Varsity Plumbing and Heating found enough believers to book a not-too-shabby $10 million worth of performance contract work in the first 10 months since launching this exciting new marketing effort last August.

Building Owner, have I got a deal for you!

“I will totally revamp your plumbing systems with modern fixtures, fittings, piping and whatever else it takes to dramatically reduce your water consumption. And it will cost you nothing. Zero!

“Your water bills will be reduced by hundreds of thousands of dollars — even millions for larger projects. These savings are guaranteed. Guaranteed! This is how you will finance the project.

“In fact, there may be enough money left over to pay for non-plumbing capital improvements, which we will be happy to arrange. Again, this will cost you nothing! Wait, it gets even better.

“Best of all, a few years down the road, all the money you save on water bills will be yours to keep. Think of all those extra dollars in your pocket! Remember, it’s GUARANTEED!”

Sound too good to be true? To many it does, and that’s about the only thing holding back Varsity Plumbing & Heating’s incredible water performance contracting program. “People are very skeptical at first because they’ve never heard of this before and it’s hard to believe,” said Robert “Bob” Bellini Jr., Varsity’s vice president and performance contracting leader.

Nonetheless, he’s found enough believers to book a not-too-shabby $10 million worth of performance contract work in the first 10 months since launching this exciting new marketing effort last August. Bellini predicts another $4-5 million in bookings before the year is out for Varsity’s performance contracting subsidiary, Conservation Contracting Group, Inc. (CCG). With four full-time salesmen working from a detailed procedures manual put together by Bellini, he expects CCG to grow to $25–$30 million in revenues in 1998. “We’ve got hundreds of potential customers among our current accounts, and we’ve only introduced the program to about 60 so far,” he explained.

Based in Flushing, NY, Varsity was established in 1962 as a home repair plumbing firm by the still very active president Robert Bellini Sr. By the mid–1970s the company started to evolve into a multi–family building specialist and has since grown into one of New York City’s largest plumbing companies.

“We’re still serving some of our original clients,” said the proud family patriarch. Despite its size and sophistication, Varsity remains very much a family business in character. In addition to Robert Jr., brothers Rick Bellini and Tom Bellini take an active role in company management.

Even before they got into performance contracting, Varsity built a reputation as conservation specialists. They were major participants in NYC’s recently concluded $300 million toilet rebate program, in which the city’s Water Department granted subsidies to owners to retrofit homes, apartments and commercial buildings with ultra-low-flush toilets. Bellini Jr. calculates that Varsity captured about $10 million worth of those installations over the program’s three–year period.

Furthermore, in January, Varsity launched a leak protection warranty program for residential buildings in the five boroughs. Conservation marketing finds fertile ground among NYC’s building owners and property management firms, whose costs go up faster than the Empire State Building’s elevators.

Varsity was introduced to water performance contracting last year by performance contracting specialists Water Management Services, Inc. (WMS). (See sidebar, page 63.) Varsity still works in partnership with WMS, which provides third-party financing and engineering assistance. However, Varsity/CCG has jumped into the sales side of the business and run a long way with it. A big edge for Varsity, said Bellini Jr., “is a family and team of licensed plumbers actually doing the work they sell.”

Water Performance Contracting: Performance contracting is a familiar concept on the HVAC side of the industry. In a nutshell, it allows building owners to pay for the retrofit of energy-efficient equipment through savings in fuel bills during the term of the contract. Detailed energy usage audits and engineering data are the keys to making it work.

Performance contracting was slower to take hold in the plumbing arena mainly because water rates around the country have been too low for savings to cover the expense of retrofitting. Not any more. According to Bob Bellini Jr., water rates are going up at three times the rate of inflation due to tough environmental regulations, crumbling infrastructure and population growth creating greater demand for water and sewer projects. The national average water rate now stands at about $4.60 per 1,000 gallons. Bellini cites a rule of thumb of about $4/1,000 gallons to make performance contracting viable. Generally, paybacks must fit into a three–to seven–year time frame.

Ironically, New York City has among the lowest metropolitan water rates in the country. It averages out to about $3.92/1,000 gallons, right at the cusp of economic viability, although CCG does benefit from a local tax abatement law encouraging building improvements. The company also must contend with NYC’s numerous unmetered buildings and estimated water bills that have to be reconciled as part of the auditing process. Bellini Jr. said that with about half of CCG’s performance contracting prospects, “we really don’t know where our starting point is.”

If I can make it there, I can make it anywhere! Sinatra referred to fame and fortune, but the famous song applies equally well to the water performance contracting business. If Varsity can pull it off with all the hoops it has to jump through in the Big Apple, performance contracting ought to work even better in other parts of the country where water rates are higher and utility bills less mysterious.

Sophisticated Business: Let’s not oversimplify. Whereas market conditions may be more favorable in other parts of the country, success in water performance contracting requires rarefied business sophistication that few plumbing companies can muster.

CCG plays in a league where projects bill out at six– and seven–figures. Selling a performance contract is typically a three– to four–month process. It begins with a preliminary audit simply to identify likely prospects based on how much they pay in water and fuel bills. (Energy savings come into play based on hot water usage.) This screening audit alone can take up to a week if it involves chasing water department records to verify usage data.

