Home Energy Rating System Industry Business Models

Home Energy Rating System Industry Business Models,

revised May 30, 2015by Brett Dillon

www.skaldicmedia.com

HERS Rating Industry Business Models Dillon �2

Executive Summary

I examine the development of the Home Energy Rating industry and the roles played by RESNET, Software Providers, Training Providers, Quality Assurance Providers, and Rating Companies within the context of the Facilitated Network, Solution Shop, and Value-Added Process business models. I also take a forward look into the future of the industry, with likely scenarios that result from the RESNET Board of Direc-tors change in policies regarding quality assurance.

The Home Energy Rating industry has existed since the 1980’s as a fragmented industry that was consolidated with the creation of RESNET in 1995. Originally over-seen by a steering committee from the National Association of State Energy Offices and the National Mortgage Bankers Association, in 2002 RESNET emerged as an indepen-dent 501(c)(3) organization tasked with the regulatory oversight and technical develop-ment of the Home Energy Rating System. RESNET is accredited by the American Na-tional Standards Institute as a Standards Development Organization.

The Facilitated Network business model is a single organization that creates a network of clients. RESNET is a multi-sided network with complex cross-group network effects.

The Solution Shop business model uses highly trained subject matter experts to mobilize resources to create individual solutions to client problems, and to exploit mar-ket opportunities. This business model is best employed for Rating Companies working with custom homes, existing homes, and programs that do not have a guaranteed out-come such as ENERGY STAR(R) New Homes, Net Zero-Ready Homes, LEED for Homes, and all other green building programs.

The Value-Added Process business model is driven by cost and efficiency. This business model is suited for Training Providers, Quality Assurance Providers, and Rat-ing Companies working with production homebuilders.

With the recent changes in Board policy regarding quality assurance, I look at 6 different scenarios that could play out, all with profound implications for the industry. In Scenario A, vertically-integrated Provider/Rating Companies contract quality assurance out to independent members of a facilitated network controlled by the Provider compa-ny. In Scenario B, independent Quality Assurance Providers administer the quality as-surance protocols under contract to the Rating Companies. In Scenario C, RESNET hires staff to perform all the quality assurance functions. In Scenario D, RESNET con-tracts out all the quality assurance functions to independent Quality Assurance Compa-nies who do not perform any ratings. In Scenario E, Software Providers take on the role of Quality Assurance Provider and perform simulation file reviews while contracting field quality assurance out to independent Quality Assurance Companies. In Scenario F, Software Providers perform the simulation file reviews while RESNET contracts the field quality assurance reviews out to independent Quality Assurance Companies.

I also look at the inherent conflicts of interest and biases that exist between quali-ty assurance auditors and those who are being audited, with a particular focus on ways to reduce or eliminate the potential for ethical failures using strategies taken from other industries that have undergone massive disruption due to regulatory intervention be-cause of unethical behavior on the part of auditors responsible for ensuring integrity.

Copyright (C) 2014, Brett Dillon. All Rights Reserved


Brett Dillon

March 3, 2014

Executive Summary 2

Background 4

Roles 8

RESNET 8

Software Providers 12

Training Providers 12

Quality Assurance Providers 13

Rating Companies 14

Business Theory 15

Facilitated Network Model 18

Solution Shop Model 18

Value-Adding Process Model 19

The HERS Industry Today 20

RESNET 20



Quality Assurance 25

Rating Companies 28

The Future HERS Rating Industry 30

RESNET 30



Quality Assurance 37

In-house Provider/Rating Company Facilitated Network Model (Scenario A) 39

Independent Quality Assurance Company Model (Scenario B) 40

RESNET Staff Quality Assurance Model (Scenario C) 41

RESNET Contracts Quality Assurance Model (Scenario D) 41

Software Providers QA Files, Contract Field QA (Scenario E) 42

Software Providers QA Files, RESNET Contracts Field QA (Scenario F) 44

Rating Companies 45

Conclusions 47



BackgroundIn the early 1980’s, the National Shelter Industry Energy Advisory Council was

formed by the mortgage industry. The mission of this Council was to establish a way to

predict the financial energy savings generated by installing energy efficient measures in

a home and to provide a methodology for crediting those financial energy savings into

the mortgage application process. This birthed Energy Rated Homes of America, a na-

tional non-profit organization committed to supporting the mission of the National Shel-

ter Industry Energy Advisory Council. The activities of Energy Rated Homes of America

provided support to those states that had home energy rating programs, but at the na-

tional level most of the energy efficient mortgage programs remained under-utilized due

to general lack of awareness of the existence of the product among lenders and home-

buyers, inconsistent evaluation methods across the nation, and bureaucracy-generated

complexity. Mortgage industry representatives, Energy Rated Homes of America, and

the National Association of State Energy Officials (NASEO) founded the Residential En-

ergy Services Network (RESNET) in 1995 and tasked the new organization to develop

national home energy rating standards and to create the market for home energy rat-

ings and energy efficient mortgages. Oversight of the new organization was provided by

a steering committee of national mortgage industry executives. RESNET emerged as

an independent non-profit 501(c)(3) organization in 2002, and Energy Rated Homes of

America was merged into the RESNET organization. RESNET is overseen today by a

volunteer Board of Directors who are elected from the different classes of membership.

