Last Updated on May 2, 2018 by Summer Rain Ursomarso
Illustration, Tom Miller
I had many discussions last week at SPI concerning the impact of the upcoming trade case on solar contractors. While there are many far-reaching implications for the industry, most pressing for contractors is the question of what to do about the existing backlog of contracts, which were presumably sold at a specific price and might need to be installed with higher-priced equipment than anticipated.
The tariff outcome is unpredictable. The scenario most frequently anticipated is a moderate injury ruling, such as a floor price of $.58/W, as opposed to a ruling for the full requested floor price of $.78/W. It is also possible that a tariff, rather than a floor price, will be established. This could cause price increases for modules even if they are already priced above the anticipated floor. Obviously, at $.78/W the issues illustrated below will be more dramatic.
Most solar contractors operate with a 30-60 day backlog of projects, so it stands to reason that on the date a decision is made regarding the trade case, there will be 30-60 days’ worth of jobs “at risk.” What can a contractor do to mitigate that risk? There are four basic “levers” at a contractor’s disposal that I can think of:
- Ensure there is a clause in your contract that allows you to back out in the case of increased equipment costs.
- Allow, in your contract, for re-pricing a system, within a mutually acceptable range. A vehicle to achieve this could be utilizing open-book pricing, and demonstrating a price increase via quotes from your supplier dated before and after the tariff decision.
- Purchasing the equipment needed to fulfill the backlog in advance of the tariff decision. (Note – in the current module shortage, you are more likely to find premium modules than Tier 1 Chinese, so this option is not universally viable.)
- Increase your selling prices in advance of the tariff decision so that your backlog, at the date of
priceincrease, is still viable.
These levers can also be combined – for example, raising your prices by enough to cover the incremental cost of tying up your storage space and cash from making an advance purchase, or simply raising your prices incrementally to “hedge” against higher equipment costs.
In the table below, the following terms are used:
- “Margin health” – assumes your margins before the tariff are healthy
- “Streamlined” vs. “Complex” – allows that altering your process for selling a project or getting it financed could increase complexity for your team, and should be considered an expense.
- “CAC” – Customer Acquisition Cost – would increase if your close rate is reduced as a result of higher cancellation rates or increased prices.
- “Backlog health” – assumes your normal state of affairs is a balanced backlog – if it is too short you may struggle to keep crews busy and right-size inventory; if it’s too long, you may lose customers who don’t want to wait.
First, evaluate the risk: do you still make a margin with the projected higher equipment costs? Is it worth just absorbing the higher cost
Impact on margins
Impact on sales/financing process
|Do nothing||Negatively impacts margins||Keeps process simple and streamlined||Supports backlog health|
Enable contract termination for contractor
|Allows margin health but could increase CAC||Increased complexity||Could reduce
|Enable contract re-pricing||Allows margin health but could increase CAC||Increased complexity||Could reduce
|Buy in advance||Allows margin health on jobs, but could increase operating
costs (storage and cash)
|Keeps process simple and streamlined||Supports backlog health; however, modules (or cash) may not
Start selling at
|Allows healthy margins, or even upside if
assessed; however, could increase CAC via lower close rate
The most important factors to balance are your business’ sensitivity to weathering reduced margins for the duration of your backlog (and the degree of that margin reduction) compared with your willingness to let your backlog get lean, or even disappear, as a result of preserving margins. Do you already know if one of these factors is more important than the other?