Every Equipment Upgrade Proposal Should Include Financial Justification

Posted by Jim Crowder on Oct 3, 2018 1:08:51 PM

I heard those words come out of the mouth of one of my clients as he trained a team of Project Salespeople on our Project Financial Analysis software platform. While I appreciated his exuberance, I must admit I was taken aback by that statement. While I didn’t challenge him in front of the class (believe me I didn’t have to), I made a point of challenging him later that evening over dinner. His responses form the basis of this post.

Paul is a sharp guy. He started his own Mechanical Service company and successfully sold it recently. He was very actively involved in leading his project sales business, so he knows firsthand the challenges many of us face in the field. What follows is some of his rationale.

Our facilities customers face a lot of challenges getting the capital they need to keep things running. They compete internally for those capital dollars. Whether it’s a desktop modernization project, IT security, Life and Safety, or building envelope improvements, our mechanical equipment upgrade requests are up against some stiff, well organized competition. In Paul’s view, he needed to work closely with his clients to make their project requests more appealing than all the other requests making their way to the ultimate financial decision maker.

To that end, he pushed his team to build financial justification into his company’s DNA. It didn’t matter if it was as small as a rooftop unit replacement or a chiller upgrade, each proposal had to have a financial justification. Paul found that if you could get the team into the motion of doing this, it became a good habit. As a team you build best practices and learn together from success and failure.

So, what is a financial justification and how do you use it in a proposal? Simply, it should include the following:

  • Calculated sources of potential energy savings
  • Other sources of potential savings or cost avoidance
  • Financial analysis of impact of proposed upgrade(s) including cash flow analysis provisions for down payments, municipal and utility incentives, rebates, etc.
  • What is the cost of not acting?
  • A concise, graphic oriented proposal that clearly summarizes the financial impact of your proposed upgrade(s).

Savings: You’d be surprised at the number of potential sources of financial impact an upgrade can have. While energy savings is a big contributor, some additional savings sources include reduced maintenance costs, parts, 179e tax impact of accelerated capital write off, cost avoidance from emergency response (interim rental equipment), lost revenue, lost productivity, etc.

Financial Analysis: While the industry is stuck on Simple Pay Back (SPB), you could really improve your close rate using some alternative analysis. SPB ignores the benefit your proposal generates in the years beyond the payback period. Alternatively, using Discounted Cash Flow (DCF), Net Present Value (NPV), or even Internal Rate of Return not only presents longer term benefits but speaks to the real financial decision makers. Remember you’re helping your client compete internally for scarce capital.

The Cost of Doing Nothing: Your analysis should graphically explain how much money they will waste if they don’t act now. This should drive some sense of urgency. Tick, tick, tick….

Cost of Delay

Presentation: Finally, condense this analysis down to 1 page back and front. A concise, accurate document that speaks to the financial decision maker without you being in the room should be your objective. Work with your client to ensure they understand all aspect of your proposal and its financial benefits.

So, my last post discussed the use of an “EASY BUTTON” Benchmarking tool to start discussing the impact your service program can have on your customers’ cost of operations. It is effectively an on ramp for your sales team. My objective in this post is to establish a rationale for incorporating financial analysis into your equipment upgrade proposals. You may not go as far as Paul and require it in all your proposals, but if you’re a leader, you should think about beginning to introduce it in select opportunities and begin building your team’s financial presentation skills.

You can either continue down the path of “3 quotes” or lead your team down an alternative, far more lucrative path…..

Topics: operating costs, energy efficiency, Project Sales, HVAC, Equipment Upgrades, capital planning, Mechanical Equipment Upgrades, Energy Savings

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