Understanding the Realities of Missouri Performance Contracting

The Missouri State Legislature enacted enabling legislation in August of 2002 to define what, how, and with whom a Missouri governmental unit could engage in a contract for guaranteed energy cost saving projects for their facilities.  The specific statute can be found on Mo.Gov under Missouri Revised Statute 8.231.

Unfortunately, over the last 18 years more than a few Missouri public school districts have executed contracts for guaranteed energy cost savings that are inconsistent with language and definitions contained within the statute.

The contract terminology that has created the most confusion and potentially negative financial consequences on a district’s finances following implementation of a performance contract are:

  • Stipulated Savings
  • Capital Cost Avoidance

Paragraph 4 of statute 8.231 specifies that the contract shall include a written guarantee of the specified annual savings and that the provider shall reimburse the district for any savings shortfall on an annual basis.  The terms of current performance contracts however replace this terminology with language that states that the district has “stipulated to the savings projections included in the contract and no further guarantee or reimbursement is required”.  This effectively holds the contractor harmless for any savings shortfall. However, the district is still obligated to pay the full value of the contract but may not have the savings to offset the required financial outlay.

Paragraph 1.4 of the statute contains a definition for “Operational Savings” that defines it as the elimination of future expenditures avoided as a result of new equipment installed or services performed.  This essentially means that for example, if a specific performance contract includes a cost of $250,000 for new HVAC equipment, then by definition the contractor can include that value as a savings component in the contract. The typical contract language used is capital cost avoidance.  The rational is that by spending funds on facilities this year the district has saved this expense in the future.  Unfortunately, this has absolutely no impact on reducing the district’s actual annual operating costs which is the primary benefit of a performance contract.  Capital cost avoidance is typically the largest dollar component of the savings projections included in current performance contracts but unfortunately represents no actual savings.

Because performance contracts are lengthy complex legal instruments that obligate district’s to large financial outlays for periods up to 15 years in length it is incumbent on administrators and their legal counsel to understand the commitment they are making.  There are numerous additional potential area of misunderstanding in current performance contract language and FSG is glad to help clarify any of those so that district administrations can be confident that they are making an informed decision as to whether performance contracting is the right project delivery system for them.