So look for reasonableness consistency and backup documentation on all these prices. Make sure that the total price is complete and reflects the appropriate implementation costs. Make sure all the math is correct. Check the math. That's another thing that's important. Then make sure that the performance period services are consistent with the risk responsibility and performance matrix, which was covered in a previous session.

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So let's take a look at the TO2 schedule again, now with an eye towards reviewing the pricing, okay? Let's look specifically at ECM 5.1: Lighting improvements. The lighting improvements that they're installing here save 29,000 kilowatt hours a year and are costing about $1.9 million.

Now we have some price benchmarks, which I'm gonna talk about in a second - and you'll see that the prices of lighting ECMs are pretty well correlated with the number of kilowatt hours that you save per year. 

Water conservation measures similarly are well correlated with the number of gallons that you save per year. That column ECM Size is very important to make you're price reasonableness determination. So you look at the price and you also look at the size, and that's how you make that determination.

If this is a chiller ECM, you'd see the number of tons, and we have a benchmark for that too. Now, notice the M&V expense, what you see here on this schedule, that's M&V equipment that's installed at the time the ECMs themselves are installed, so this is not the price of the M&V services. Those appear on Schedule TO3. This is things like data loggers, measurement equipment, and things like that.

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Now Schedule TO3 then is a comprehensive summary of the project cash flow showing all the financing rates and costs and how much of your payments go to interest and principle. TO3 also breaks down the details of the performance period service cost. 

Notice that the implementation price from TO2 is shown at the top left, and in the same column it shows the implementation price, plus finance procurement price less the implementation period payment, and then the amount financed.

So the lower section is where you want to concentrate when you're doing your price reasonableness determination on the performance period services. Look at what the ESCO is charging you for maintenance repair and replacement and measurement and verification.

We have some information on what those are in previous contracts as proportion of the total price, so we can help you there. But also in general, you'll know what your site was originally paying for operations and maintenance on the equipment that's being replaced.  So that's one point of comparison.

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Okay, I think that the first step in a pricing review is to assess the information that the ESCO has provided you. Ask yourself do you have everything you need to assess that price? 

The ECMs have to be clearly described in the proposal, including the quantity to be installed. So for example, if the project includes ground source heat pumps or chillers, you need to know how many are being installed and what the total capacity is. As I said, that information should be entered under the ECM Size column on Schedule TO2.

Now, we recommend that the agencies use the price benchmarks that FEMP has made available as much as possible. We have benchmarks available for lighting, chillers, a variable frequent drives, ground-source heat pumps, and also for water conservation measures now. We have a website and I'll give you a link to that.

So, turns out, as I said before, when you plot the price of these ECMs vs. some measure of the size, which is on the benchmark information that we provide to you, you'll see that in most cases it lines up as kind of a straight line. The more kilowatt hours you're saving per year in a lighting measure, the more it's gonna cost you.  Likewise with water conservation measures - the price is directly related to the number of gallons per year you're going to save.  There's some variation in there.

But what you see when you use these benchmarks is where your project lines up with all previously awarded projects that include that ECM. So we'd like to think that these benchmarks save you time. If you know that the price you're offered is comparable with the prices received on similar ECMs and other projects, you don't need to spend a lot of time analyzing the price.

And thing we do in these benchmarks is we inflate prices to the current year. For example, we'll include lighting ECMs that were installed as far back as 1998, but we'll inflate that price to 2013.  We'll also adjust that price for location. If an ECM was installed, say, in Kansas and your project is New York City, we have a construction cost index that will adjust that price to make all the previous projects comparable to what you're doing.

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For less common ECMs, we recommend that your agency perform a price reasonableness as it would with any other project.  So one way you can do that is to compare ECM price with your agency's historical data or other estimating tools that you may have, such as Means handbook.

You can also take a look at the prime contractor analysis of the subcontract pricing. That's a term right out of the far. You can also perform cost analysis of the ESCO's pricing data, so you can take a look, dig into the details of their cost analysis.

