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World Energy Use to Increase 53 Percent by 2035; China and India Account for Half the Total Growth

International Energy Outlook 2011 (IEO2011) released by the U.S. Energy Information Administration (EIA) presents updated projections for world energy markets through 2035. The IEO2011 Reference case projection does not incorporate prospective legislation or policies that might affect energy markets.

Worldwide energy consumption grows by 53 percent between 2008 and 2035 in the Reference case, with much of the increase driven by strong economic growth in the developing nations, especially China and India. “China and India account for half of the projected increase in world energy use over the next 25 years. China alone, which only recently became the world’s top energy consumer, is projected to use 68 percent more energy than the United States by 2035,” said Acting EIA Administrator Howard Gruenspecht.

Some key findings:

China and India lead the growth in world demand for energy in the future. The economies of China and India were among those least affected by the worldwide recession. They continue to lead world economic growth and energy demand growth in the Reference case. In 2008, China and India combined accounted for 21 percent of total world energy consumption. With strong economic growth in both countries over the projection period, their combined energy use more than doubles by 2035, when they account for 31 percent of world energy use in the IEO2011 Reference case (Figure 1). In 2035, China’s energy demand is 68 percent higher than U.S. energy demand.

Renewable energy is projected to be the fastest growing source of primary energy over the next 25 years, but fossil fuels remain the dominant source of energy. Renewable energy consumption increases by 2.8 percent per year, and the renewable share of total energy use increases from 10 percent in 2008 to 15 percent in 2035 in the Reference case. Fossil fuels, however, continue to supply much of the energy used worldwide throughout the projection, and they still account for 78 percent of world energy use in 2035. While the Reference case projections reflect current laws and policies as of the start of 2011, past experience suggests that renewable energy deployment is often significantly affected by policy changes.

Natural gas has the fastest growth rate among the fossil fuels over the 2008 to 2035 projection period. World natural gas consumption increases 1.6 percent per year, from 111 trillion cubic feet in 2008 to 169 trillion cubic feet in 2035. Unconventional natural gas (tight gas, shale gas, and coalbed methane) supplies increase substantially in the IEO2011 Reference case—especially from the United States, but also from Canada and China.

World oil prices remain high in the IEO2011 Reference case, but oil consumption continues to grow; both conventional and unconventional liquid supplies are used to meet rising demand. In the IEO2011 Reference case, the price of light sweet crude oil (in real 2009 dollars) remains high, reaching $125 per barrel in 2035. Total world petroleum and other liquids fuel use increases by 26.9 million barrels per day between 2008 and 2035, but the growth in conventional crude oil production is less than half this amount at 11.5 million barrels per day, while production of natural gas plant liquids increases by 5.1 million barrels per day. World production of unconventional resources (including biofuels, oil sands, extra-heavy oil, coal-to-liquids, and gas-to-liquids), which totaled 3.9 million barrels per day in 2008, increases to 13.1 million barrels per day in 2035 (Figure 2).

Other report highlights include:

  • From 2008 to 2035, total world energy consumption rises by an average annual 1.6 percent in the IEO2011 Reference case. Strong economic growth among the non-OECD (Organization for Economic Cooperation and Development) nations drives the increase. Non-OECD energy use increases by 2.3 percent per year; in the OECD countries energy use grows by only 0.6 percent per year.
  • Petroleum and other liquid fuels remain the largest energy source worldwide through 2035, though projected higher oil prices erode their share of total energy use from 34 percent in 2008 to 29 percent in 2035.
  • Projected petroleum consumption and prices are very sensitive to both supply and demand conditions. Higher economic growth in developing countries coupled with reduced supply from key exporting countries result in a High Oil Price case in which real oil prices exceed $169 per barrel by 2020 and approach $200 per barrel by 2035. Conversely, lower economic growth in developing countries coupled with increased supplies from key exporting countries result in a Low Oil Price case in which real oil prices fall to about $55 per barrel in 2015 and then gradually decline to $50 per barrel after 2030, where they remain through 2035.
  • World coal consumption increases from 139 quadrillion Btu in 2008 to 209 quadrillion Btu in 2035, at an average annual rate of 1.5 percent in the IEO2011 Reference case. In the absence of policies or legislation that would limit the growth of coal use, China and, to a lesser extent, India and the other nations of non-OECD Asia consume coal in place of more expensive fuels. China alone accounts for 76 percent of the projected net increase in world coal use, and India and the rest of non-OECD Asia account for another 19 percent of the increase.
  • Electricity is the world’s fastest-growing form of end-use energy consumption in the Reference case, as it has been for the past several decades. Net electricity generation worldwide rises by 2.3 percent per year on average from 2008 to 2035. Renewables are the fastest growing source of new electricity generation, increasing by 3.0 percent and outpacing the average annual increases for natural gas (2.6 percent), nuclear power (2.4 percent), and coal (1.9 percent).
  • The transportation sector accounted for 27 percent of total world delivered energy consumption in 2008, and transportation energy use increases by 1.4 percent per year from 2008 to 2035. The transportation share of world total liquids consumption increases from 54 percent in 2008 to 60 percent in 2035 in the IEO2011 Reference case, accounting for 82 percent of the total increase in world liquids consumption.
  • In the IEO2011 Reference case, energy-related carbon dioxide emissions rise from 30.2 billion metric tons in 2008 to 43.2 billion metric tons in 2035?an increase of 43 percent. Much of the increase in carbon dioxide emissions is projected to occur among the developing nations of the world, especially in Asia.

International Energy Outlook 2011 is available at www.eia.gov/forecasts/ieo/.

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Insulation Leaders: Get The Recognition You Deserve!

Share your insulation energy appraisal experience with the industry and be recognized as an Insulation Leader. Educate others about the value of mechanical insulation while promoting yourself and your company’s smart insulation investment and energy-efficiency decisions in a nationwide publication—it’s now easy!

Appraisers, facility/plant managers, and owners can submit case studies to Insulation Outlook. The information will be featured in an article about the energy appraisal, the insulation work done as a result, and the benefits the facility reaped from the project. Although specific information is welcome, company names and other identifying information can be left out of the article if required by a company’s confidentiality policy.

Companies from all industries and of all sizes are welcome—there is no minimum energy savings requirement. The insulation energy appraiser must be certified through the National Insulation Association (NIA).

Please fill out the Appraisal Information form and return it by e-mail to editor@insulation.org, by fax to 703-464-5896, or by mail to Insulation Outlook, 12100 Sunset Hills Road, Suite 330, Reston, VA 20190.

Your Rewards

You and your company will be recognized in Insulation Outlook magazine and through a press release from NIA, which will be made available for you to send to your customers as well. You’ll also receive extra copies of the issue in which your story appears, and you can order reprints of the article with your company’s logo and information to include in your sales and marketing packets.

Best of all, you’ll have documented your company’s dedication to saving energy and making your operations as efficient as possible while demonstrating a commitment to sustainability by reducing energy use and greenhouse gas emissions. All through the most cost-effective, proven energy-saving technology available: mechanical insulation!

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Annual Energy Outlook 2011

The projections in the Energy Information Administration’s (EIA’s) Annual Energy Outlook 2011 (AEO2011) focus on factors that shape the U.S. energy system over the long term. Under the assumption that current laws and regulations remain unchanged throughout the projections, the AEO2011 Reference case provides the basis for examination and discussion of energy production, consumption, technology, and market trends and the direction they may take. It also serves as a starting point for analysis of potential changes in energy policies. AEO2011 also includes 57 sensitivity cases, which explore important areas of uncertainty for markets, technologies, and policies in the U.S. energy economy.

Key results highlighted in AEO2011 include strong growth in shale gas production, growing use of natural gas and renewables in electric power generation, declining reliance on imported liquid fuels, and projected slow growth in energy-related carbon dioxide (CO2) emissions even in the absence of new policies designed to mitigate greenhouse gas (GHG) emissions.

AEO2011 also includes in-depth discussions on topics of special interest that may affect the energy outlook. They include: impacts of the continuing renewal and updating of federal and state laws and regulations; discussion of world oil supply and price trends shaped by changes in demand from countries outside the Organization for Economic Cooperation and Development or in supply available from the Organization of the Petroleum Exporting Countries; an examination of the potential impacts of proposed revisions to Corporate Average Fuel Economy standards for light-duty vehicles and proposed new standards for heavy-duty vehicles; the impact of a series of updates to appliance standards alone or in combination with revised building codes; the potential impact on natural gas and crude oil production of an expanded offshore resource base; prospects for shale gas; the impact of cost uncertainty on construction of new electric power plants; the economics of carbon capture and storage; and the possible impact of regulations on the electric power sector under consideration by the U.S. Environmental Protection Agency (EPA). Some of the highlights from those discussions are mentioned in this article. Readers interested in more detailed analyses should refer to the full report at www.eia.gov/forecasts/aeo/.

Imports Meet a Major but Declining Share of Total U.S. Energy Demand

Real gross domestic product grows by 2.7 percent per year from 2009 to 2035 in the AEO2011 Reference case, and oil prices grow to about $125 per barrel (2009 dollars) in 2035. In this environment, net imports of energy meet a major, but declining, share of total U.S. energy demand in the Reference case. The need for energy imports is offset by the increased use of biofuels (much of which are produced domestically), demand reductions resulting from the adoption of new vehicle fuel economy standards, and rising energy prices. Rising fuel prices also spur domestic energy production across all fuels—particularly, natural gas from plentiful shale gas resources—and temper the growth of energy imports. The net import share of total U.S. energy consumption in 2035 is 17 percent, compared with 24 percent in 2009. (The share was 29 percent in 2007, but it dropped considerably during the 2008–2009 recession.)

Much of the projected decline in the net import share of energy supply is accounted for by liquids. Although U.S. consumption of liquid fuels continues to grow through 2035 in the Reference case, reliance on petroleum imports as a share of total liquids consumption decreases. Total U.S. consumption of liquid fuels, including both fossil fuels and biofuels, rises from about 18.8 million barrels per day in 2009 to 21.9 million barrels per day in 2035 in the Reference case. The import share, which reached 60 percent in 2005 and 2006 before falling to 51 percent in 2009, falls to 42 percent in 2035 (Figure 1).

