Most of solar installation contracts I've seen are pretty weak. They don’t cover the essentials and won’t hold up in court. Here’s why.
Solar installation is construction contracting. No state exempts solar work from compliance with construction contract law. From what I’ve seen, solar contractors don’t understand that yet. Whether structured as a lease, a power purchase agreement or outright sale, every solar installation contract needs the same notices and disclosures required for a residential remodeling contract. That’s black letter law. Heavy penalties await a solar contractor who uses a defective contract.
But solar contracts have to be different. Conventional construction is sold with a cost estimate. Solar jobs are sold on a forecast of cost savings. Solar contractors use Web tools to work up the savings forecast:
Just plug in the numbers to get a persuasive sales packet – usually with cost savings in the thousands. Then total the financial incentives, rebates and credits listed for your community at http://www.dsireusa.org/. Most likely, your client will be a good candidate for solar.
What comes next is harder: The installation contract. Why? Because with solar, the cart goes before the horse. You start with a signed contract based on the forecast of savings. Then you draw plans and do the engineering.
Why get a signed contract before plans are final? That’s easy. Putting the job together takes time and costs money: approvals and commitments (utility company, HOA, building department), engineering and a site audit. Don’t start planning a job without a signed contract and a deposit.
As I said, solar installation contracts are different. I’ll tick off the essentials.
Nail down the assumed power savings. Every solar job starts with estimated savings. Suggest that savings will be X+Y and actually deliver savings of X alone and you’re in trouble – even if the contract doesn’t include a guarantee. (More on guarantees later).
Your forecast of power generated by a photovoltaic (PV) system is pure solar engineering. Enter the numbers accurately in any of the financial modeling programs linked above and you’ll get a good power forecast. But to forecast cost savings, you need an estimate of power consumption. Pick one of four ways, listed here in order of decreasing reliability:
- The annual average of 3 years of actual power used as reported on utility statements.
- One year of actual power used as reported on utility statements.
- The square feet of living area multiplied by published averages (such as by the EIA).
- A guestimate of the annual power cost divided by the average cost of electricity.
Your contract should identify which method was used in the forecast. It’s OK to be way off in a power consumption estimate – so long as your contract is clear that the forecast was based on figures supplied by the property owner.
To protect yourself, reference the forecast of power savings in your contract. Leave no doubt about how you estimated the savings.
Exactly what gets installed? Conventional construction contracts reference a set of plans and specs. But with solar, the cart goes before the horse. Eventually there will be working drawings and specs for a solar job. But that’s not going to happen before you ask for a signature on the contract. So your contract has to list what gets installed. Fortunately, that’s a short list:
That’s about all you need to bid the job. If something changes later, such as in engineering or during the site audit, be sure there’s a contract clause that covers substitutions. More on that later.
Cover solar incentives and permits. Incentives, credits and rebates all belong to the owner. Your forecast of cost savings should pile these on as deep as the law allows. But cover two points in your contract.
- Solar incentives change and expire. Don’t guarantee any specific credit or rebate. Your client should have the right to cancel if incentives evaporate. That right should expire once the permit is issued.
- You need the right to apply for incentives, rebates and credits in the name of the owner. Cashing in on these incentives takes time and persistence. Don’t depend on the property owner to get it right. The same is true for permits and approvals, such as from an HOA or a utility company.
Cover interconnection issues. You’ll do the actual connection. The utility company will retain ownership of lines connecting your solar equipment to the power grid – and will probably want a utility easement so they can service installed equipment.
What about the service entrance panel? This is where even experienced solar contractors stumble. The existing breaker box is always a question mark when planning a solar job. Either it needs major work or it doesn’t. Replacing the existing box can add $2,000 to the cost of a residential solar project. An electrical engineer, the utility company and maybe the building inspector will make the decision later. So your contact has to cover the contingencies. Either:
- You’re sure the existing panel is OK. The contract price doesn’t include anything for work on panel, or
- You expect the panel will need work but haven’t included that cost in the contract, or
- The panel will have to be replaced and the contract includes an allowance to cover the cost.
There will be changes. Contracts for solar energy projects are signed before the site audit and final engineering. Occasionally, the need for a change in the contract will become obvious – either in selections of materials or in project design. For example, panel specs and availability can change. Make sure your contract explains how to handle changes.
Be specific on project closeout. Work is complete when you pass final inspection. A green tag from the inspector means the system can start delivering power. Commissioning by the utility company qualifies your client for incentives. But the utility company may not be in any hurry to schedule the commission test. Months may pass. The contract should be clear: Final payment is due when you can show power production as predicted in the forecast of savings, not when the utility company commissions the project.
Offer to maintain the system. Every solar energy system requires maintenance. That raises two contract issues. First, it’s an opening to offer a service contract. Quote a price for annual maintenance right in the installation contract. Describe what’s covered and what isn’t. Second, disclaim liability for system performance if maintenance isn’t done annually by qualified personnel.
Guarantee the solar savings. Your forecast of savings made the job possible. Why not put your money where your mouth is? Guarantee those savings. That’s common on commercial solar jobs. It works just as well on residential jobs. There’s little risk if the guarantee is written correctly.
Remember, I said that production of a PV system is pure solar engineering – very predictable unless there’s a train wreck. Exclude responsibility for train wrecks and there’s little risk you’ll have to cover a shortfall.
Guaranteed savings will be very persuasive when it’s time to sign the contract. Even better, a guarantee creates extra solar business: maintenance and monitoring. Make the guarantee contingent on annual maintenance and monitoring by your company. Monitoring is automatic by wired or wireless connection between the inverter and the owner’s router or access point. That’s something else to cover in your contract. Revenue-grade monitoring will be required for net metering – the electric meter turns backward.
What about a warranty? The contracts I’ve reviewed try to dance around the issue, passing on the manufacturer’s warranty and disclaiming everything else. That’s clever. But it doesn’t cut the mustard in most states. In Kansas, for example, it qualifies the contractor for a $10,000 fine. Remember, residential solar jobs are residential construction. The warranty in a solar contract has to comply with state law, just like everything else in a solar contract.
For info on solar installation contracts that comply with the law in your state and touch all the bases, have a look at Construction Contract Writer.
But don’t let me discourage you. Solar installation contracting can be good business. Solar is growing. It’s easy to understand why. A Federal tax credit covers 30% of your client’s cost. Rebates, incentives, lease deals and power purchase agreements can reduce up-front cost to near zero. And the cost of solar arrays drops 10% nearly every year. With benefits like that, many contractors should think solar.