I should say too that we - for ECMs that don't lend themselves to the development of benchmarks, we also make available to you the price of every other ECM that was awarded in the IDIQ. So for example, for a CHP system, it's very difficult to develop a measure of the size of that equipment. However, if you're going to install a CHP system in your ESPC, you can use this tool called the ECM locator to find all previous projects that have installed CHP systems. 

You may find that one of the projects has been with your agency and you may want to give a call to your colleague at the site where that ECM was installed and ask them for some information about their project. That's another tool we have available.

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So here's how you access the ECM benchmarks and the locator.  There's our website there: hyperion.ornl.gov/espc. When you go there, you won't be able to do anything. The first thing you'll do is request a sign-on. When you do that, you include your e-mail and your password, and then an e-mail gets sent to my IT person. She comes to me and says, "Is this person okay?" And I authorize you and then you get a sign-on for the site.

So as we say, they make quick work of some of the major ECMs and that frees up your time to analyze the prices of more difficult ECMs, where there's no price comparison data available.

There are a lot of other resources you can draw on for pricing review. You can ask for supporting information supplied by the ESCO. As we said, you can look at their subcontract pricing, get the copies of all their quotes, and make sure that they chose the lowest one.

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We have a guidance document called Determining Price Reasonableness in Federal ESPCs. This is available on the ESPC resources page. Talk to your project facilitator. They're a good source of pricing information as well. Your agency or your site may have price estimator's available or technical experts in certain technologies. 

Your project facilitator will also make national laboratory experts available to you. So for example, if you have a renewable ECM, such as wind, they'll make experts available to you from NREL.  And as we said, finally, we have these price benchmarks available from FEMP.

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Okay, so that's pricing review. Now we turn to financing. Now, financing is something you likely haven't run into in Federal contracting, unless you've worked specifically with ESPC or UESC before. 

So as I said at the beginning, the ESCO obtains private financing to purchase and install the equipment at your site. Then it repays that financing out of the payments you make from the savings.  Now Doug mentioned before that interest rates are probably the most important part of the project, and we can't control these it rates. Nobody really can. They vary according to conditions in the credit markets. 

They are going up right now, as Doug said, and I did some analysis the other day and found that they're going up about one basis point per day. So that's .01 per day, all right? Which may not sound like a lot, but when you think about what you project pays in terms of interest, it is pretty important.

Now in ESPC, it's the government paying back the financing, and that's good, because the government is seen as good credit risk. The financing rates that ESCOs obtain on these ESPCs are generally related to the treasury rates. But the projects are not without risks. So there's a premium associated with them. 

There's an adder to the treasury rate. I think as a general rule of thumb, you can look at a 20-year treasury note as the benchmark for the ESPC program. So if you look at what 20-year treasury notes are selling for right now in terms of interest rate and then add about 1.4 percent to that, that's a rough general idea of what the interest rate is going to be on your project. That's the premium on average right now in our program, is about 1.4 percent, or 140 basis points, as they say.

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So, that's on Schedule TO3.

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The next slide shows that Schedule TO3. Now, in this case, they've used - all right, so they used a 16-year treasury. Now, that really doesn't exist. There's a 10-year treasury and a 20-year treasury, but because this project is 16 years long, they've extrapolated between the 10 and 20 to get this index rate of 4.6 percent. 

You'll see that in this project they've added the premium of 1.1 percent, which is not bad, okay. As I said, the average is 1.4.  Some are going to under that and some are going to be over that, depending on the perceived risk of the project. But in this case you add those two up, 4.6 and 1.1, and you get the project interest rate of 5.7 percent.

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Okay, now, ESCOs are required to compete the financing. This is right there in the IDIQ contract, so the ESCOs have to solicit multiple bids for the financing. They produce a document that's called The Investor Deal Summary. That's something they take out then to the financiers and it provides the same information. So it's to make sure that all the bidders, all the financiers, are receiving the same information on the project.

The financiers then respond with a document called the SFO, the Standard Finance Offer, and the ESCO selects the SFO then with the best financial terms. Now, it wasn't always this way in ESPC.  As Doug said, competition has been very beneficial to the Federal government. On average, competition has taken about 120 basis points off the premium, so we're at about 1.4 right now. Prior to the competition requirement, we were at about 250, 260 basis points. So it's really helped out and really saved the government a lot of money.

