Three Must Have Financial Components for All HVAC Project Proposals

Think Like Your Customer

When pitching energy efficiency projects, providing an economic analysis of project benefits is an essential sales technique. However, the traditional approach of estimating energy and maintenance savings is not enough – it shows your customer only part of the picture.

This article provides examples showing the importance of each of these three financial components. By including these in ALL proposals, customers will see the entire picture when reviewing your project’s economics. As you know, an informed customer is much more likely to say YES!

Your company might already provide you the tools to offer these financial components. If not, see the EnFlux Project Savings Analysis described at the end of this article. It takes less than 5 minutes to complete and shows project economics on one page in an easy-to-read format. A picture is worth a thousand words.

Missing Component #1: Special 2019 Tax Benefits

In 2019, HVAC retrofits can be written off for 100% of the installation cost in the first year based on a recent update to Section 179 of the tax code. Most of your customers will not know about this benefit and it has a huge impact on project economics.  The same special 2019 Tax Benefits also applies to replacements of roofs and systems installed to provide fire protection, alarms and security. A technique to include special 2019 Tax Benefits is shown further below.

Missing Component #2: Offer Financing and Show Annual Debt Payments

As you know, your customer’s assessment of the benefits of deploying capital for a project (especially if unplanned) is critical in their decision making. The CFO must consider whether additional funding capacity is available given the investments already approved in the budget. So, even if they like your project, if liquidity is tight, they will have a bias towards a repair without you even knowing.

Therefore, you should offer financing in all your proposals. Otherwise, the CFO will not know it’s available. Don’t wait for them to ask because CFO’s do not like to ask vendors for financing. I would have shuddered at the thought of doing so when I was a CFO.

So, let’s assume your customer uses their own capital to fund the project. You still benefit if your financing proposal shows how annual debt payments are offset by project savings and Special Tax Benefits for 2019. Though actual debt payments will differ slightly, your customer will see a snapshot of how project savings plus tax benefits offset debt payments.

By including these first two financial components, you’ve given your customer a much clearer picture – but there’s one more piece that’s missing.

Missing Component #3: Cumulative Net Savings

Cumulative Net Savings captures the long-term benefits of your project much more accurately than traditional payback methods.

For example, assume Project A and Project B have identical costs and payback periods. The equipment in Project A has a relatively short economic life while Project B has a life of 25 years. The long-term project economics for Project B are clearly superior and are captured when viewing Cumulative Net Savings (see below).

Let’s Put It All Together

We are going to create a set of project assumptions and show you a comparison of what your customer sees under four very simple scenarios:

  • Scenario 1: Energy and maintenance savings only – the traditional approach
  • Scenario 2: The above plus special 2019 Tax Benefits, and
  • Scenario 3: Both the above plus financing including annual debt payments.
  • Scenario 4: All the above plus Cumulative Net Savings

Scenario 1: The Traditional Approach – Project Savings Only 

To show estimated Project Savings (see Total Annual Savings below) over the next ten years, your presentation might look something like below. For simplicity, the examples below do not assume a degradation in Total Annual Savings.

Your customer can easily see their annual savings of $100,000 for $500,000 project – simple payback of 5 years.

Scenario 2: Add Special 2019 Tax Benefits

Now, let’s layer in the Tax Benefits in addition to the traditional Total Savings analysis above using the same Assumptions.

Tax Benefits increase the project’s Year 1 true Total Savings from $105,000 to $205,000. The tax benefits of $105,000 are 21% of the Total Project Cost. By including the Year 1 Tax Benefits, your project pay back is 4 years instead of 5. 

  • Year 1 Savings:        $205,000   (from the box above)
  • Year 2 – 4 Savings:    300,000   ($100,000 for 3 years)
  • Total Savings            $505,000

Special 2019 Tax Benefits are a game-changer in evaluating project economics. 

Scenario 3: Add Financing & Annual Debt Payments

Now, let’s look adding a Financing proposal showing annual debt payments over a 5-year period. At first glance, your project has recurring negative net cash flow in Years 2 – 5.

Scenario 4: Add Cumulative Net Savings

The observation in Scenario 3 is quite misleading. It ignores the Year 1 Tax Benefits highlighted in yellow below AND Cumulative Net Savings in purple. The project has positive Cumulative Net Savings for Years 1 through 4 and is ~ break-even in Year 5. After the debt is paid off in Year 5, Cumulative Net Savings goes through the roof!

“In order to truly assess a project’s economics, you must show your customer Cumulative Net Savings which includes project savings, Special 2019 Tax Benefits, and annual debt payments over a long period of time.”

Conclusion

So, to conclude, don’t forget to include these three financial components when submitting project proposals.

  1. Show Special 2019 Tax Benefits, which are very substantial and lower your project’s true Year 1 cost by 21%.
  2. Offer a Financing proposal – CFO’s do not like to ask vendors for financing. The financing proposal must include annual debt payments showing how they are offset by project savings plus Special 2019 Tax Benefits.
  3. Show Cumulative Net Savings, which pulls everything together reflecting the real benefits of replacing long life HVAC equipment.

By combining all three of these financial components, your customer will see a complete picture of your project’s economics.  An informed customer is always more likely to say YES to projects with strong economics.

I appreciate any comments on this article.  Please do not hesitate to contact me with any thoughts or questions at lderrett@enfluxbuildingsolutions.com, or, 713.714.0575.

Larry Derrett – Founder and CEO, EnFlux Building Solutions

 

Postscript: EnFlux Project Savings Analysis (PSA)

In just 5 minutes, you can enter a few inputs into the PSA and create a one-page proposal showing project savings, Special 2019 Tax Benefits, annual debt payments and Cumulative Net Savings for 10 years. A screenshot of our PSA with the 5-year traditional debt financing example assumed in this article is provided below. The inputs are in the boxes in the top half and the lower portion shows the results. Note that when you register on our site, your company’s logo can be automatically inserted instead of the one for EnFlux.

Learn more about the EnFlux Project Savings Analysis in this two-minute video:

Once you complete a short registration, you can use the Project Savings Analysis along with all our other Products.

About the author: Larry Derrett is the founder and CEO of EnFlux Building Solutions, which provides financing and energy solutions to building owners either directly or through contractors who provide them services. For contractors, EnFlux provides access to financing, energy solutions, and online sales tools that are customized to help them win more business. Larry brings a unique perspective to financial selling having sat on both sides of the desk as a banker and a CFO. In addition, he has a very strong background in developing financial selling techniques for clean energy projects ranging from a simple $20,000 change out to projects for hundreds of millions of dollars for Fortune 500 companies. For three years, he led the financial structuring group at Enron Energy Services working solely on the origination side of the business helping clients understand the importance of allocating capital to energy efficiency projects. Upon the demise of Enron, he formed HVAC Capital Corp whose clients included large mechanical contractors with a national footprint. HVAC Capital provided a finance program that contractors could access to offer financing to their customers for replacement projects. During this time, Mr. Derrett trained hundreds of sales reps at mechanical contractors on the finer points of incorporating financial selling into their sales process.