The preliminary audit may not show enough savings to justify further numbers crunching. Since the deal requires a guarantee of significant savings to the customer, CCG has no incentive to fudge the numbers just to land the work. Instead, they’ll just file the data for another call a few years hence when water rates go up even higher. “The last thing I want to do is sit across the table from one of Varsity’s long-established customers and try to explain why the savings aren’t there,” said Bellini.

If the rough numbers do crunch the right way, then CCG launches a full-scale engineering audit developed by WMS, which evaluates some 35 different savings strategies and their payback. This can take as long as three weeks, depending on the size and complexity of the project.

CCG guarantees 80 percent of the calculated savings, which Bellini says is conservative. On many of their performance contracts, Bellini believes the customer can achieve as much as 120 percent of calculated savings if all goes well.

No matter how tight the engineering data, exact savings depend on many unknowns over which CCG has no control. Occupancy rates, for instance, will impact apartment building water usage in a big way. So will lifestyle changes. A family of two vacates an apartment and a family of six moves in. Young children who used to bathe together get a little older and start taking separate baths. Guaranteeing 80 percent leaves CCG plenty of room to accommodate worst case scenarios. According to Bellini, they’ve never come close to guessing wrong yet. On the other hand, some performance contracting customers are thrilled to see substantially higher utility savings than they had bargained for.

This has enabled the company to take the program beyond plumbing work. Often the savings generated through their performance contracts are great enough to finance other capital improvement projects that building owners never have enough money for, such as roofing or windows. When extra savings materialize, Bellini will try to convince building owners to use them for these additional capital improvements. Varsity/CCG will act as the general contractor on these projects, subbing out the work and charging a project management fee.

CCG receives its payments on normal project completion level terms. The building owner may tap his capital reserves or else finance the project through loans hinged to the projected savings on utility bills. Building owners are free to use their own lenders, though experience has shown that most bankers are unfamiliar with performance contracting and hesitant to trust the payback figures.

Here’s where the WMS connection comes in handy. WMS is in touch with lenders who know performance contacting. The way the deals are written, it is actually WMS that guarantees the savings to the owner, leaving the projects essentially risk-free to CCG. A New Approach: Bellini got shopped around on a few early audits. This led him to develop a bold new approach for selling a job. If a preliminary audit shows potential, before proceeding further he asks the prospective customer to sign a contract guaranteeing payment of $10,000–15,000 to cover the cost of the more detailed engineering audit. Conceptually, this is no different than the $200–300 design fee typically charged by a kitchen-bath remodeler or interior designer. It acknowledges the vast amount of work that goes into the audit, and separates the serious prospects from the tire kickers.

Seeing is not always believing, however. No matter how much light they cast on the numbers, some buildings owners and managers still perceive them as murky.

“The biggest objection we hear is: ‘What’s the catch?,’” said Bellini. “In most sales situations you have to convince the customer to jump in your car to go down some road. With performance contracting, we’re just building that road. It’s getting a little easier now that we’ve gotten some projects under our belt and references to offer.”

One of the reasons it takes so long is because the CCG representative usually has to convince multiple parties of the project’s worth, from owners to maintenance people to bankers. With co-op buildings, they may be faced with the task of persuading an entire co-op board to go along with the program.

Zealotry: Since starting CCG as a separate company, Bellini has closed all of the jobs he personally pursued, including one at a major hotel and casino.

It’s been said that the first prerequisite of a successful salesman is unwavering belief in the product. In this vein it was interesting to watch the transformation that came over Bob Bellini when our conversation turned from the nuts and bolts of performance contracting to a bigger philosophical picture. That’s when this supremely rational businessman suddenly turned animated with passion.

“I love working in a business where everybody wins, and that’s what performance contracting is all about,” he crowed, unconsciously pounding his fist on his desk. “The building owner wins, we win and WMS wins. Even the Water Department wins, because while they may lose some money up front in reduced water bills, they save in the long run by not having to spend enormous amounts for capital improvements in water plants, sewers and reservoirs.

“A tremendous opportunity will be lost if people in our industry don’t get involved,” he added. “Not everyone can handle the size of projects that we do, but there are levels of participation all the way down to the single-family home. If plumbing contractors get into this in a progressive way now, they will secure a niche for themselves in a great new market.”

To illustrate, Bellini talked about Executive Order #12902. Issued in 1994, President Clinton mandated every federally owned building to prove at least a 30 percent reduction in water usage by the year 2004. What’s more, the only approved method of achieving that goal is through performance contracting.

“Think of it — the federal government mandates the use of water performance contracting. It’s only a matter of time before the private sector picks up on this concept in a big way.

“If our industry doesn’t start pursuing this business from the ground floor, they’ll end up just doing the dirty work of changing out toilets. Then they’ll start bidding down the work against one another and get shopped around.

“I also believe the utilities are putting together the pieces to get into performance contracting right now. Everybody in the industry better look around or they will end up working for the utilities, Sears and Home Depot.

“Not me,” said Bellini, his voice rising in indignation. “I want the utilities to be working for me.”

Varsity Plumbing & Heating can be reached at (718) 358-5400.