It's important to note on this slide that the finance costs are a pass through, so there's no markup or no profit on those finance costs.

So the ESCO's not just financing the cost of the ECMs. There's also the cost of the project development that is the surveys, studies, designs, et cetera. Plus the ESCO's indirect cost and profit, as well as the financing procurement price, and we're gonna talk about that in the next slide.

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So the financing procurement price is something of a misnomer.  It's not really the cost to get the financing. What it is mostly is capitalized construction period interest. So the ESCO doesn't really receive any payments from the government until the equipment is constructed and accepted by the government.

Now, there are exceptions to that. There may be some construction period payments or implementation period payments, but those are generally small. So the ESCO, even though it's borrowed this money from a private financier, it's not getting any money from the government yet in order to pay that financier back interest, okay?

What the ESCO does is it over borrows by the amount of interest that it has to pay to the financier during the construction period.  So this is money that's borrowed on top of the prices of the construction project in order to be able to pay the interest to the financier.

A general rule of thumb, you can take the financed amount and multiply that by the interest rate and by the construction period length in years, and that should be roughly equal to your finance procurement price. 

Now, there are some other things in there. There may be performance bonds. Sometimes you see hedges to lock in rates, but those are very, very small in comparison with this capitalized construction period interest.

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So once again, just to summarize, competition is required. In a sense, the ESCO is picking the lowest finance rates for the project.  But you have the right to see that. You can ask the ESCO to see those bids and to see what they received and make sure you're getting the finance deal that's the best one.

Again, we think you should review the details of your financial schedules, especially TO3, to understand all the components of the offer; require justification for any differences between the financier's offer and the ESCO's offer to the government. You shouldn't see any difference between what's on that standard financing offer, the SFO, and what's on those TO3 schedules.

Also, FEMP will provide a backstop for you, so the Golden Field Office will review that financing. Generally the National Lab - somebody at the National Lab will as well - I'm kind of looked at as their financial specialist, so I'll take a look at that award as well.  And we'll also take a look at the financial schedules.

So that's about it and now I'm gonna turn it over to Wayne and Michella to talk about finalizing the deal.

Michella:
All right, thank you, John. Good afternoon, my name is Michella Hill. Kurmit mentioned previously I'm one of two contracting officers here in the Golden Office on the FEMP team working on the master contract. I'm also joined by Wayne Latham, IDIQ contracting officer, as well as the FEMP section.

[Next slide]
On the first slide, we're going to begin with negotiations and proposal review processes and best practices. In the proposal review stage prior to negotiations, it's important that the agency has assigned parts of the proposal to appropriate team members, just as you would any other acquisition.

For example, the program is going to review the technical portions; pricing would be another section, that type of thing. That the team has allocated appropriate resources and priorities to the different review task; ensure that the agency has utilized a project facilitator, as well as any of the other resources that we have provided, such as the FEMP websites. That's a pretty comprehensive resource - quite a few templates that you can use; and the contracting officers and program here in the Golden Office as well. We're always available for questions and answers and help along the way.

As well, the agency's COs will want to have what - thought ahead to their agency's specific approval processes. What I mean here is that by the HCA is the chain of command there, an appropriate management been notified on your milestone. Keep in mind how long each of these review periods are gonna take. I think that's probably been some of the issues that we've had along the way, and maybe just getting that streamlined.

Some other ideas and efforts can include reviewing reviews that coincide with project development. For an example, as the proposal's being reviewed, can any of these parts of the review be done along the way? So just be aware of what's being submitted and when, and what scenario is going to be different, which is something to think about.

Keep up on development as it proceeds, to avoid surprises during the review of the proposal and the lab's bullet that I was just talking about. Try to keep on top of them which I'm sure that all of you have heard before, but plan to go into negotiations with the intent to come.  It's so important, because what we're looking for here is a beneficial contract for both the government and the contractor. Obviously, as you've heard before, it's not an effort to get the contract into the [audio dropped].  We just want to make this mutual for everyone.