In the early years (1995-2006), RESNET produced a Home Energy Rating Sys-

tem (HERS) Score based on a benchmark home built to the minimum energy efficiency



standards of the 1993 Model Energy Code. The evaluation criteria compared the end

results of predicted heating, cooling, and domestic water heating energy use to a com-

puter simulation of a similar home (with some fixed features such as orientation, window

areas, door areas) with the same building enclosure surface areas and minimum code

building assemblies and mechanical equipment efficiencies. The result was a Score

with higher values indication greater energy efficiency. The primary use of the HERS

Score was in the Environmental Protection Agency’s ENERGY STAR® New Homes

Program. In 2006, a massive disruption occurred when the benchmark reference home

was changed from the 1993 Model Energy Code to the 2004 International Energy Con-

servation Supplemental Code. The building industry had evolved construction practices

over the intervening years and the prevailing national energy codes had followed suit,

while RESNET had remained locked into a legacy code. This disruption provided the

opportunity to refine the calculations to include lighting, appliances, and on-site power

generation in the energy use calculations . This created the need to change the funda1 -

mental equation used to generate the HERS Score; the resultant equation now gener-

ated a value against a HERS Index, with 100 referencing the benchmark home and

each point above (less energy efficient) or below (more energy efficient) 100 represent-

ing the predicted performance of the rated home. This allowed net-zero homes to have

their energy efficiency evaluated more appropriately, as well as homes that are less en-

ergy efficient than the benchmark reference home. At the same time, the ENERGY

STAR New Homes program revamped their program requirements to include specific

verification of airsealing and insulation details using a checklist. Well over 80% of the

homes rated in the United States participated in the ENERGY STAR New Homes pro-



gram, reflecting the use of that national energy efficiency program as a marketing tool

for home builders.

The Environmental Protection Agency overhauled the ENERGY STAR New

Homes program in 2010, changing the benchmark reference home in their program

from the HERS Reference Home to a reference home based on the 2009 International

Energy Conservation Code (IECC). This reflected the stipulation in the American Re-

covery and Reinvestment Act (ARRA) produced by the Obama administration that

states receiving funds through this Act must adopt the 2009 IECC or a more stringent

energy code by 2017 or face refunding the money provided to them under that Act. The

new ENERGY STAR New Homes program included more checklists and revised the

airsealing and insulation checklist to include additional energy efficient features such as

advanced framing details and building assembly technology (structural insulated panels,

etc). The builders now had a checklist for the water management details of the building

enclosure, HVAC contractors had a checklist to ensure their design and installation met

the requirements of the ANSI Standard for Quality HVAC Installations, and HERS

Raters had an additional checklist to verify specific items from the HVAC contractor

checklist.

As a result, participation in the ENERGY STAR New Homes program dropped

significantly in many markets, in some cases going from 80% of a HERS rating compa-

ny’s business to 30%. At the same time, demand for the HERS rating by itself has in-

creased.

This represents a 11% increase from 2012 to 2013. At the same time, national

single family building permits have increased from roughly 518,000 in 2012 to 617,000



in 2013 (19% increase), and new single family home sales were reported at approxi2 -

mately 428,000 for 2013, up from an estimated 368,000 in 2012 (16% increase).3

RESNET also has received recognition from ANSI as a Standards Development

Organization, providing the opportunity for the RESNET standards to receive certifica-

tion as ANSI standards, broadening the audience that can utilize the standards pro-

duced. The first RESNET Standard to receive ANSI recognition was ANSI/RESNET

Standard 301-2014, “Standard for the Calculation and Labeling of the Energy Perfor-

mance of Low-Rise Residential Buildings using the HERS Index”, on March 7, 2014.

