New government scheme could help contractors pip the competition

We are all aware of the economic headwinds that the construction sector is facing. Of all the industry sectors construction has seen the largest decline in output since 2008. Those of us that are in the industry feel the effects of this every single day. With fewer new projects being tendered there are more companies going after each one and the winner is usually the company that has forgotten something in their price, and comes to regret it later.

Some of the bigger construction firms are winning projects by quoting at a minimal profit margin. Clearly this is a dangerous approach but their hope is that they can make savings along the way by being tougher on their suppliers and gaining a profit this way, or at least break even. Long term this philosophy is seriously flawed but with so few jobs available it is a way of keeping their employees busy during this tough period.

The effect of all this is that companies in the construction industry need to find ways to offer potential clients a better deal- and that’s where the Renewable Heat Incentive scheme could help them.

The Renewable Heat Incentive, or RHI as it is more commonly known, is a government incentive which pays the owner of eligible renewable installation (heat pumps, biomass or solar thermal) over time for the heat that is produced. The RHI is run by Ofgem who manage the application process and also make the payments (from a pool of funds allocated by the treasury).

The scheme is extremely generous and gives the owner of the installation an index linked 12-15% return on investment guaranteed by the government for 20 years. You really couldn’t find a better investment anywhere else.

On top of these savings the client will also benefit from lower heating costs and extra BREEAM points by installing a renewable heat source.

As an example, imagine that you are tendering for a design and build contract for a new doctor’s surgery. Your total tender price comes to £1.5million for the whole project and you know that you are neck and neck for the project with a competitor. However, you switch the 100kW gas boiler, which was specified, for a 100kW ground source heat pump system with boreholes.

You omit the cost of the gas system (including getting gas to site) to save £60k and then add about £120k to your bid price for the ground source heat pump leaving a net increase of £60k. For this £60k the client will receive £278k over 20 years and save approximately £4k per year in gas heating costs. The first year RHI payment of £10,340 plus the heating cost saving of £4k means that the client’s total financial benefit is £14,340 in the first year, or return on the initial £60k of 24%.

That’s quite impressive and could help to sway the contract in your favour.

Despite the lucrative returns offered by the Renewable Heat Incentive scheme the number of new renewable heat installations in the UK is still below the government’s target. They have stated their intention to use building regulations and the planning process to increase the uptake of renewable.

All this means that your company has everything to gain from embracing renewable heating technologies.