The administration work associated with capturing negotiated incentives, as noted in the prior article, “Negotiating for Incentives,” is as important as any other step in the process. You would think that with all the analytics, site visits, negotiations, and contract reviews that the majority of the work is done, but that is often not the case. Some of the biggest complexities lie in the administration details.
As anyone who has negotiated an incentive will tell you, an incentive only has value when it is realized. Often, when a project’s budget is approved, that budget includes the value of the incentives, whether cost avoidance, reimbursement or reduction, and the facility’s financial performance can be negatively impacted if the negotiated incentives are not realized. This is not only true for financial incentives. There are those incentives that reduce project time, whether it is obtaining permits, acquiring land or installing infrastructure. Achieving the “time” incentives can be equally as critical to a project’s success and require the same attention during the incentive administration process.
Let’s Start at the Beginning
The administration process begins as far back as the start of the incentive negotiation. The way a project is framed during the negotiations will impact how the incentives are administered. The best way to ensure the incentives are received is to make sure they are negotiated properly.
Some deal points that impact incentive administration success include:
- Are the commitments all achievable? Were there any performance cushions built in?
- Is the performance window accurate? Does it account for any potential construction or hiring delays?
- What triggers a clawback and is the clawback a pro-rated clawback or is it all or nothing?
- Do the incentive agreements capture the appropriate legal entities who will hold the lease, real estate, headcount, etc.?
- Does the incentive flow to the entity making the investment or the entity causing the investment?
Once the site location decision has been made, often the team that led the site selection and incentive negotiation efforts is now focused on getting the facility up and running, presenting a challenge in capturing the negotiated incentives. Therefore, it is critical to establish a team and an administration lead early in the site selection process.
Some of the more creative and valuable incentives have a more complex process and often involve external entities. A recurring issue that we see in incentive administration is a lack of consistency in the administration team. The administration period could last for more than 10 years so it is important that a team is constructed that can ensure a smooth transition as changes in the team occur. Another factor to assembling the right team is to identify points of contact — both within and outside of the organization — who will be responsible for providing the required reporting data. This could be headcount, payroll, taxes, construction spend, utility usage, and port activities to name a few.
Understand the External Parties
There are some universal performance and measuring requirements when it comes to incentives such as headcount, payroll, and investment among other things, and companies tend to understand how to gather and manage that data internally. However, as incentive programs continue to evolve, the methods for receipt of benefits, parties to incentive agreements, and filing requirements will continue to evolve as well. Some of the more creative and valuable incentives have a more complex process to realize the incentives and often involve external entities. When this is the case, it is important to educate these external entities, as early in the process as possible, about their role in the incentives and what data will be required from them in order to ensure successful administration of the respective incentive.
Some examples where these external entities will play a key role in the administration of the incentives may include:
- Infrastructure Incentives — There are several types of incentives that require a partnership with a third party in order to realize the incentive. A good example of this is funding for infrastructure such as road improvements. A developer may need to go through certain bidding processes, which can impact the timeline for the work as well as vendor selection. In addition, the developer may need to provide invoices in order to complete the administration of the incentive.
- Contract labor — Several states and communities are now allowing the inclusion of contract labor. Typically, when this is allowed, there is a high level of detail required in order to demonstrate performance since the payroll is not being made directly by the entity receiving the incentive. In these scenarios, it is important to share these reporting requirements with the third party prior to entering into a contract labor agreement. In some cases, there may even be a separate agreement between the company and the contract labor firm to address a pass-through of the incentive.
- Spend requirements — There are several incentive programs that can impact the real property investment in a facility. In some cases, a certain percentage of both the up-front capital spend and even ongoing operational spend must be with specific contractors, which can directly impact the contractor and sub-contractor bidding process.
Incentive administration is a combination of project activity monitoring, regularly scheduled performance reporting, and filings and claims to realize the incentives. It is critical to remember that a missed deadline or commitment can create a clawback and potentially put a project in default. With so many moving pieces and partners, an implementation plan and action calendar are effective tools to manage the administration.
There are a vast number of items that should be included in a complete implementation plan; some of these items should include:
- Incentive program summaries to include an overview of clawbacks
- Offer letters, approvals, and other negotiation documentation
- Contracts, statutes or ordinance awarding the incentive
- Calendar indicating due date for each action item required to remain in compliance
- Internal and external points of contact
- Performance requirements and tracking of achievements
- Copies of all previously filed reports and claims
