Winning high-first-cost projects
Enhance your engineering with economic acumen and sales techniques to overcome first-cost and payback-period barriers.
If I could do one thing over from my college years, I would take a few economics courses. I neglected to realize that economics and environmentalism would be powerful companions by reframing higher first costs and longer paybacks as investments yielding higher returns than other investments. And, investments in green or clean technologies and energy efficiency would have ancillary benefits as well, such as community and investor relations, positive press coverage, and improved worker and tenant comfort, satisfaction, productivity, and retention.
In two ways, consulting engineers face similar issues today. First, gaining higher fees for the extra time, talent, and resources it takes to design better systems is a tough sell. Second, high-performance systems tend to command higher first costs for new construction and for retrofits and capital improvements following retrocommissioning services or energy audits. How can engineering firms level the playing field when other firms are comfortable selling options that have lower upfront costs but higher operating costs, shorter equipment lifetimes, and undesirable environmental impacts?
Answer: Better economic analyses, and better sales skills.
Even though many engineers may have taken engineering economics as an undergraduate course, the level of sophistication with which engineers generally communicate financial costs and benefits for energy-efficiency investments, retrocommissioning services, and high-performance buildings rarely extend beyond simple payback and return on investment (ROI). These parameters are mismatches for expressing the positive energy, economic, environmental, and human factors benefits, and they play to the strengths of poorer-quality systems.
No wonder so many engineers ask why their higher first-cost projects and equipment selections do not get funded.
In April, I had the privilege of attending a one-day seminar on the economics of energy efficiency instructed by Mark Jewell, president, EEFG. The training session was hosted by ComEd and facilitated by the Energy Center of Wisconsin. According to Sharon Madigan, senior program manager, ComEd, they wanted to offer sales training for their trade allies supporting rebate programs who are in the field selling energy-efficient products and services.
The first half of Jewell’s class was an economic primer that exposed the weaknesses and inaccuracies of simple payback and ROI for complex, long-term decisions, such as those involving single-equipment decisions. He then described how to use modified internal rate of return, net present value, and lifecycle cost analyses to provide the information building owners could consider.
Jewell also covered how to be a better sales professional, offering tips on language (when asked for the simple payback period, say “The payback is ‘X’ years, and what you’ll find more interesting is that over the next ‘Y’ years, this project returns ‘Z’ times what you’re investing in today’s dollars.”), resources for self-directed learning on sales techniques, and how to train your brain for success.
Another attendee, Kate Mullaney, CPSM, associate vice president, director of business development, Primera Engineers Ltd., Chicago, shared what she got out of the daylong session. “Mark's session really drove home the idea that engineering firms, more than ever before, need to understand the business of our clients' business. Engineering firms’ sales success will depend on an ability to see the big picture and communicate to decision makers, in their language, how we help them further the mission of their organization,” said Mullaney.
To sum up, if you have the opportunity to attend a session on economics, rebates, or other topics taught by Jewell, I highly recommend you do so.
Ivanovich is the president of The Ivanovich Group LLC, which provides research, analysis, and consulting services to the buildings industry. Read his blog at theivanovichreport.wordpress.com
Why payback periods are poor decision-making criteria
- Simple Payback Period does not consider economic benefits past the payback period, which is when reliability (mean time between failure) and service life (mean time to replace) benefits come into play.
- Simple Payback Period focuses on the relationship between first cost and first-year return. It also ignores the time-value of money.
- The prime rate was 18.75% in 1980 and 3.25% in 2010. Does it make sense to insist on a two-year maximum simple payback period (which implies a minimum 50% annual return on investment) in both eras?
Short-and-sweet books on sales skills
- Escaping the Price-Driven Sale by Tom Snyder and Kevin Kearns
- The Little Red Book of Selling by Jeffrey Gitomer
- The One-Page Proposal by Patrick G. Riley
Train your brain to win
- At the end each day, write down the seven most impactful tasks you should accomplish the next day. The next day, pursue them in that order.
- On your way to meeting with a new prospect, imagine that the person is already a long-standing client and that the purpose of this visit is to do more business. You will be amazed at how that influences the outcome of the first meeting.
- Write down very specific sales goals for the day, week, month, quarter, year, five years, and 10 years. Let them be the first thing you read in the morning and the last thing you read at night.
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2012 Salary Survey
In a year when manufacturing continued to lead the economic rebound, it makes sense that plant manager bonuses rebounded. Plant Engineering’s annual Salary Survey shows both wages and bonuses rose in 2012 after a retreat the year before.
Average salary across all job titles for plant floor management rose 3.5% to $95,446, and bonus compensation jumped to $15,162, a 4.2% increase from the 2010 level and double the 2011 total, which showed a sharp drop in bonus.