Kurmit Rockwell:
Michella, we're having a little trouble hearing you right now.

Michella Hill:
Is that better?

Kurmit Rockwell:
Yes. There's kind of you keep going in and out a little bit. 

Michella Hill:
Okay, all right. 

Kurmit Rockwell:
Thank you.

Michella Hill:
I turned it up a little bit.

Kurmit Rockwell:
Okay, great.

Michella Hill:
All right.

[Next slide]
The next slide [audio dropped] review of these documents [audio dropped] do it on any other acquisition if you have a complete and detailed review of things, such as the technical proposal, the IGA [audio dropped] requirements [audio dropped].

Ensure that you're putting out there what you want [audio dropped]. I think that's the golden rule - make sure that what's in there is what you want to receive when the work is done.

Kurmit Rockwell:
Michella, we're still hearing a background noise and so it's very hard to hear your voice over the - it sounds like movement in the background.

Michella Hill:
Really? I'm not sure what that is. It's pretty quiet in here, but we'll do what we can.  [Laughter]

Michella Hill:
Okay, thank you.

[Next slide]
Okay, so this next slide, I believe this was one that was also shown in one of yesterday's presentations that is definitely worth showing again. It's a good visual of the different parts that make up the end task order.

So you'll have things included in there, such as your master IDIQ requirements, the RFP, along with your agency site specific terms and clauses of different things that you put in there to tailor it to your agency needs and specific policies and procedures. Then of course the proposal, which includes the technical specs and financial schedule.

[Next slide]
All right, next slide. For the contracting office, negotiations for any ESPC task order same vein as any other contract negotiation. Like I said before, the same type of procedures you would use on any other projects that you're working on. So you're going to review the proposal and just sign on negotiation points; negotiate those points eventually. 

And when all is decided and agreed upon, you're gonna revise the TORFP and capture all those agreed-upon changes. So there's no difference for the COs at the agency on how you would normally keep that negotiation. 

And obviously, with any other proposal review, when preparing for negotiation, look for redundancies in cost, that type of thing - just exactly what you would look for otherwise.

And this is kind of a side note here, keep review timeframes in the back of your mind. Timing for your individual agency reviews sign-off and approval, your chain of command how they do the specific procedures there.

[Next slide]
And this slide is essentially a brief recap on negotiations, which are covered in part [audio dropped].  And what I wanted to say here is the big picture of negotiations is they're used to minimize the complexity and lead to eventually a proposal that's gonna provide the best value to the government and in turn as well help to get to a determination for a reasonable pricing.

Negotiations will serve to reflect a fair-market value, provide a realistic price for the contractor to accomplish the work, and provide an avenue for coming to a reasonable cost, and then that's defined in Far 31. A cost is reasonable if in nature in amount it does not exceed that which would be incurred by a prudent person in the conduct of competitive business.

And at this point I'm gonna hand the slides to our contracting officer, Mr. Wayne Latham.

Wayne Latham:
[Next slide]
And getting down the road in reference to the negotiation process, a couple of points that are brought up on this slide perhaps is to the contracting community just, as Michella mentioned earlier, just one of those things that we do during a course of negotiation. You will be obviously participating in this with your program folks, because they become reference to the contracting officer. They acknowledge base that they are working for on a technical component.

But as I mentioned to you, we're not necessarily chasing down the lowest price for the lowest price, say, but basically that is the best price for the government and the contractor. Best value is the key here, and as was mentioned earlier in reference to the Far reference, looking for a reasonable price on this.

Then the second bullet has to do with pricing and taking a look at those components of those proposals. It goes on to talk about if those components look a bit high, you have the right to sit there and question those prices and get further detail on the ECMs or the profit, or your indirect costs.

And the contracting officer may have some of this knowledge, but the program office will also have knowledge on this, and as John Shonder mentioned earlier, there's all sorts of resources within FEMP that can enrich the knowledge on those pricing issues. So keep in mind this is a team effort on this and take advantage of it, as they say, all of the FEMP tools and the benchmarking tools that are out there.

