Operating Expenses

How to Cut Corporate Utility Costs: Look at Your Lease

Utility-services expense is one of the few costs that can be managed when a company relocates.
Michael ZwangJanuary 5, 2017

Energy can represent as much as one-third of a facility’s operating costs, suggesting that even marginal reductions in consumption, rates, or both, will result in meaningful savings.

Michael Zwang

Michael Zwang Utility cost

It’s no secret that energy costs vary widely by region. Beyond moving its facility, however, how a commercial tenant gets its energy can also be a major factor in its overall costs. The utility services available at a particular location – and the methods of redistribution – can lead to surprising price disparities within a given region, even within the same service area. And while the cost of utility service is just one of the many considerations when deciding upon a new office location or the lease renewal at a current facility, it is one of the few costs that can be managed.

Tenants should start with a general assessment of their existing situation by understanding how the company uses utilities such things as electricity or water, how they are delivered to the space, and what the appetite is for change in order to achieve a given level of savings. Tenants should consider the following questions:

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  • Is your company leasing space in a multi-tenant property, or are you the sole occupant?
  • Do you buy electricity, HVAC, and/or other utilities from the landlord or are you a direct customer of the utility company?
  • Does your company have internal expertise to operate and maintain your equipment and systems efficiently, or should you employ third-party facility managers?
  • How much time is left on the existing terms of your lease? Are you considering relocating, extending the lease, or making an investment in upgrading your current space’s infrastructure?

Depending on the specific situation, these basic understandings may provide tenants with options to help manage utility costs and perhaps drive them down in 2017.

Sole Tenant of the Property

As a sole tenant, a company may be responsible for purchasing the energy consumed within the building. Compared to the benefits realized by institutional owners who often avail themselves of bulk purchases, a direct utility customer can tailor the contract to suit its needs.

Sole tenants should ask themselves:

  • Can your operation shed load during the utility’s peak demand period or shift entire processes to off-peak periods?
  • What types of improvements can you make to certain systems to increase efficiency?
  • The correct cost structure of your agreement with an energy service provider may produce an outcome comparable to those of large property owners.

As the utility’s customer of record, your company’s participation in various incentive programs could result in reduced consumption and provide other benefits that accrue directly to your company. Even if a company gets its energy via the landlord, as the sole occupant, one of its representatives should be actively involved evaluating and decision-making regarding the obtaining of utility services. Depending on the lease, many benefits of the utility customer may still be passed on to the tenant.

Opinion_Bug10Another consideration is whether a company’s operational and engineering needs are better served by its own employees or outsourced to a third-party facility manager. The decision will rest upon the specific needs and complexity of the facility, as well as the ability to leverage cost efficiencies through relationships, expertise, or experience. Each situation is different and must be evaluated independently.

Multi-Tenant Buildings

If a company leases space in a multi-tenant building, the landlord typically purchases all the energy and then redistributes it. It’s the landlord’s responsibility to secure the most favorable rates, maintain and operate the HVAC and other mechanical systems in an efficient manner, and then allocate those costs among its tenants.

In fact, nearly all professional property owners or managers have teams devoted to energy management — from procuring utility services to operating the property efficiently and in an environmentally sustainable way. It may appear, in this instance, that the burden of utility management has been taken on by the owner/operator. But not only is this area complex, but the owner may not be considering the unique interests of each tenant.

Since the landlord has primary responsibility over the building’s systems and energy buying, a company’s attention should focus, in part, on how the premises consumes energy. More importantly, the company’s representatives should pay attention to how the landlord passes energy costs along to each tenant.

While some of the opportunities for savings are apparent, others are not. For example, what steps have been taken to upgrade or improve lighting? Have motion sensors been installed in offices and conference rooms? Are there timers on supplemental HVAC equipment? Are IT closets still being cooled with decades-old equipment installed by the previous tenant? Even after exploring these potential areas to reduce consumption, more significant savings opportunities could exist in the billing rendered by the landlord for operating-expense pass-through costs, common area utilities, and above-standard services.

Consider a situation in which other tenants routinely require HVAC services after the building’s normal business hours. How are the engineering and utility costs associated with operating the building’s systems accounted for during these extended hours? Who is paying for the increased wear and tear, maintenance, and repairs this additional operation causes? How does the landlord charge for after-hours or above-standard services? Does the lease afford the chance to audit the books and records of the landlord in order to verify an equitable allocation of cost? These areas can be ripe with savings opportunities, since the costs can be significant and the pricing requirements ambiguous.

Data Aggregation

Ultimately, the ability to identify cost savings opportunities is only as good as the information available for analysis. Utilities costs are not routinely captured in one place. And without a mechanism for aggregation, it can be challenging to perform a comprehensive evaluation. Moreover, since these costs aren’t static and will evolve throughout the duration of a lease, savings opportunities don’t start and end with the initial assessment. An ongoing utility management program that regularly assesses how energy is bought and consumed is critical to reducing inefficiencies and uncovering new savings.

Michael Zwang is a managing director at BDO Consulting.