Domestic Shale Gas Resources Support Increased Natural Gas Production with Moderate Prices

Shale gas production in the United States grew at an average annual rate of 17 percent between 2000 and 2006. Early success in shale gas production was achieved primarily in the Barnett Shale in Texas. By 2006, the success in the Barnett shale, coupled with high natural gas prices and technological improvements, turned the industry focus to other shale plays. The combination of horizontal drilling and hydraulic fracturing technologies has made it possible to produce shale gas economically, leading to an average annual growth rate of 48 percent over the 2006–2010 period.

Shale gas production continues to increase strongly through 2035 in the AEO2011 Reference case, growing almost fourfold from 2009 to 2035. While total domestic natural gas production grows from 21.0 trillion cubic feet in 2009 to 26.3 trillion cubic feet in 2035, shale gas production grows to 12.2 trillion cubic feet in 2035, when it makes up 47 percent of total U.S. production—up considerably from the 16-percent share in 2009 (Figure 2).

The estimate for technically recoverable unproved shale gas resources in the Reference case is 827 trillion cubic feet. Although more information has become available as a result of increased drilling activity in developing shale gas plays, estimates of technically recoverable resources and well productivity remain highly uncertain. Estimates of technically recoverable shale gas are certain to change over time as new information is gained through drilling, production, and technological and managerial development. Over the past decade, as more shale formations have gone into commercial production, the estimate of technically and economically recoverable shale gas resources has skyrocketed. However, the increases in recoverable shale gas resources embody many assumptions that might prove to be incorrect over the long term.

Alternative cases in AEO2011 examine the potential impacts of variation in the estimated ultimate recovery per shale gas well and the assumed recoverability factor used to estimate how much of the play acreage contains recoverable shale gas. In those cases, overall domestic natural gas production varies from 22.4 trillion cubic feet to 30.1 trillion cubic feet in 2035, compared with 26.3 trillion cubic feet in the Reference case. The Henry Hub spot price for natural gas in 2035 (in 2009 dollars) ranges from $5.35 per thousand cubic feet to $9.26 per thousand cubic feet in the alternative cases, compared with $7.07 per thousand cubic feet in the Reference case.

Coal Continues to Account for the Largest Share of Electricity Generation

Assuming no additional constraints on CO2 emissions, coal remains the largest source of electricity generation in the AEO2011 Reference case because of continued reliance on existing coal-fired plants. EIA projects few new central-station coal-fired power plants, however, beyond those already under construction or supported by clean coal incentives. Generation from coal increases by 25 percent from 2009 to 2035, largely as a result of increased use of existing capacity; however, its share of the total generation mix falls from 45 percent to 43 percent as a result of more rapid increases in generation from natural gas and renewables over the same period. The role of natural gas grows due to low natural gas prices and relatively low capital construction costs that make it more attractive than coal. The share of generation from natural gas increases from 23 percent in 2009 to 25 percent in 2035.

Electricity generation from renewable sources grows by 72 percent in the Reference case, raising its share of total generation from 11 percent in 2009 to 14 percent in 2035. Most of the growth in renewable electricity generation consists of generation from wind and biomass facilities (Figure 3). The growth in generation from wind plants is driven primarily by state renewable portfolio standard (RPS) requirements and federal tax credits. Generation from biomass comes from both dedicated biomass plants and co-firing in coal plants. Its growth is driven by state RPS programs, the availability of low-cost feedstocks, and the federal renewable fuels standard, which results in significant cogeneration of electricity at plants producing biofuels.

Proposed Environmental Regulations Could Alter the Power Generation Fuel Mix

The EPA is expected to enact several key regulations in the coming decade that will have an impact on the U.S. power sector, particularly the fleet of coal-fired power plants. Because the rules have not yet been finalized, their impacts cannot be fully analyzed, and they are not included in the Reference case. However, AEO2011 includes alternative cases that examine the sensitivity of power generation markets to various assumed requirements for environmental retrofits.

The range of coal plant retirements varies considerably across the cases (Figure 4), with a low of 9 gigawatts (3 percent of the coal fleet) in the Reference case and a high of 73 gigawatts (over 20 percent of the coal fleet). The higher end of this range is driven by the somewhat extreme assumptions that all plants must have scrubbers to remove sulfur dioxide and selective catalytic reduction to remove nitrogen oxides, that natural gas wellhead prices remain at or below about $5 through 2035, and that environmental retrofit decisions are based on an assumption that retrofits occur only if plant owners can recover their costs within 5 years. The latter quick cost recovery assumption is meant to represent the possibility of future environmental regulation, including for GHGs.

In all these cases, coal continues to account for the largest share of electricity generation through 2035. Many of the coal plants projected to be retired in these cases had relatively low utilization factors and high heat rates historically, and their contribution to overall coal-fired generation was relatively modest.

Electricity generation from natural gas is higher in 2035 in all the environmental regulation sensitivity cases than in the Reference case. The faster growth in electricity generation with natural gas is supported by low natural gas prices and relatively low capital costs for new natural gas plants, which improve the relative economics of gas when regulatory pressure is placed on the existing coal fleet. In the alternative cases, natural gas generation in 2035 varies from 1,323 billion kilowatthours to 1,797 billion kilowatthours, compared with 1,288 billion kilowatthours in the Reference case.

CO2 Emissions Grow Slowly and Do Not Return to 2005 Levels until 2027

After falling by 3 percent in 2008 and 7 percent in 2009, largely as a result of the economic downturn, energy-related CO2 emissions grow slowly in the AEO2011 Reference case due to modest economic growth, growing use of renewable technologies and fuels, efficiency improvements, slower growth in electricity demand (in part because of the recent recession), and more use of natural gas. In the Reference case, which assumes no explicit regulations to limit GHG emissions beyond vehicle GHG standards, energy-related CO2 emissions do not return to 2005 levels (5,996 million metric tons) until 2027, growing by an average of 0.6 percent per year from 2009 to 2027, or a total of 10.6 percent. CO2 emissions then rise by an additional 5 percent from 2027 to 2035, to 6,311 million metric tons (Figure 5).

To put the numbers in perspective, population growth is projected to average 0.9 percent per year, overall economic growth 2.7 percent per year, and growth in energy use 0.7 percent per year over the same period. Although total energy-related CO2 emissions increase from 5,996 million metric tons in 2005 to 6,311 million metric tons in 2035 in the Reference case, emissions per capita fall by 0.7 percent per year over the same period. Most of the growth in CO2 emissions in the AEO2011 Reference case is accounted for by the electric power and transportation sectors.

The projections for CO2 emissions are sensitive to many factors, including economic growth, policies aimed at stimulating renewable fuel use or low-carbon power sources, and any policies that may be enacted to reduce GHG emissions. In the AEO2011 Low and High Economic Growth cases, projections for total primary energy consumption in 2035 are 106.4 quadrillion Btu (6.9 percent below the Reference case) and 122.6 quadrillion Btu (7.4 percent above the Reference case), and projections for energy-related CO2 emissions in 2035 are 5,864 million metric tons (7.1 percent below the Reference case) and 6,795 million metric tons (7.7 percent above the Reference case), respectively.
For the full report, visit www.eia.gov/forecasts/aeo/.

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What’s New in the 2011 ConsensusDOCS Documents

There’s nothing like a near economic meltdown to make you rethink the agreements and forms you use for your construction projects. When ConsensusDOCS launched its original suite of documents on September 28, 2007, no one could have anticipated just how much the construction industry was going to change in such a short period of time. ConsensusDOCS has responded with earlier-than-expected revisions to its library of contract documents and forms. A number of the changes impact subcontractors.

In 2007, a coalition of 20 subcontractor, general contractor, owner, surety, and other construction industry associations, including the American Subcontractors Association (ASA), published more than 70 different ConsensusDOCS documents and forms. Since then, more than a dozen other industry associations, including groups representing design professionals and the National Insulation Association, have joined the coalition. The 2011 editions of these documents, released on January 19, 2011, happened earlier than the 5 years anticipated for major revisions. The 2011 releases, which bring the ConsensusDOCS library to more than 90 documents and forms, include a revised prime agreement for design-bid-build, design-build, and CM-at-risk, as well as revised subcontracting agreements and other documents.

One of the first changes subcontractors will notice in the 2011 editions of the ConsensusDOCS documents is that the term “contractor” has been replaced with “constructor,” while “architect/engineer” has been replaced by “design professional,” and references to the “Owner-Contractor Agreement” are replaced by references to the “prime agreement.” A “time is of the essence” clause has also been added to all the documents, where it did not exist in earlier editions.

Subcontractors have reason to celebrate expanded project financing assurances in the 2011 editions. These provisions give the project team earlier warning of potential problems with project financing. The constructor must now promptly provide its subcontractor with notice of any material variation in the owner’s ability to pay. The subcontractor may still obtain information about the owner’s ability to pay for the services provided by the subcontractor, upon request. The 2011 editions also provide the project owner with the right to audit the constructor’s books.

ConsensusDOCS 750: What’s New

With the 2011 release, the ConsensusDOCS coalition continues to foster the “balanced approach” to project administration, affording more protections to subcontractors than traditional construction industry documents.

The 2011 edition of the 750 form adds a description of the “Parties’ Relationship” (2.1), which states that the parties will “proceed with the Subcontract Work on the basis of mutual trust, good faith, and fair dealing. The Parties shall endeavor to promote harmony and cooperation.” This provision furthers the ideals of the collaborative nature of the ConsensusDOCS.

One significant change may reduce disputes and the costs of dispute resolution for subcontractors. Under the 2007 edition of the 750 document, the party that did not prevail in a binding dispute resolution procedure (typically arbitration or litigation) bore most of the costs of the dispute, but did not pay all the fees of the prevailing party. Each party was responsible for its own attorney fees. In the 2011 edition, the non-prevailing party must also pay the other party’s attorney fees. This change will be helpful to subcontractors as they pursue payment claims against constructors. It may even hasten the resolution of disputes and create an incentive for disputes to be resolved earlier.

A change in the retainage provision (8.2.2) of the 750 document is also a plus for subcontractors. If the constructor’s retainage is reduced per the prime agreement and the subcontractor’s work is satisfactory, then the constructor must reduce the subcontractor’s retainage when its retainage is reduced.

The 750 document’s requirements related to review of contract documents have also improved. If subcontract work is indicated in either the drawings or specifications but not both, the subcontractor must perform the work as is “reasonably inferable” from them, as if they appeared on both documents. This change eliminates the 2007 edition’s ambiguous phrasing that the subcontractor should perform work that is inferable “as being necessary to produce the indicated results.”

