The truth about risk vs. value of contracting with separate firms versus a full-service firm?

Full Sevice Retrofit Lighting

Lighting has changed dramatically over the past decade, but the lighting industry and the implementation of lighting retrofit projects have not. A full-service firm aligns the owner and the contractor incentives and provides a best value contracting solution.

Traditionally, whether during the incandescent era or the fluorescent era, lighting manufacturers sold products with planned obsolescence—lights simply burned out every year and thus required replacement. The advent of the LED product lines changed that dynamic. As a result, Lighting Manufacturers need to change the approach to the market. Selling a product that lasts three, five or even ten years requires a different mindset than selling a product that will require replacement every year.

Incandescent vs Fluorescent vs LED

The traditional lighting industry structure involved a manufacturer relying upon a series of geographically distributed Representatives who carried the manufacturer’s lighting products on the Representative’s Line Card along with other manufacturer’s associated products. That Representative sold the manufacturer’s products in exchange for varying forms of commission. The data sheets associated with the products and the pricing were opaque to the consumer absent working through a Representative. That sale was then processed by a Distributor who stocked or otherwise arranged for a drop shipment of the manufacturer’s product. Not surprisingly, the Distributor was also paid for its involvement in the supply chain.

Value chain 1

An industry that had seen little change since Edison’s first filament was content with this cost-laden structure. In order to address the annual demand for new bulbs or tubes, the industry needed these distributed players. LED changed all that, but the industry has been slow to respond.

More considerations than with previous technology

LED has more considerations

LED also brought a series of technical choices to an industry that was once content with simply dealing with bulb shape or length and wattage. Now, color temperatures, lumen outputs, warranties, and the ongoing dynamic change in the lighting industry products require specialized knowledge.

All agents are looking for compensation through to implementation

As a result, the implementation of a project has changed. Instead of looking to a single architect or engineer who can provide the necessary design insights, the selection process for lighting has grown specialized. Architects/Engineers thus find themselves now reaching out to lighting specialists—typically lighting focused engineering firms that will provide guidance on the lighting as a part of a larger project. These lighting focused engineering firms continue to rely upon the lighting manufacturer Representatives for insights into the lighting products being developed or released to the market by the lighting manufacturers. Not surprisingly, these consultants, sub-consultants, representatives, distributors and any other steps along the chain all expect to be compensated for their engagement. All these agents are involved in the selection of the lighting systems to be implemented.

Value Chain 2

The implementation itself is potentially just as layered—with a general contractor, a specialty (electrical) contractor and, potentially a low-voltage electrical specialist and a commissioning agent to tie the system together. Each of these steps also requires some compensation and, at least generally, a fee on top of the inherent labor and material costs for the management of those whose risks of performance are being wrapped by the next level contractor.

Value chain 3

The Full Value Chain

Full Value Chain

Management & Maintenance Responsibilities

Once installed and operational, the lighting system is then available for the internal resources to manage and maintain. Appropriate maintenance is required in order to avoid any impact on manufacturers’ warranties. Records must also be maintained in order to track just who owes what obligation with respect to what fixtures. If there is a later problem, then slips in this part of the effort can prove fatal to the recovery of what the Owner originally believed that it had paid to receive.

Incentives along the chain

Ultimately, the consumer must consider not just these added costs as an element of the risk, but also the incentives of each of these steps along the chain. The designer is not incentivized to consider the plight of the installer(s) and certainly is not incentivized to consider whether a less expensive alternative is available if that alternative carries any element of performance risk. Instead, a designer, whether at a first tier (A/E firm) or at a sub-consultant level is incentivized to minimize any risk of failure, which may mean a lighting selection that is more expensive as a first dollar cost of purchase or forces more labor costs because of installation difficulties.

Motivations and Risks

Similarly, the Representative and Distribution resources are incentivized to move the product lines that pay their salaries. As a result, what is on the particular representative’s line card is the ultimate determinant of what product a Representative is likely to recommend.

Once a project reaches the installation stage, the bidding contractors are simply bidding what is presented. An incomplete package or a selection of lighting products that are more expensive to install is not something that the installation team (General Contractor, Electrical Contractor, Low-Voltage Contractor, Commissioning Agent) is likely to change as each is aware that all competitors are looking at the same installation challenges and thus likely to present consistent pricing for that task. Similarly, omissions or a lack of clarity in the package might seem like opportunities for later pricing adjustments that are typically less subject to competitive pressures. Finally, the installer forced to compete against others for the work is incentivized to consider only the day zero costs and not look toward the longer lifecycle view that may be more important to your business.

Transparent design-build approach aligns incentives

By contrast to a design-bid-build mentality, working with a trusted partner in a transparent design-build approach eliminates the pricing layers and the inconsistent incentives inherent in the alternative approach. Confident that there is a single “throat to choke” the owner avoids all the risks attendant to sorting out whether a problem resulted from design (at what level), construction (at what level), or manufacture (at what level). Instead, the owner simply contacts their Full-service provider and all the problem is resolved by that full-service provider. The Full-service provider may spend effort addressing the source of the problem, that all happens in the background and is not the obligation of the Owner. From the very outset, the Full-service provider and the Owner have consistent incentives to put in place a satisfactory system that balances the day zero costs with those lifecycle costs.

Multiple Firms Problem

The risk that the Owner might make poor choices, influenced by minimal information that is supplied by others who have sometimes conflicting incentives is eliminated in favor of working in partnership with a trusted expert who handles all the details of selection, installation, commissioning, and warranty.

Multiple sites problem solving

This risk shifting is particularly helpful in a setting where an owner has multiple properties across multiple territories and thus avoids the inconsistencies inherent in hiring multiple different experts with different geographic expertise and thus a risk of different approaches because of inconsistencies in background and experience or, worse still, differences in the line card of manufacturers who are represented.

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