[Next slide]
The next slide basically has to do with it, and we see this a lot.  Obviously these proposals come our way, but the queries have to do with what we are reviewing in this office, and all of these components are part of the proposal, the IGA that come in, and we take specific care to look at the M&V and the options associated there, the A, B, C, and D, to get a feel as to where this project's going and this review in this office is not only on a contractual basis, but our program partners will be taking a look at these and providing some feedback if it is deemed necessary.

The subcontracting plan, which is required in the base contract and is required in a task order level, we will take a look at that and see what it has to say and see if it meets the requirements. 

Investor deal summary and the financing rate, this somewhat is another sanity check that comes down the pike for you folks to say, "Are we heading in the right direction? Are our risk responsibility in the performance matrix?" We look at all of those particulars on that as it is spelled out by the ESCO and their proposal. 

And then the final thing we take a look at in great detail is the task order schedules, looking at those numbers to see if those numbers jive so that when we give feedback on this, we're taking a look at this big picture, not saying whether you are right or wrong, or whatever, but we will come back to the agencies and makes recommendations, suggestions as to what we see there.

It's up to you as to how you manage to move forward with those particular changes that may come from that. So the follow-up bullet has to do with revisions that come necessary before the award. 

So I mentioned earlier, we may address some of those values we signed in the task order schedules, or we may query something having to do with the small business subcontracting plan. We'll let you know those things, and at that point I may be going back to your contractor and saying, "We need to take a look at these. We need particularly more information."

[Next slide]
Next slide doesn't say a whole lot. It's basically saying where we're going with the ordering the task order at this point in time, so we'll just move on to the next slide.

[Next slide]
This now becomes - wow, you've got to a point where you're actually gonna award this, and so you want to take a look at do you have all this pre-award requirements met? All of these things that you have asked the ESCO provide. Communication is the key here between yourself, the contracting office, the program office, and the ESCO. All of these components are gonna be part of this thing to understand what you have and what you need to get before you can actually make the award.

As Michella mentioned earlier, the review process that you go through internal to the agency, we here at DOE have business clearance in some cases that may apply to these contracts. HCAs, Small Business Administration, whatever your agency requires to say, "Yup, we're good with this. Go ahead and award the contract."

We will hear at the Golden Office upon taking a look at your proposals. We will provide you with an authorization on our end.  Sometimes we will note on these authorization letters, as I mentioned, discrepancies that we find and recommendations that you move forward with.

[Next slide]
On the next slide, this should be pretty straightforward, as far as like we're gonna sign this. The agency then is the owner of this.  You've been the owner, but right now you're signing the task order and things are gonna move forward. You're gonna be making sure that you incorporate what is in the base IDIQ contract. There are certain things there that need to be placed in this document that you move forward with.

Obviously in reference to your award document, you're gonna be using your agency's task order documents, the RFP, and the revised negotiations. So keep those particular things in mind.  What have you negotiated and where do you want this thing to be set in cement?

As far as the ESCO's proposal, which we talked about earlier, what we review, are those things, such as the M&V, the subcontracting plan, the investor deal summary, the risk and responsibility matrix, and the task order schedules. These are the core of what is gonna happen. 

I should also note at this point and time that as far as in contracting shop and the technical folks, that ability to establish a trusted local source for the support of that contact in the future, because these things are gonna go on for many years ahead. The ability to say, "Okay, we can implement this thing. We can build this thing out in 12 months, 18 months, 24 months, whatever it may take," but down the pike you may have a buy-back period of 5 years, 10 years, 20, 24 years. So establish those relationships on a local business so you can make this contract for you.

And with that, we're pretty much at the end of this discussion, and I didn't know if Kurmit wanted to take it from here.

Kurmit Rockwell:
[Next slide]
Oh, sure, thanks, Wayne. That concludes our presentation today. I just want to remind everyone before I open up for questions that we really appreciate feedback, and if you can, please send your evaluation forms for either today's session or any of the other days you have attended, and we will send out certificates for your participation for any of the three days that you have attended. 

[End of Audio]