Further, in the 2007 edition of the 750 document, the subcontractor was required to make a “careful analysis and comparison of the drawings, specifications, other Subcontract Documents, and information furnished by the Owner.” The 2011 edition eliminates the “careful analysis and comparison” wording and replaces it with a standard of “examine and compare.” In addition, this provision (3.3) now affirmatively states that the subcontractor does not have liability for errors, omissions, or inconsistencies. Note, however, that the liability is excused “unless the Subcontractor knowingly fails to report a recognized problem to the Constructor.”

The consequential damages provision in the revised ConsensusDOCS 750 specifically limits the damages that an owner is entitled to recover to those it recovers “against the Constructor under the prime agreement.”

Subcontractors are now provided with a second notice to cure defective work. In the 2007 edition, a constructor could proceed with remedies against a subcontractor that failed within 3 business days of notice to begin and satisfactorily progress on curing a default. In the 2011 edition, the constructor must give a second notice to the subcontractor (and surety, if any) within 2 business days of its failure to cure. However, under Section 10.1.1.1, the subcontractor is liable for the payment of any amount by which the expense to cure may exceed the unpaid balance of the subcontract. The subcontractor has the right, upon request, to obtain from the constructor a detailed accounting of the costs to finish the work.

Other changes to the 750 subcontract include:

  • “Substantial completion” is defined as being reached when succeeding work is allowed to proceed, or when partial owner occupancy or use occurs. The latter triggers the commencement of the warranty period.
  • The dispute resolution section clarifies that the requirement for senior executives to meet is within 5 business days of failure of the parties’ representatives to resolve a dispute, as opposed to 7 days.

Subcontractors should note that the abbreviated ConsensusDOCS 751 Short Form Agreement Between Contractor and Subcontractor includes the changes made in the 750 subcontract, where the 751 has parallel provisions.

ConsensusDOCS 200: What’s New

The ConsensusDOCS 750 document incorporates by reference the prime agreement, special conditions, general conditions, specifications, and other documents. The changes to the ConsensusDOCS 200 document may impact subcontractors when the document is used as the prime agreement.

First, the 200 general conditions more clearly define the “Contract Documents.” They require the owner to identify whether a document provided to the parties is actually considered to be a contract document. Addenda to be made part of the contract must now be “issued and acknowledged” prior to the execution of the agreement.

Approved submittals are no longer considered contract documents. Alternates, which were previously considered to be contract documents under the subcontract agreements, are no longer considered as such. Furthermore, a constructor is now required to send submittal requests to not only the owner, but also the design professional. Previously, this was required only if the constructor was directed to do so. This change facilitates a faster turnaround time for responses to submittal requests that the subcontractor has forwarded to the constructor.

Other changes to the 200 document include:

    • The constructor is no longer entitled to “rely” on worksite information (4.3) provided by the owner.
    • A new “Compliance with Laws” section (3.21.1) of the general conditions states: “The Constructor shall be liable to the Owner for all loss, cost, or expense attributable to any acts or omissions by its…Subcontractors.”
    • The general conditions allow for change orders even with a lump-sum agreement (8.3.1.3).
    • The termination provisions have been revised. If a constructor is incorrectly terminated for default, then the termination reverts to a “termination for convenience.” In such a case, the owner is not subject to claims for damages related to an improper termination, but the constructor is able to recover damages pursuant to the termination-for-convenience provision.

    Proponents of the ConsensusDOCS say that the documents allow contractors and subcontractors to experience a lower project cost and that owners that use these documents are worthy business partners who value fair risk allocation. The January 2011 revisions to the ConsensusDOCS continue to foster the collaborative project ideals that should help subcontractors weather the current economic storm.

    What’s New in Other Documents

    Several other documents have been changed, including:

    • Form 721 Subcontractor’s Statement of Qualifications for a Specific Project. The time period for which information on qualifications such as licensing, safety, and project history must be provided has been greatly reduced.
    • Form 221 Constructor’s Statement of Qualifications for a Specific Project. The time period for which information must be provided has been reduced, as has the type of information that is requested.
    • Form 410 Standard Design-Build Agreement and General Conditions Between Owner and Design-Builder. The changes to this document do not necessarily directly affect subcontractors, but subcontractors should be aware that this document now: (1) requires an accounting for deductions to a contingency to be provided with each payment application; (2) narrows the cost of work for which a design-builder is compensated, and gives the owner the right to audit costs; and (3) requires immediate work stoppage upon encountering of unknown site conditions.
    • Form 500 Standard Agreement and General Conditions Between Owner and Construction Manager (Where the CM Is At-Risk). Similar to the changes to Form 410, this document narrows the cost of work for which an at-risk CM can be compensated; however, unlike the design-build agreement, it allows recovery for damages resulting from copyright infringement.
    • Form 240 Standard Agreement Between Owner and Design Professional. The owner now plays a much more active role in the project rather than allowing the flow of information to be interrupted by requiring the design professional to be the only conduit for information. Green building design and building information modeling are included as basic services if required by the owner. Finally, this agreement provides much greater flexibility to provide documents in electronic format, which is an important part of today’s construction industry.

    Along with these revisions, ConsensusDOCS released two new forms in early 2011: Form 703 Standard Purchase Agreement for Non-Commodity Goods by a Constructor and the insurance exhibit (Exhibit E) to Form 725 Standard Agreement Between Subcontractor and Subsubcontractor. The buyer and seller of special project material/equipment can use Form 703 to facilitate the purchase, coordination, and installation of the material/equipment. The insurance exhibit to Form 725 is a tool for establishing liability and other insurance options and limits for subsubcontractors.

    The ConsensusDOCS Guidebook, available on the ConsensusDOCS website (www.consensusdocs.org), now includes a recommended model “incentive clause” for prime contractors to receive a designated incentive amount for early completion of a project. Subcontractors can use this new recommendation in the Guidebook to negotiate with prime contractors to include an incentive clause in the subcontract agreement, along with a liquidated damages provision, so that the subcontractors can share in the incentive award for early completion.

    Integrated Project Delivery and Building Information Modeling

    Integrated project delivery is becoming more prevalent in the construction industry. This approach is premised on the principles of minimizing risk and delay and eliminating waste in design and construction. As a result of the January 2011 revisions of the ConsensusDOCS, Form 300, formerly known as the Standard Form of Tri-Party Agreement for Collaborative Project Delivery, is known as the Standard Tri-Party Agreement for Integrated Project Delivery (IPD). Under this document, the owner, designer, and CM/GC are all equal parties to the agreement in order to make decisions for the best interest of the project. To facilitate consensus decisions, key trade contractors, subcontractors, and suppliers may be added to the team during early project design to provide preconstruction services and facilitate an integrated, collaborative design process. Approved contractors, subcontractors, and suppliers sign joining agreements to become members of the IPD team.

    The greater flexibility to provide documents in electronic format is an integral part of the ConsensusDOCS revisions. The increased use of electronic formats encourages the use of building information modeling (BIM), a tool that is sweeping across the design and construction industries with the promise of helping projects be completed on time and on or even under budget. The ConsensusDOCS 301 Building Information Modeling Addendum addresses how BIM applies to projects and apportions the legal risks. The addendum is an amendment that modifies the principal contracts between the parties; it is not intended to stand alone.

    Owners are realizing the value of BIM and are requiring designers, constructors, and subcontractors to utilize IPD methods. While subcontractors may be concerned about the costs associated with BIM, experience with and the use of BIM could become the deciding factor when awarding projects to subcontractors. Some GCs are even requiring subcontractors to include the initial software costs in their bids. Each subcontractor should determine whether the advantages of BIM will be beneficial to their businesses and outweigh the costs.

    The ConsensusDOCS documents are ahead of the curve in the construction industry and will continue to improve and provide the latest and best practices and fair risk allocation. Subcontractors that understand and use these documents can promote their individual businesses and remain competitive far into the future.

    Reprinted with permission from ASA’s The Contractor’s Compass.

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The Last Management Act: Selling Your Contracting Firm

Owners of contracting firms are all eventually faced with the inevitable. They will not be leaving this earth alive and breathing. Only astronauts do that consistently; but then, they return. At some point in their careers, contractors’ energy and attitude will wane. They will see that the business they built needs new leadership. Their bodies and minds tell them that the time has come to take on a different role in life.

When that time comes, what do they do about transferring ownership of their firms? That is often a difficult decision both intellectually and emotionally. Fortunately, several options are open to them.

Sometimes, it is just a matter of some legal paperwork giving ownership to a son or daughter with a family payout agreement. This is a common occurrence in the construction business.

On occasion, employees will step in as the new stockholders. Again, an agreement has to be sworn to and a cash payout schedule accepted by both parties. Such transactions, as long as there is a talented core group that owns the majority of stock, can give the company a new life and a thriving existence for many years.

The most complicated and daunting option is the third party buy/sell agreement. In many cases, the buyer and seller will not personally know each other beforehand. This leads to a longer transaction process with an unpredictable ending.

In all these examples, the owner’s goal must be to accomplish two things:

  • Change his/her relationship to the firm
  • Derive some monetary value for the firm.

The transaction between the former and new owner(s) will be unique. Each of the parties in any buying/selling situation will have unique sets of circumstances and needs.

As stated before, emotions are part of the equation. The owner who has spent many years nurturing the firm now has to say goodbye. As you know, this not an easy transition.
A majority of proposed transactions do not go through because of this very reason.

To address this issue, the selling party needs to think about this life change and what he or she will do in the future. Having a specific plan for particular activities to fill the time is more beneficial to making the transition than just thinking about “enjoying retirement.”

Once the seller achieves a comfort level with the idea of divestment, then the next hurdle is to think through the transaction from both the seller’s and acquiring party’s perspectives. All contractors have a fairly clear idea of what they want to happen. However, the buyer’s perspective is just as important for the seller to keep in mind. Ask yourself, “What would I want or accept if I were buying a contracting firm?” Keeping a balanced perspective in your approach to the negotiation will not kill it prematurely.

Do understand that construction firms do not sell at a premium. While in some rare cases they may be valued at as much as four times earnings (plus the value of the firm’s assets), most firms are typically valued at no more than two times earnings. Sadly, this is not a great amount of money. As you can guess, if financial concerns are your top priority, then keeping your construction firm until you die makes the most sense. But if your goal is not a strictly a financial one, then selling your firm may be the best move, as some of the best benefits cannot be valued in dollars.

Contractors buy contracting firms. A majority of transactions occur between like professionals. Yes, sometimes there is the one-off transaction far afield. Money management firms and public utilities have purchased construction companies. However, these are rare cases. In essence, only contractors want to be in this business—some say 9 out of 10. Hence, the search for a buyer is more efficient if pursued within the population of contractors.

