This article was originally published in BayWa r.e. Solar Systems’ magazine Solar r.e.view, and was reprinted with permission.
By Boaz Soifer, CEO of BayWa r.e. Solar Systems
I had many discussions at Solar Power International 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- to 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 to 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 situation 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 price increase, 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 or 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 on the backlog (to keep your crews busy and prevent complexity in your business)? If the answer to either of these is no, read on for some risk management mechanisms a few contractors are putting in place.
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?
If you want to try to preserve both your margins and backlog, you need to look at increasing the complexity of your sales process, as you would be having more frequent, and more complicated, discussions with your customers and possibly with the financing companies supporting their installations. If you want to preserve simplicity, margins and backlog, you might consider purchasing in advance if you’re sure you have the cash and space to do so.
Importantly, you still have time to choose your destiny, but not long. If you get your team together now and make some decisions about how you will manage, you will at least have your eyes open about the impacts a tariff may have on your business, and what levers you want to pull – and how hard you want to pull them – in response.
Please note: Boaz is not a contract lawyer, and he does not intend to give any legal advice. Contract laws vary from state to state, so please make sure you consult the appropriate resources before getting too creative with your contract language.