This has allowed the RESNET calculation methodology for evaluating the pre-

dicted energy efficiency of a home to be included in the 2015 IECC as another code

compliance option. This inclusion was the result of a concerted effort between RESNET,

building industry partners such as Leading Builders of America, and other stakeholders

such as the Natural Resources Defense Council and the Institute for Market Transfor-

mation. With the adoption of the 2015 IECC, jurisdictions will be allowed to provide

builders with more options to demonstrate energy code compliance, while the energy

rating index option is the only option that includes verified energy efficiency perfor-

Year HERS Ratings Performed, rounded down

2014 149,000

2013 143,000

2012 128,000

2011 120,000

2010 120,000

2009 116,000

2008 100,000



mance of the home as a whole system instead of partial verification of component

pieces of that system.

RolesRESNET

RESNET is overseen by a non-compensated Board of Directors who are elected

from the various classes of membership (Providers, Rating Companies, Energy Smart

Builders, Energy Smart Contractors, Energy Efficient Product Manufacturers and Sup-

pliers, Associate Member). The Board has 20 members, with 14 members representing

the HERS industry, 2 members representing Energy Smart Builders, 1 member repre-

senting Energy Smart Contractors, 2 members representing Energy Efficient Product

Manufacturers and Suppliers, and 1 member representing the Associate Members. Of

the 14 members representing the HERS industry, 2 strictly perform HERS ratings, while

4 are strictly Providers. The remaining 8 Board members representing the HERS indus-

try perform both HERS ratings and provide Quality Assurance oversight (Provider) to

HERS Raters.

The Board of Directors is tasked with developing strategy, and providing fiduciary

oversight and corporate governance. Currently, the Board adopts the strategic plan pro-

posed by RESNET staff and sets the annual priorities. The Board is responsible for set-

ting the annual budget, reviewing the monthly financial statements, and receiving the

yearly financial reports. The Board can request a financial audit at any time, but as a

California corporation an annual audit is not required until the budget goes over 2 million

dollars. Corporate governance is provided over the corporation by the Board by main-

taining and amending the corporate by-laws and articles of incorporation, leadership of



the Executive Director, debt management oversight, handling dissolution of the corpora-

tion if required, and adjudicating disciplinary appeals from members.

The Board of Directors established an Executive Committee currently consisting

of 3 representatives of the HERS industry, 1 contractor representative and 1 representa-

tive of the associate membership. The Executive Committee, whose members are

elected from the Board of Directors, is tasked with many of the operational responsibili-

ties, providing the bridge between strategic and operational objectives for RESNET

staff.

Many of the operational responsibilities are handled through the various commit-

tees established by the Board of Directors. To satisfy the requirements of an ANSI

Standards Development Organization, a Standards Management Board was created

consisting of members who are appointed by the Board of Directors and have personal

knowledge of standards, the standards development process, ANSI Essential Require-

ments, and experience in the building energy efficiency industry. The Standards Man-

agement Board (SMB) is responsible for coordinating standards development technical

work, establishing the scope of the work, reviewing the need to expand the standards

development work into new fields on a regular basis, establishing the Standards Devel-

opment Committee (SDC), establishing the work scope for the SDC, appointing the

Chair of the SDC, appointing the members of the SDC, approval of new work items for

the SDC, establishing the priorities of the SDC, ratification of the establishment of sub-

committees and task groups for the SDC, resource management with the RESNET

Standards Manager, monitoring work progress with the Standards Manager, reviewing

the procedures followed by the SDC, approval of all final actions taken by the SDC, es-



tablishing templates for standards development, maintaining and updating the stan-

dards development policies and procedures manual, maintaining RESNET’s accredita-

tion with ANSI, adjudicating appeals on SDC decisions from stakeholders, responding to

the public on inquiries on the standards development process, coordinating expert sup-

port for standards development, and assisting the Standards Manager with establishing

the budget required for standards development work. The Chair of the Standards Man-

agement Board is appointed by the Board of Directors.

Standards Development Committee 300 is a committee established by the Stan-

dards Management Board following an ANSI requirement for a balanced committee of

subject matter experts. The balance is provided by not allowing any single interest cate-

gory more than one-third membership for safety related standards and not allowing a

single interest category to have a majority of membership for non-safety related stan-

dards. The interest categories are divided into producers, users, and general interest.