The Process

  1. Gather Data
    • Tax returns
    • Financial statements
    • Closed job information
    • Organizational chart
    • Loan agreements
    • Employment contracts
    • Other important documents, such as any legal settlements and supplier agreements
  2. Conduct Interviews

    The business broker will interview the owner(s) after studying the corporate information. This needs to be accomplished so the broker knows all circumstances surrounding the company and can answer them for a prospective buyer.

  3. Assemble Contact List
    The business broker will assemble a potential buyer list. The owner(s) will review the list, cross off those people who are objectionable, and add people he or she may know.
  4. Make Contacts
    Typically, formal letters will be sent to individuals who have been identified as potential candidates. The letters have a sales flavor to them and describe the company and its situation in general terms so there can be little chance of someone guessing which firm it might be. After the letters are sent, follow-up phone calls are made to generate interest.
  5. Confidentiality and Non-Disclosure Agreements

    Once interest is signaled by one or more potential buyers, formal documents are drawn up, including the interested party’s pledge not to disclose or otherwise disseminate your company information, including the fact that it is for sale. A good agreement will have remedies for violations. The remedies can be financial penalties.

  6. Send Company “Book” of Information to Potential Buyer
    The book of information will be created by the business broker. It will disclose the details of the business, its financial status, market share, organization structure, and labor situation, among dozens of other areas. The buyer should be able to decide whether the company is of interest based on the data provided. If not, the book should be returned.
  7. Face-to-Face Meeting between the Seller and Potential Buyer
    This meeting is crucial to establish a working relationship and to see whether the chemistry is right between the parties. Sometimes this is the last meeting between the two and the transaction dies. If both parties feel there is a value to going further, additional meeting(s) will be held.
  8. Potential Buyer Issues Letter of Interest
    Once a letter of interest is sent to the seller, some steps occur in rapid succession.
  9. Due Diligence
    Buyer will have 60 to 90 days to inspect the business being purchased. They will go through the books, see the fixed assets, look over the projects, etc.
  10. Create Purchase Agreement
    The parties will create a purchase agreement that spells out in great detail what is being bought, under what conditions it is being bought, and at what amount it is being bought.
  11. Set a Closing Date/Hold the Closing
    The business broker, the seller, and the buyer will set a closing date that is fairly close in time—90 to 120 days—from the date of the Letter of Interest.

Types of Buyers

There are three types of buyers. You should be aware of each type’s goals and focus:

  • Strategic buyer
  • Economic buyer
  • Familial buyer

A strategic buyer is someone looking for geographic or service expansion. They can be looking in your state. People from the north sometimes buy a firm in the south. Alternatively, a buyer could be looking for a business to expand their service offering. A plumbing firm may purchase an HVAC contractor. Suffice it to say, there are numerous possibilities.

An economic buyer is looking for good price for the value received. The potential buyer might speculate that they can buy the firm at X and hope that it will be worth 2X in a couple of years. They will sometimes purchase a firm in financial trouble to capture its work force. As you know, journeymen are not easy to grow.

A familial buyer is someone who knows the owner through a family relationship or is an employee(s) of the company. (Company employees are often considered an informal family.) This kind of transaction is a good first option. There always seems to be more comfort on both sides with this situation. People know each other well and the payment terms are friendlier. Trust is typically high.

The Value of Your Firm

The value of a construction firm is fairly simple: a multiple of the predictable income stream plus the value of the assets.

Ascertaining and agreeing on a predicable income stream can be difficult, historical performance notwithstanding. A commercial or industrial contractor’s worth is based on several factors, including bids and present and future work in process. A residential builder might be based on inventory, name recognition, product, and economic factors. A service contracting firm is more straightforward, since the business acts more predictably.

A common mistake is to believe that an abnormally great year can be used as the basis for value. It should not be. An average over several fiscal years should be used. Another mistake is to presume that the real estate you own for your construction operations is worth a premium price. Again, think of what you would want to pay if you were the buyer.

The market determines the multiple and the value of the assets. The last few years of closed transactions are a good basis for valuations. Certified professionals in this area are the only ones who can ascertain the fair market price. In some cases, each party will hire its own business appraiser and then negotiate with the other with its report in hand.

The owner has a range of working options after the sale. Some, who obviously know more than anyone else about the firm, stay involved as the leader for a period of time. This gives a smoother transition to the new owner, who will need to become familiar with the business.

The other end of the spectrum of options is for the exiting owner to completely leave the business as soon as the sale is complete. As you might guess, there has to be some transition period, but in this scenario, the transition time is brief.

The seller should expect to be compensated for time spent working with the new leader(s). If the previous owner stays on as a senior manager, then an “earn out” is formulated. Typically, it contains salary plus bonus, the bonus being a percentage of profits, typically gross margin.

Some Traps

  • It is estimated that a majority of all proposed transactions do not go through. There are several reasons for this, and they are not surprising.
    • An owner feels the company is of greater value than the market will bear.
    • The candidate company has no second-in-command to take over. The new owner most often has no one to come in and take charge. They are looking to the company for leadership. If there is none, the risk is too great to the purchaser.
    • There is a “profit fade” between the initial
      contact campaign and the closing date. Some owners start leaving the business mentally and the financial statement shows it.
  • An estimated 80 percent of the transactions that do go through are sales to employees or family members. Neither of these can make a cash payment for the business, so a payment plan must be formulated. This means the acquirer will be using your future profits to buy your business. If they fail, you may get your business back.

One caveat to anyone considering selling their firm: There is no such thing as “retirement.” Understand you must be intellectually engaged in something. To not do so decreases your chance at a long post-contracting life. Additionally, if you talk to others who have sold their companies, you will find that there is certain happiness in doing something challenging or rewarding.

Make no mistake: a construction contracting firm is difficult to sell. It takes several factors to come together simultaneously. Most importantly, the two sides must be willing to negotiate and be reasonable in their demands. Other factors that complicate the matter are valuation, economic forecasts, business performance, and the regulatory environment. Bottom line: if the two interests want to, they can make the transaction happen.

NIA Sites > Insulation Outlook Magazine > Global

Succession for Boomers

FMI has helped contractors plan ownership transitions since 1971. Our succession planning practice grew out of our management consulting business triggered by the familiar scenario of soldiers returning from World War II, starting a construction business, and wanting to figure a way out of the business by the 1970s.

Much of what business owners need now in planning a transition is the same as it was three decades ago. For the baby boomer generation, however, we are seeing a number of changes that make planning more complex and that require it to be more comprehensive.

Some of the changes in succession for boomers are:

  • Companies are larger. Growth in the American economy has meant greater opportunity for the construction industry. The result is that successful companies are larger in revenues, profits, and asset-base and are more complicated to manage.
  • People are living longer. Longer life-spans mean potentially longer retirements or longer careers.
  • The industry is more complicated. There is more regulation, a more diverse labor force, and more sophisticated clients. Businesses, therefore, are more complex to manage for the next generation.
  • Generation X employees require different management than boomers. Attracting people to the industry and providing effective leadership has always been a challenge.
  • Boomers want to retire differently. Retirement used to involve ceasing work and perhaps moving away. Boomers may want to retire sooner, or stay and reduce their role. In addition, upon retirement, they may seek another career or activity to keep them engaged.
  • Investment alternatives are more confusing. Boomers are looking for less risk and more diversification when selling their business. Stocks, bonds, cash, and real estate used to be the prime categories for investment. With the difficulties of the markets, particularly since 1999, hedge funds, international investments, and private equity, among others, have been increasingly sought as investment vehicles.
  • More third parties say they want to buy construction businesses. The mergers and acquisition community is very active, and most business owners are inundated with inquiries, real and false.
  • Tax law affecting ownership transition has changed. Tax rates, estate law, S Corporation, LLC, and ESOP rules have all changed, making planning simpler in some cases and more complex in others.

The changes listed above have created new challenges to succession planning. Let’s consider them one by one.

Companies Are Larger

Larger companies require more money to buy out the selling stockholders and greater management/leadership capabilities in the next generation to run the business. Some of the largest companies have developed a culture around employee ownership. For example, Kiewit and PCL maintain broad employee ownership and a detailed mechanism covering share pricing and stock offerings. Both companies serve as excellent examples for privately held companies wanting to remain private.

Making this work for Kiewit and PCL is an arguably conservative valuation for stock transactions and the ability to develop talent. A conservative valuation puts less strain on the company’s balance sheet in a transition, while developing people ensures succession and a strong management team to drive profitability.

Size and success have also attracted more exotic structures such as ESOPs (Employee Stock Ownership Plans) and recapitalizations with the help of private equity. Numerous ESOPs exist in the construction industry. For some companies, ESOPs have become a dominant owner and a culture-changing vehicle for broadly held ownership. For others, ESOPs represent a competitive buyer and may or may not be a long-term owner. At FMI, we have often seen ESOP companies sold to third parties, or bought out by the company.

Private equity for a narrow segment of companies in the industry has provided a lucrative means of transition. Companies with $3 million and greater in annual Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) may attract this type of capital; however, this type of investor is most interested in companies with a well thought-out growth plan, strong successor management, limited bonding needs, and high net margins. If you meet these criteria, this may be a viable means to achieve a strong valuation and reasonably quick liquidity, though you will likely be expected to continue with the company and rollover some investment.

Strategic buyers and international firms also continue to make acquisitions in the industry. Initial Public Offerings come in cycles but are an increasingly used tactic with larger firms.

In short, size has created more options for companies in need of ownership transition while demanding improved management and leadership. Larger contractors who have made a lot of money have more options to consider.

People Are Living Longer

Since people are living longer, company owners are concerned with funding a longer retirement, including health costs. Some owners define themselves closely with the business and decide to own the business longer. This can be frustrating for the next generation of family or employees who want the reins but have to wait until later in their careers.

At the other extreme, some owners want to retire early or slow down. To maximize their financial security, these owners may ask for a greater price for the business or sell stock more slowly as their role is reduced to maintain an income stream.

It is hard to predict how much money is needed or wanted to retire. Living to age 90 or even 100 is not out of the ordinary today, and health costs continue to increase. Thinking through the financial and personal issues surrounding a transition is important for owners contemplating one.

The Industry Is More Complicated

This is no surprise. Safety; federal, state, and local regulations; construction methods; technology utilization; longer distance competitors; and the changing banking and bonding industry are more complicated areas today. For boomers, this means that their successors need more time and training to learn what they need to know to operate in today’s environment.

In the past, plans may have focused more on the stock sale or transfer issues. Today, people issues are more important. Hiring the right people is critical. Hiring the wrong people causes a “double whammy”; you don’t have the right people to succeed you, and you’ve lost the time it takes for you to learn they are the wrong people when you could have been developing others. Training and development become more important since there is more to learn, and failure to provide training may result in losing the next-generation leader.

Management systems, including financial reporting, planning facilitation, and communication systems are an important part of countering complexity. In the past, you likely made some decisions based on your own experience, without consulting others. For successors taking over decision-making, management systems provide a framework for them to learn about the business and your decision-making. It also provides an opportunity to observe successors’ thinking.

Generation X Employees Are Different Than Boomers To Manage

Extensive literature exists about the differences between the “greatest” generation, who grew up in the Depression and emerged from World War II to build the modern economy, and the baby boomers, who grew up in prosperity and social turmoil. Generation Xers also grew up in the prosperity that followed boomers. While these are generalities, Generation Xers seek more out of work than a paycheck.

Just as the greatest generation was challenged to lead the boomers, the boomers are now challenged to lead Generation X. Xers have numerous career alternatives besides construction. Successful construction firms are recruiting Xers and keeping them. More and more we are seeing the development of corporate universities, increased training opportunities, and leaders seeking additional leadership training and education. Generation Xers want to be sought out, desired, and involved. The challenge for business owners is to stay on the offensive to attract the next generation and to develop and retain the current talent. Firms that understand this and work toward this will be the ones most likely to succeed.

Boomers Want To Retire Differently

Business owners are starting to discuss transition issues at a younger age. They are also less certain about what they want to do. Typically, these owners have made a lot of money by mid-career and are at the peak of their earning-years. Yet, they see other things they want to do, such as spending time with family, pursuing other business opportunities, and traveling. Others are tired of the cell phone ringing at all hours and the resulting constant demand for attention. While these owners may be “away” more, they don’t feel “away” since they are always reachable and their clients and employees know it. Boomers often don’t want to retire outright as many of the greatest generation did, but instead want to change the dynamic of their working life. This might mean taking a lesser role within the company (a non-CEO chairman versus a CEO), starting a new venture, or becoming a philanthropist. Many of these owners try retirement and don’t like it. Other owners fear retirement.

Retiring-while-not-retiring is neither simple nor easy. Paying less attention to a construction business you own can be dangerous, and selling too soon can mean giving up income and value. Empowering the next generation may put you in their way. Deciding what to do next after making the transition is not easy, and whether you will like your next endeavor is unknown. Therefore, the process of going from a successful, engaged business owner to the “next step” requires some soul searching and experimentation. There is no one-size-fits-all answer.

Investment Alternatives Are More Confusing

Conventional wisdom once was to put your nest egg in a combination of cash, real estate, and stocks and bonds. Two things make some business owners hesitant to follow this logic. First, private ownership of a business usually provides better returns than an owner’s diversified investments. Second, market volatility has made diversification more complicated as a protection for your nest egg.

Private companies outperform most investment vehicles for two reasons. First, entrepreneurs are driving the business, and there is no substitute for enterprising individuals motivated by ownership. Second, private construction companies are typically valued at three to six times pre-tax earnings in acquisitions and other valuations. In a low-growth business, three to six times earnings implies a return of 17 percent to 33 percent pre-tax return on the value of your investment. Contrast that with the stock market, where price-to-earnings ratios average over 20 on after-tax earnings. That implies a multiple of about 12 times pre-tax earnings or about an 8 percent return, excluding growth. For real estate, capitalization rates are typically in the range of 8 percent to 10 percent, meaning investors will pay 10 to 12 times cash flow.

That’s why investors offered a 17 percent to 33 percent return like most industry business owners effectively receive would gladly take the higher anticipated return. Indeed that is exactly the logic that private equity funds use—buying private companies for their investment funds. The difference is that if you own private businesses through a private equity fund, you are paying tremendous fees to fund managers and buying businesses you do not know.

Following this logic, why would anyone want to own anything but a private business? The answer is risk. Any business can turn upside down for any number of reasons. Hence, diversification protects your wealth, while a healthy investment in your own business provides tremendous
opportunity to achieve above-market returns.

FMI generally counsels owners to continue to invest in their own business since that is usually where the best returns are. In addition, we recommend allocating some assets to diversified investments to protect the owner’s nest egg. In other words, have your “get-rich money” seeking high returns and the remainder of your money in a diversified portfolio to keep you rich.

Regarding the second point above that causes business owners to hesitate to diversify their nest egg, market volatility has always existed. But two events have hit boomers. The first was the real-estate meltdown in the early 1990s. This put many developers out of business and hurt many boomers with real-estate investments. Since the early 1990s, real estate has been one of the best places to invest money. The second event was the bursting of the technology bubble in 1999. The NASDAQ fell by half, and the stock market went flat for several years. These two events sent investors looking for other investment vehicles. Most investors did not abandon real estate and the stock market entirely, but they sought other ways to earn returns that were not correlated to real estate and stocks.

Asset allocation became a prevalent strategy. Historically, a stock and bond portfolio might have earned 9 percent to 10 percent per year, on average over the last 80 years. Simply put, investors started looking for other ways to make 10 percent per year. Since the stock market fluctuates from year to year, investors sought alternatives so they would show positive returns during a down year or flat period in stock or real estate. Large investors such as university endowments, pension funds, and high net-worth individuals were the first to go into alternative asset classes. In the last 10 years, investment has greatly expanded in international stocks, hedge funds, and private equity. Strategies within each of these categories vary tremendously, providing a diversity of vehicles to achieve returns at varying correlations. Asset allocation is used by investors to protect against any downside while seeking the upside.

Some business owners have shunned the asset allocation strategy for two reasons. First, as previously outlined, owners have achieved better returns in their privately owned business, and second, they understand their business or local investments, such as real estate, better. The problem with this strategy is the risk involved. The business could have a problem or the local real-estate market could turn upside down. Further, in construction, these two events could be correlated.

The take-away for boomers is to diversify assets outside your business in areas you understand or invest with a knowledgeable advisor. Continue to hold onto your private investment as long as prudent and productive. It is prudent as long as you can limit your liability from personal signatures on bonds and bank lines. It is productive if you are not driving off management that drives future profits by keeping your stock away from them.

More Third Parties Say They Want To Buy Your Business

Most business owners we talk with receive regular letters and calls from people saying they want to buy their business. This type of solicitation has increased dramatically in recent years with the increase in merger and acquisition activity in the industry and the expanding number of private equity firms. It is flattering, and sometimes the interest is real. However, much of the time the contacts are from business brokers trying to drum up business, or inquiries from people that do not understand your business.

Until recent years, inquiries in the industry were fewer and probably easier to sort out. Now it is easy to operate under the assumption that there is a buyer out there when there is not, or alternatively, to ignore a serious buyer.

The difference today is that the odds of a strategic buyer having the resources and interest to purchase your business has increased, and if you fit a private equity firm’s criteria, you may have the opportunity to take significant money off the table while retaining an interest in your business. This changes an owner’s thinking. If an internal sale is the only option being considered, lining up the next generation or contemplating a shutdown is more dominant in an owner’s mind. If a third-party sale is possible, the owner may hesitate to prepare the internal sale option even though it may be needed.

Tax Law Affecting Ownership Transition Has Changed

It may be hard to believe, but tax law has, in many ways, become friendlier to ownership transition in recent decades. The big change was when Ronald Reagan cut tax rates in 1981, followed by the 1986 overhaul that substantially cut personal rates. The drop in personal rates in 1986 to below corporate rates caused many owners to change their corporation from C corporations to S corporations, removing the problem of double taxation. It also led to more companies using the Limited Liability Company (LLC), a pass-through entity for taxes like an S corporation, for their business structure.

ESOP tax law has also become friendlier over the years as Congress has sought to increase its use. One of the most beneficial changes to contractors came in the 1990s when S corporations were allowed to have an ESOP as an owner.

Tax rates have crept back up to 35 percent since Reagan left office, but planning has not become more complicated since more firms are using S corporations and LLCs. One area that is more complicated is transfers of stock among family members. There are IRS Chapter 14 rulings that require transfers to be done at fair market value, which does add compliance costs to a transfer.

What Is A Boomer to Do?

Given all these changes, FMI’s advice to the boomer owner contemplating future ownership is as follows:

  • Pay more attention to leadership in your business. Spend more time understanding and developing your leadership skills. Spend more time hiring the right people to work for your business and more time understanding how Generation Xers think. Finally, spend more time and invest more money training your next-generation leadership. Use your management systems. Know your costs. Have business planning sessions involving next-generation leadership. Communicate with your team in order to manage your risk, and develop your successors.
  • Manage your personal balance sheet and indemnifications. Grow your business, but also grow your balance sheet outside the business. If you need help for investment outside the business, get help.
  • Control your exit strategy. Don’t be forced to sell when you are not ready. Develop the next generation; don’t run them off. You need them whether you sell to them or a third party.
  • Wrestle with how you want to retire, if you call it that. Do you want a clean break? Do you want to transition slowly? Do you want to go out with your boots on? Is your spouse ready for your retirement? What are your other interests? Is the nonprofit world fulfilling or tedious for you? Put your toe in the water.

Wrestling with the personal transition is probably the least comfortable piece of the puzzle. Do you really want to have more free time? What would you do? Will you like it? Do you have enough in your nest egg to give up your compensation and returns from your business? How much do you want? How will you shift your energies? Succession for a successful business is a good problem to have, but not easy.

Reprinted with permission from FMI Corporation, 919-787-8400. For more information, visit www.fminet.com or call Sarah Vizard at 919-785-9221.

NIA Sites > Insulation Outlook Magazine > Global

Ohio Supreme Court Broadens Rights of Injured Workers

In the recent Ohio Supreme Court decision of Sutton v. Tomco Machining, Inc., the Court ruled that an employer’s termination of an employee shortly after a work-related injury but before he filed a workers’ compensation claim can be retaliation in violation of public policy. The effect of the decision is to cloak Ohio’s at-will employees with an additional cause of action against employers for “workers’ comp retaliation,” even before the employee has expressed an intent to file a claim or has actually done so. Prior to this decision, Ohio law merely prohibited an employer from retaliating against an employee after he or she filed, instituted, or pursued a workers’ compensation claim.

To have a wrongful termination claim, an Ohio employee now merely needs to show a nexus between the adverse employment action (i.e., termination) and the potential workers’ compensation claim. Therefore, employers should take additional precautions to ensure that they have an “overriding business justification” for terminating an injured employee shortly after an incident. Of course, it is not unusual for an employer to take disciplinary action against an employee who has been injured as a result of his or her own negligence or misconduct. This decision encroaches upon that right to discipline and also upon the general law of Ohio that employees serve at the will of the employer, thereby permitting termination without cause.

Facts of the Case

Employee DeWayne Sutton allegedly injured his back early on a Monday morning in April 2008 while disassembling a saw at Tomco Machining, Inc., in Dayton, Ohio. Within 1 hour of being told of the injury, Tomco’s President Jim Tomasiak fired Sutton, who had been an employee for 2½ years. Tomasiak did not give Sutton a reason for the firing but did state that the firing was not because of Sutton’s work ethic or job performance or because Sutton had broken any work rule or company policy.

On July 1, 2008, Sutton sent a letter to Tomco informing it of his intention to file a claim under Ohio’s workers’ compensation retaliation statute—O.R.C. 4123.90. Sutton accused Tomco of terminating him to avoid having him considered an employee when he filed for workers’ compensation benefits, thereby foreclosing the claim and avoiding higher workers’ compensation premiums. Customarily, back injury claims are very costly to employers and are investigated and monitored closely. In addition, injuries complained of at the start of a shift on Mondays are scrutinized carefully by many employers to make sure the injury is not attributable to personal weekend activities.

The Ohio Supreme Court ruled that while the retaliation statute was inapplicable due to Sutton not filing a claim before he was fired, a new public policy tort claim should be created to cover the “gap” in the statutory workers’ compensation law. As a result, the case has been sent back to the lower court to have a trial on the issues of fact, including the motivation of the employer in terminating Sutton.

Based upon several cases over the last two decades, the right of employers to terminate employment at-will for any cause no longer includes the discharge of an employee where the discharge is in violation of a “public policy.” Unfortunately, an employer does not know that it has violated such a policy until the courts find one to exist—long after the termination decision has been made. The broadening of employee claims by the Ohio Supreme Court arguably undermines the authority of the legislative branch to prescribe what is in violation of the law and upsets the intricate statutory scheme designed to address workplace injuries. The dissenting justices argued that the existing retaliation statute, which requires the workers’ compensation claim to be filed or pursued before retaliation protections arise, should be honored because the lawmakers could have written a broader law to fit Sutton’s pre-claim circumstance if they had chosen to do so.

Ramifications of the Case

Every employer should carefully consider whether to terminate or discipline an employee for circumstances surrounding a workplace injury. Also, consider whether the employee has claimed an injury or sought accommodation under the Americans With Disabilities Act in an effort to strategically block the employer from taking justifiable disciplinary action against him or her for some other reason. Always document and date performance issues in a timely manner to avoid an inference of retaliation after the employee claims the injury.

No law prohibits an employer from terminating or disciplining an employee who disregards safe working practices and engages in misconduct. However, work and safety rules should be carefully crafted to justify such disciplinary action, and those rules should be uniformly applied. Employers should not be discouraged from enforcing their safety discipline programs, especially if an employer wishes to raise in an OSHA case the affirmative defense of unpreventable employee misconduct.

Most importantly, any discussion at the time of termination must be well considered before the words are uttered. Remember, you need not give any reasons for termination. If you do, make sure the reasons can be supported.
Review your safety and work rules today. Closely monitor all your workers’ compensation claims and consult experienced counsel on these delicate issues.

NIA Sites > Insulation Outlook Magazine > Global

Making the Case for Mechanical Insulation

Making the case for mechanical insulation is the first step in ensuring a facility is as energy- and cost-efficient as possible. Recently, the National Insulation Association (NIA) has not only introduced new design and evaluation tools, but also succeeded in having the Mechanical Insulation Installation Incentive Act introduced in the 112th Congress.

Mechanical Insulation—There’s an App for That

Building on the success of the Simple Calculators in the Mechanical Insulation Design Guide (MIDG) at www.wbdg.org/midg, NIA is proud to announce its first-ever mechanical insulation smartphone application: the Mechanical Insulation Financial Calculator. Based on the MIDG Financial Returns/Considerations Simple Calculator, this app helps quickly determine the financial returns related to investments in mechanical insulation. It can be used for an overall project or a small investment such as insulating a valve or replacing a section of insulation.

The app is available for Android phone users in the Android Market—just search for “mechanical insulation.” Download this free tool to find out how quickly mechanical insulation can pay for itself in a building or facility and discover how much energy, money, and greenhouse gas emissions can be saved and what the return on investment will be.

Running the Numbers

In addition, some of the MIDG Simple Calculators have been updated, with a new Personnel Protection Calculator added and the Temperature Drop Calculator split into two based on application type:

  • Temperature Drop Calculator for Hydronic Piping: This calculator estimates the temperature change of water flowing in a pipe. An example is the use of insulation to minimize temperature (drop or rise) of a process fluid from one location to another (e.g., a hot fluid flowing down a pipe). Based on input, this calculator will provide temperature drop (or rise) in °F and leaving water temperature in °F.
  • Temperature Drop Calculator for Air in Ducts: This calculator estimates the temperature drop (or rise) of air flowing in a duct. An example is the use of insulation to minimize temperature change of a supply duct in a commercial building. Based on input, calculator will provide temperature drop (or rise) in °F and leaving air temperature in °F.
  • Personnel Protection Calculator for Horizontal Piping: In many applications, insulation is provided to protect personnel from severe burns. In addition, there are safety and comfort concerns related to personnel working in high temperature, high radiant exposure locations. This new calculator helps prevent severe burns by estimating the time personnel can be in contact with surfaces above 140°F (the standard industry practice) without suffering second and third degree burns. For example, surfaces at the standard temperature of 140°F contacted for up to 5 seconds would cause no more than first degree burns. Based on input, calculator will provide surface temperature in °F and maximum contact time in seconds.

Other Simple Calculators are:

  • Condensation Control Calculator for Horizontal Pipe
  • Energy Calculator for Equipment (Vertical Flat Surfaces)
  • Energy Calculator for Horizontal Piping
  • Mechanical Insulation Financial Calculator
  • Estimate Time to Freezing for Water in an Insulated Pipe Calculator
  • Simple Heat Flow Calculator
  • Simple Thickness Calculator

These calculators are useful for both the beginner and experienced professionals in the construction, design, specification, maintenance, management, and budgeting fields. The MIDG is used by design professionals, corporate management, facility owners and managers, energy and environmental consultants, mechanical engineering teachers, and mechanical insulation industry manufacturers, distributors, and contractors, among others.

The calculators were developed for MIDG by the Mechanical Insulation Education and Awareness Campaign (MIC), part of efforts by the Department of Energy’s (DOE) Industrial Technologies Program?s Save Energy Now initiative to improve the energy efficiency of the U.S. industrial and commercial sectors. Project Performance Corporation and the National Insulation Association, in conjunction with its alliance with the International Association of Heat and Frost Insulators and Allied Workers, are working together to execute the MIC.

Congress Gets the Value of Mechanical Insulation

On September 8, Reps. Don Manzullo (R-IL) and Tim Ryan (D-OH), along with Senators Kirsten Gillibrand (D-NY) and Mike Johanns (R-NE), introduced the Mechanical Insulation Installation Incentive Act on Capitol Hill in Washington, D.C. This bipartisan, bicameral legislation would cut energy costs, reduce carbon emissions, and put Americans back to work through a tax incentive encouraging the use of mechanical insulation.

The Mechanical Insulation Installation Incentive Act of 2011, introduced in both the House of Representatives (H.R. 2866) and Senate (S. 1526), would create up to a 30 percent tax deduction to encourage commercial and industrial entities—like manufacturing facilities, office buildings, schools, hospitals, power plants, hotels, and universities—to go beyond minimum mechanical insulation requirements in new construction and retrofit projects and increase their maintenance activities.

H.R. 2866/S. 1526 provides a facility owner an incentive to increase the use of or maintenance of mechanical insulation by lowering his/her tax expense in the fiscal year in which the mechanical insulation was put in service or maintenance completed. If the property owner is not subject to U.S. income tax, the tax deduction would transfer to the primary contractor for the property, providing an incentive for energy efficiency regardless of the property owner tax status.

Specifically, H.R. 2866/S. 1526 allows businesses to increase or accelerate the depreciation deduction for the incremental insulation cost based on the percentage of energy saved above the minimum ASHRAE requirements, up to a maximum of 30 percent. Also, H.R. 2866/S. 1526 allows businesses to increase their maintenance deductible expense up to a maximum of 30 percent of the energy saved in comparison to the heat loss from the insulation system that was originally installed versus no insulation value. The tax incentive applies to the installed insulation system cost.

Conservative estimates indicate that over a 5-year implementation period, this legislation could save $35 billion, reduce 170 million metric tons of CO2, and create more than 25,000 jobs for skilled craftsmen in all 50 states within weeks or months?not years. While similar incentives have been developed for walls, roofing, windows, lighting, and other energy efficiency options, there are no existing tax incentives tailored for mechanical insulation.

The bill was first introduced in the 111th Congress, where it attracted 60 bipartisan cosponsors. NIA and the International Association of Heat and Frost Insulators and Allied Workers are working to encourage those cosponsors and others to support H.R. 2866/S. 1526 in the 112th Congress as well. To learn more about this initiative and how you can help, visit www.insulation.org/mimi.

Supporting Evidence

Insulation Outlook regularly runs articles containing data that can support your case for properly designed, installed, and maintained mechanical insulation. In recent months, we’ve published the results of the Mechanical Insulation in
Hospitals and Schools study and the Montana Mechanical Insulation Assessment Pilot Program, to name just two. All Insulation Outlook articles are archived online one month after they appear in print, so bookmark www.InsulationOutlook.com for handy reference. Free electronic reprints of selected articles are also available to NIA members on the Insulation.org Members Only site.

We welcome articles or topic suggestions about mechanical insulation from our readers and subject matter experts. Contact us at editor@insulation.org, and you might be featured in a future issue.

NIA continues working to make it easier to demonstrate the cost-effectiveness of mechanical insulation installation, upgrading, and maintenance by developing new tools, advocating on Capitol Hill, and disseminating data. Please send feedback and ideas to niainfo@insulation.org.

NIA Sites > Insulation Outlook Magazine > Global

Liability Issues for Subcontractors

In today’s business world, being a contractor or subcontractor is fraught with legal issues. Every time you sign a contract as either the principal or a subcontractor, you are exposing yourself to significant risk.

Of course, the major risk is probably whether you will get paid. But you also have to be concerned about whether any of the other parties involved in the project will be filing a lien against the principal or against you claiming unpaid charges. And as an employer, you always have the concern of potential employment law claims against you by your employees or those of another subcontractor or the principal. Finally, there are liability issues resulting from regulatory infractions or injuries suffered by the employees of the principal or another subcontractor that may be levied against your company.

These issues may take various forms, but all must be anticipated. Most of these situations can be addressed in the language of the contract. No matter how many times you have dealt with a particular principal or another subcontractor, always review any contract you are about to sign in great detail. If you have questions, seek the advice of your corporate attorney. Most times it is too late to raise these issues or concerns after a claim has been filed against your company.

Other than straightforward liability issues that arise because a clearly negligent act by one of your employees resulted in physical injury to a non-employee, there are three basic avenues where liability can arise. First is the relationship with your subcontractors. Is it truly an arm’s-length business relationship? Is there room in the language of the contract or in how your management carries out the contract for an employee of a subcontractor to argue that they were essentially your employee? A second area that may be addressed in the contract is an indemnification and hold harmless agreement that will benefit the principal or the subcontractor. The third area falls outside the contract: the Occupational Safety and Health Administration’s (OSHA’s) multi-employer work site policy. Under this policy, there are numerous ways you can become responsible for the safety of other employers’ employees on the work site.

Contractual Relationship with a Subcontractor

To define your relationship with a subcontractor, you may use a short form contract, a one-line handwritten agreement (not recommended), or a contract designed by your attorney that goes into great detail covering multiple points. It is important to be sure that the contract you enter demonstrates an arm’s-length relationship with the subcontractor while you are working with them.

Some contractors try to avoid the responsibility that comes with having employees by essentially considering everyone who works for them to be subcontractors. This type of extreme situation is frequently unraveled by regulatory authorities as soon as any problem arises.

However, many contractors find themselves in similar situations despite trying to operate with an arm’s-length relationship with the subcontractor. Some contractors take great pains with their attorneys to develop contractual agreements that clearly set out the business relationship between them and their subcontractors. However, all that effort can be undone by an onsite management team who begins to direct everyone on the job site as though they were their employees.

One example: a subcontractor’s employee files a workers’ compensation claim against you. Suddenly you have to defend what would otherwise be a valid on-the-job injury claim but which was made against your company rather than the true employer. Usually the claimant (the subcontractor’s employee) will try to demonstrate how your onsite management treated him as an employee of your company and why therefore he should be entitled to workers’ compensation benefits against your company. This situation can be difficult to defend, especially if the subcontractor is arguing that it has no employees.

The moral of this story is that using very clear language in drafting your contract and setting out the relationship with your subcontractor is only half the battle. You must also be sure that your onsite employees conduct themselves with the subcontractor’s employees as befits an arm’s-length relationship. They must not place themselves and your company in the position of being considered the employer of the subcontractor’s employees.

Make sure that your onsite management, at all levels, works through the subcontractor’s onsite management and does not direct the subcontractor’s employees. Of course, even with this situation, if a subcontractor’s employee is injured due to the full or partial negligence of your employee, you could find yourself defending a general liability personal injury claim against your company.

Indemnification and Hold Harmless Agreements

The waters can get very muddy in the next potential avenue for liability: the indemnification and hold harmless agreement. While the indemnification and hold harmless agreement might seem to be the panacea for all situations that could expose your company to liability, always remember that it can be a two-edged sword. As a subcontractor yourself, you must very carefully review any indemnification and hold harmless language in any contract you are about to sign.

Further, when signing contracts with other subcontractors who will work for you, be sure the agreement includes effective indemnification and hold harmless language under the law of the state in which the work is being performed. Different states address indemnification and hold harmless language in different ways. Always be sure the language in your subcontract with your principal is compatible with the laws of the state in which you are performing the work. For this reason, using boilerplate language for the indemnification and hold harmless agreement may not be a good idea.

In some states, the party against whom the indemnification and hold harmless language applies must be 100 percent negligent for the language to become operational. In those states, if the indemnification and hold harmless language is written so that you can exercise it against your subcontractor even if you have some negligence for the actions that caused the injury, the indemnification and hold harmless language may not be enforceable.

Also, check with regulatory agencies to determine whether indemnification and hold harmless language extends to fines and penalties that may be issued against you as the result of some regulatory violation by your subcontractor. Regulatory enforcement is considered a means of penalizing the violator for its wrongful actions to ensure it will “toe the mark” in the future. In most cases, indemnification and hold harmless agreements that apply to regulatory fines and penalties are not enforceable since they are against public policy. In other words, the courts view regulatory fines and penalties as a means of ensuring regulatory compliance. If someone can depend on someone else to pay their fines or penalties, even under a contract to do so, they are less likely to comply with the laws and regulations.

This is especially true with regard to Environmental Protection Agency (EPA) and OSHA fines. The theory is that if through contract language you can expect your subcontractor to pay your fines and penalties, you have no incentive or reason to comply with the environmental laws or the health and safety laws that govern your business. It would follow that you also have no reason to provide your employees with a safe work site. So, before drafting indemnification and hold harmless language that extends to such regulatory issues, be sure that the language you wish to use is not prohibited in the state in which you are working. If you go forward with such language, even though it might be unenforceable in the state in which you are going to work, be sure that its lack of enforceability will not make the entire contract or the entire indemnification and hold harmless clause unenforceable.

Frequently a contract includes a time frame in which you must accomplish your work for the principal, perhaps providing a penalty if your work is not completed before a certain deadline. Many things could delay your completion on time. Consider potential causes for delay and work language into the contract that excuses delay for those specified reasons.

For example, when regulatory officials appear on a job site, the prudent contractor stops work at least until he can determine the purpose for the visit. Another cause might be a delay in delivery of materials. This situation can be handled with language either in your contract with the owner or principal or in your agreement with your supplier. Each potential interest should be considered and a strategy developed to avoid liability in case of such a delay.

Another area in which an indemnification and hold harmless agreement might affect your company is in dealing with your material suppliers. For example, if you are an insulation contractor operating under any type of applicator agreement or certification with your material manufacturer, you might find language in that agreement that indicates you agree to indemnify and hold it harmless for any liability that may be alleged against them based on your installation of their product. Be sure to read all the language in all the contracts you sign to be sure any indemnification and hold harmless agreements will pass muster if the need arises.

OSHA Multi-Employer Work Site Policy

The final avenue of liability is the OSHA multi-employer work site policy/doctrine, which includes four types of employers for regulatory enforcement: controlling, creating, exposing, and correcting.

The controlling employer controls the work site and therefore takes responsibility for the safety of all employees there. On a work site where you are working for a principal but also have subcontractors working for you, you might be considered the controlling employer for all the employees under the umbrella of your contract with your subcontractors. (There is not space enough in this article to address all the details of how OSHA enforces this concept.)

The creating employer is the one who creates a safety hazard to which its employees or those of another contractor are exposed. As a subcontractor, you might be a controlling employer to your subcontractors but a creating employer to your principal or your subcontractors. In other words, your employees might create a situation that exposes other contractors’ employees to a safety hazard. In such a situation, you could be fined by OSHA as the creating employer.

The exposing employer is most frequently considered liable to OSHA for fines or penalties because its employees are the ones exposed to a safety hazard. Simply put, this employer is cited because its employees are exposed to safety hazards either of its own creating or that of some other employer on the job site. The fact that the exposing employer did not create the hazard is not a defense to this type of citation.

Finally, the correcting employer, through its contractual responsibilities or authority, has either the responsibility or the authority to correct a safety hazard it has observed to which either its own or other contractors’ employees are exposed. This employer can be cited for not fulfilling its obligations under the contract or for not correcting a safety hazard it or some other contractor has created.

Conclusion

There are many ways to have exposure liability under contracts with either your principal or other subcontractors. The first step to eliminating or to minimizing the impact of such exposure is to carefully review the contract you are about to sign or the contract you and your attorney have drafted to ensure that it is easy to understand, is straightforward in its language, and complies with the law of the state in which you are about to perform the work.

Also, remember that in most states it is against public policy to try to make someone else responsible for regulatory fines and penalties that might be assessed against your company, even though some other party created the situation that gave rise to the penalty. And finally, no matter how clear and detailed the contracts you enter might be, frequently it is how you and your management team operate on the job site with employees of the other contractors and the principal that will define the actual relationship between you and the other contractors.

NIA Sites > Insulation Outlook Magazine > Global

Mechanical Insulation in Hospitals and Schools

There are approximately 5 million commercial buildings (80 billion square feet1) consuming approximately 18 percent of all primary energy used in the United States. Energy usage in commercial buildings varies by size and by building activity.

A recent study undertaken by the National Insulation Association (NIA) as part of the Mechanical Insulation Education and Awareness Campaign focused on quantifying the use of mechanical insulation in two commercial building types: hospitals and schools. It found that mechanical insulation is used extensively in these types of commercial buildings.

The study’s approach was to contact NIA insulation contractor members to request insulation specifications and quantity take-offs for recent hospital and school projects. Using this data, insulation energy assessments were performed to estimate the energy savings due to mechanical insulation. The projects were selected to represent the range of climates reflected in DOE Climate Zones 1-7 (Figure 1). For details about the study methodology, see the sidebar to this article.

While the vast majority of mechanical insulation applications in commercial buildings are indoors (not exposed to weather), the climate zone location does impact the type of HVAC equipment used and its run time. Building locations across the range of climate zones were therefore of interest.

Obtaining data on suitable projects proved more difficult than anticipated. Many of the projects submitted involved renovations or small additions rather than new construction. For this and a variety of other reasons, the quantities of projects hoped for were not achieved in every climate zone, but the 14 buildings that were selected, 9 hospitals and 5 schools, are thought to be representative of the range of climates in the United States.

A total of 14 projects were analyzed as part of this study (5 schools and 9 hospitals). The locations and general characteristics of the buildings are summarized in Figure 2.

While most of the hospital projects were additions or expansions of existing facilities, the nature of the projects allowed them to be treated as stand-alone facilities for analysis purposes.

The study found that a significant quantity of mechanical insulation is being used in hospitals and schools. Figure 3 summarizes the quantities of pipe and duct insulation in each of the 14 facilities analyzed.

Insulation Quantities in Schools

All the school projects included insulation on domestic hot water (DHW) piping. The total lengths of DHW piping ranged from 1,200 linear ft to 7,800 linear ft (1½ mi.). Within each of the facilities, size and thickness of insulation varied as well. All the facilities contained significant percentages of ½ in. and ¾ in. DHW piping with 1-in.-thick insulation (typically used for drops and run-outs to fixtures and for recirculation lines). The largest DHW lines in schools were 3 in. insulated with 1½-in.-thick insulation. On average, the schools analyzed contained about 0.022 linear ft of DHW piping per square foot of floor space.

Insulation quantities for the HVAC systems, as expected, depended on the HVAC systems used. Piping for hydronic heating water (HHW) systems was present in three of the five schools. Hydronic piping is commonly used to supply heating coils in air handling units and terminal boxes and for perimeter heating. The three schools that had HHW piping averaged about 0.032 linear ft per square foot of floor space.

Chilled water piping was identified in three of the five schools and averaged about 0.012 linear ft per square foot of building area. Sizes ranged from 1 in. up to 14 in. Note that two of the schools used water loop heat pumps for heating and cooling (no chilled water piping was present).

All the schools had insulated supply-air ductwork (averaging about 0.47 ft2 of duct surface per square foot of floor area). Current energy codes and standards do not require insulation for supply-air ducts in conditioned (or indirectly conditioned) spaces. Condensation control and/or noise control are likely the design objectives for these systems.

Four of the five schools had insulated return-air ductwork as well. Note that energy codes and standards do not typically require insulation on return-air ductwork within the building envelope, but acoustical considerations are important in classrooms.

Insulation Quantities in Hospitals

Mechanical insulation quantities are greater in hospitals than in schools because on average, hospitals are larger and contain more energy-intensive systems than schools. Additionally, mechanical insulation has a larger energy impact because most hospitals operate 24 hours per day year round.

Insulated DHW piping in hospitals is extensive. Quantities ranged from 9,700 linear ft to over 50,000 linear ft (9.5 mi.). Piping sizes ranged up to 4 in. The hospitals averaged about 0.069 linear ft of DHW piping per square foot of floor space.

HHW piping was also identified in all the hospitals analyzed. HHW is used extensively in hospitals to supply air handling units, terminal boxes, and perimeter heat loops. The Phoenix hospital project has 51,000 linear ft of HHW piping (9.7 mi.). Sizes range from ½ in. to 18 in. On average, the hospitals contained about 0.091 linear ft of HHW piping per square foot of building area.

All the hospitals contained a significant amount of steam supply and condensate piping. Hospitals use steam for sterilization, humidification, and laundry facilities. Quantities of steam piping ranged from about 800 linear ft to about 11,000 linear ft. Sizes ranged from ½ in. to 18 in. On average, the hospitals had about 0.015 ft of steam piping per square foot of floor area.

Chilled water piping was present in all hospitals as well and averaged about 0.015 linear ft per square foot of floor area. The Phoenix hospital has roughly 12,600 linear ft (2.4 mi.) of chilled water piping. Chilled water piping sizes range up to 20 in. in diameter.

Large quantities of insulated supply-air ductwork were identified in all the hospitals analyzed. Quantities ranged from 39,000 ft2 to 410,000 ft2 and averaged about 0.52 ft2 of supply-air ductwork per square foot of floor area.

Insulated return-air ductwork was present in six of the nine hospitals analyzed and averaged 0.15 ft2 of duct surface area per square foot of floor area.

Energy Impact of Mechanical Insulation

Estimates of the energy savings attributable to mechanical insulation are summarized in Figure 4. These energy savings are all estimated relative to a baseline case of no insulation (the bare case). The savings are shown in several different ways: absolute site energy savings in billions of Btu/yr, savings normalized to the gross floor area of the project (kBtu/sf), and savings normalized to the projected annual Site Energy Usage of the building (in percentages).

As discussed earlier, most of the projects analyzed were either recently completed or under construction. Actual energy consumption data was not available for most of these buildings. The site energy usage values were therefore projected using the DOE Commercial Building Benchmark Models as a point of comparison.

As indicated in Figure 4, the savings due to mechanical insulation vary greatly. The largest savings are for the hospital in Los Angeles (85 billion Btu/yr), while the smallest savings are in the elementary school in Sunrise, Florida (0.28 billion Btu/yr). The ratio of high to low is roughly 300 to 1. Normalized to building area, the savings range from roughly 200 kBtu/sf to 2 kBtu/sf (a ratio of 100 to 1).

The primary reason for the large variation is the difference in building function and systems. Hospitals are typically large facilities with many energy-intensive systems that operate continuously. Schools are generally smaller with fewer energy-intensive systems that operate only 5 days a week for 9 months per year.

To illustrate, Figure 5 contrasts the take-off quantities for the Los Angeles hospital with the quantities for the elementary school in Florida.

Based on differences in quantities alone, it is obvious that the mechanical insulation systems in the large hospital will result in significantly more energy savings than those in the elementary school. Additionally, most of the systems in the hospital will operate 8,760 hours per year, compared to roughly 2,300 hours per year for the school.

Figure 4 also shows that the variation in savings within the two categories of buildings is less but still significant. For the schools, energy savings ranged from 10 billion Btu/yr to 0.28 billion Btu/yr (a range of about 40 to 1). Normalized to floor area, the variation is still roughly 12 to 1 (from 27 to 2.3 kBtu/sf/yr). Again, this variation is explained by the differences in the systems installed. Within the hospital category, the estimated savings due to mechanical insulation ranged from a high of 85 billion Btu/yr to a low of 17 billion Btu/yr. This is a 5 to 1 variation. Normalizing to floor area reduces this variation to about 2 to 1 (194 kBtu/sf/yr to 89 kBtu/sf/yr). The average energy savings for the nine hospitals in this study was 149 kBtu/sf/yr.

These energy savings are large. Expressed as a percentage of the total projected energy usage of the building, they range from 4 percent to 101 percent.

In reality, that doubling of energy consumption could but probably would not occur because the boiler capacity would be exceeded (boilers would be running flat out trying to replace the heat lost from over 15 mi. of uninsulated steam and hot water lines), while at the same time the chiller capacity would be exceeded (trying to satisfy the increased cooling load caused by over 15 mi. of uninsulated hot lines). Temperature control in the patient spaces would be lost, and the patients would need to be moved to another hospital because the thermal conditions inside would be unacceptable. The hospital would be shut down until the system could be repaired, so the energy usage would not double.

These results illustrate the critical nature of mechanical insulation for the efficient operation of the energy distribution systems in many commercial buildings. Without insulation, extensive steam, hot water, and chilled water distribution systems would be impractical.

Comparisons to ASHRAE 90.1

The study also investigated how the mechanical insulation levels in these buildings compare to levels required by ASHRAE Standard 90.1. ASHRAE 90.1-2010, which was recently published, contains more stringent requirements for insulation on above-ambient piping than previous versions. The requirements for cold piping and for ductwork are unchanged from earlier versions of the standard. Figure 6 shows the history of thickness requirements for selected sizes of piping. The requirements had remained essentially unchanged since the 1989 version of the standard.

The data from the study provides an opportunity to address two questions:

  1. How do the insulation levels being installed in real buildings compare to the levels required by ASHRAE 90.1?
  2. What is the likely impact of the increase in stringency for the above-ambient piping?

Figure 7 compares the estimated energy savings for the 14 buildings with the savings that would be expected if the insulation requirements of ASHRAE 90.1 had been strictly followed. Savings were calculated for three cases:

  1. using insulation levels as specified for the project (labeled “As Built” in the table)
  2. using the insulation thickness requirements in ASHRAE 90.1-2007 (labeled ASHRAE–2007)2
  3. using the insulation thickness requirements in ASHRAE 90.1–2010.

As before, the savings are expressed as billions of Btu/yr (relative to the bare case). The last two columns compute the differences between the cases expressed as a percent of the projected annual site energy usage.

Taking the Harvard, Illinois, elementary school as an example, the as-built savings are estimated at 1.27 billion Btu/yr. If the piping and ductwork in the school had been insulated in strict compliance with ASHRAE 90.1–2007, the energy savings would be 1.25 billion Btu/yr. Overall, the school building exceeds the requirements of 90.1–2007. If the piping and ductwork had been insulated in strict compliance with ASHRAE 90.1–2010, the estimated savings would be 1.30 billion Btu/yr. The incremental energy savings (As Built–2010) is 0.03 billion Btu/yr, or about 0.6 percent of the projected annual site usage of this school.

Comparing the as-built savings with the ASHRAE standard, all 14 of the buildings (100 percent) exceed the 2007 standard. In addition, four of the five schools (80 percent) exceed the 2010 standard. For the hospitals, only one of the nine facilities (11 percent) exceeds the 2010 standard. Additional savings ranging from 0.1 percent to 2.6 percent are estimated for the eight other hospitals if they were compliant with the 2010 standard.

Comparing the two versions of the ASHRAE 90.1, we see that the incremental savings expected for the 2010 version over the 2007 version range from 0.1 percent to 3.4 percent. The average savings are 0.7 percent for these schools and 2.1 percent for these hospitals.

Four of the five schools exceed the requirements of the 2010 standard as well. For hospitals, only one of the nine hospitals exceed the 2010 requirements, and additional energy savings ranging from 0.1 percent to 2.6 percent could accrue if the other eight complied with ASHRAE 90.1–2010.

Conclusion

For the schools studied, it is estimated that mechanical insulation saves, on average, 13 kBtu/sf/yr of site energy (about 20 percent of the total usage). For hospitals, the energy savings from mechanical insulation are estimated to average about 149 kBtu/sf/yr (roughly 78 percent of the total site energy usage). These large numbers highlight the importance of mechanical insulation in commercial buildings. In fact, it can be argued that some of the energy distribution systems in commercial buildings could not function without mechanical insulation because distribution losses would become excessive. The importance of properly maintaining the insulation on these distribution systems is evident.

Notes

1. U.S. Department of Energy, 2009 Buildings Energy Data Book.

2. Note that ASHRAE 90.1-2007 is used as a base for this discussion. Since the requirements for mechanical insulation are unchanged from the 1999 version through 2007, comparisons hold for those earlier versions as well.

Acknowledgements

The authors would like to thank the participating contractors for their assistance during the study.

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