Producers are directly concerned with the production or distribution of products or ser-

vices addressed by the standard, such as training providers, quality assurance

providers, and software providers. Users are those who use the end product of the

standards, and include HERS Raters, government agencies, and utility programs. The

general interest category are those with expertise in the field of building energy efficien-

cy such as advocacy groups, research institutions, universities, and national testing and

research laboratories. SDC 300 has created 3 subcommittees consisting of technical

experts to handle standards development work on Calculations, Equipment, and Enclo-

sure. Membership of those subcommittees do not have to be balanced; they produce

the working draft standards for the balanced SDC to take action on. SDC 300 has 12



members, and they also serve on the subcommittees. The Calculations subcommittee

has 5 members (2 of whom are members of the SDC), the Equipment subcommittee

has 8 members (4 of whom are members of the SDC), and the Enclosures subcommit-

tee has 8 members (3 of whom are members of the SDC). SDC 300 is responsible for

maintaining the viability of the standards produced, reviewing the scope of the stan-

dards development process and making recommendations to the SMB for improve-

ments, conducting a search for and reviewing existing standards on the subject matter

of a proposed standard, developing or appointing a task group to draft standards, re-

viewing the draft standards developed, providing comments on the draft standards, vot-

ing on standards, establishing the subcommittees and task groups, monitoring the work

of subcommittees and task groups, providing interpretations on published standards,

reviewing the standards at least once every five years, and establishing amendments

for published standards. The Chair of SDC 300 is appointed by the Standards Man-

agement Board.

The Training and Education Committee (SDC 200) is a committee of the Stan-

dards Management Board. This committee is tasked with issuing interpretations of the

national training standard, maintenance of the national certification exams, approval of

education programs, and maintenance of certification categories.

The Quality Assurance Committee (SDC 900) is a committee of the Standards

Management Board. This committee is tasked with issuing interpretations of the national

quality assurance standard and oversight of the RESNET quality assurance program.

The Ethics and Appeals Committee is a standing committee of the Board of Di-

rectors. This committee is tasked with reviewing and adjudicating appeals on RESNET



findings of quality assurance and ethics violations. It has 6 members who are ratified by

the Board of Directors upon the recommendation of the Chair who is not required to be

a Board member. The Chair is appointed by the Board of Directors.

The Accreditation Committee is a standing committee of the Board of Directors.

This committee is tasked with oversight of the RESNET accreditation application review

process and procedures. It has 7 members who are ratified by the Board of Directors

upon the recommendation of the Chair who is not required to be a Board member. The

Chair is appointed by the Board of Directors.

Software ProvidersRESNET accredits Software Providers who develop the software simulation tools

used to generate the HERS Rating Index, code compliance, appraisal energy efficient

value & mortgage, and improvement analysis reports; energy efficient program labels

and certificates for the DOE Net-Zero Ready Home and EPA ENERGY STAR programs;

and general energy consumption reports. The software tools used are vetted through a

procedure performed at the National Renewable Energy Laboratory prior to accredita-

tion.

Training ProvidersRESNET accredits Training Provider companies who train Rater and Rating Field

Inspector candidates. The Training Provider company must employ or contract a

RESNET-certified Rater Trainer who delivers RESNET-approved curricula. The Training

Provider company must maintain certified Rater Trainers, maintain records for 3 years

of all training materials and trainee data, provide candidates with a certificate or letter of

completion signifying achievement of the minimum competencies established by the

RESNET training standard, maintaining curricula that aligns with the current RESNET



standards, and provide training facilities and equipment that is appropriate to the train-

ing being delivered.

Quality Assurance ProvidersRESNET accredits Quality Assurance Provider companies who certify Rater and

Rating Field Inspector candidates, and perform quality assurance on the Rater and Rat-

ing Field Inspector’s work (1% field review, 10% simulation file review). Each Quality

Assurance Provider must employ or contract a RESNET-certified Quality Assurance

Designee who is responsible for managing the quality assurance program of that QA

Provider. The QA Provider must establish and maintain minimum operational policies

and procedures that govern projected ratings based on plans and specifications, field

verification of the minimum rated features of the rated home in accordance with the

RESNET standards, infiltration and duct leakage testing for all homes claiming credit for

reduced infiltration and leakage, improvement analysis, written conflict of interest dis-

closure, written disciplinary procedures for non-compliance in accordance with at least

the minimum RESNET requirements, tax credit verification record-keeping, maintaining

a registry of the Raters affiliated with their quality assurance program, maintain a sys-

tem for receiving complaints, registering the rating simulation file with the national

RESNET buildings registry, providing a site data collection manual to Raters affiliated

with their quality assurance program, and maintaining a record of the Rater training and

certification requirements met by Raters affiliated with their quality assurance program,

as well as maintaining records of the Rater professional development and recertification

requirements met by Raters affiliated with their quality assurance program.



Rating CompaniesHERS Raters and Rating Field Inspectors are certified by RESNET-accredited

Quality Assurance Providers through a process of supervised probationary ratings.

Once certified, HERS Raters are qualified to perform all the site data collection and

software simulation elements required to produce an as-built, confirmed HERS rating.

They may utilize Rating Field Inspectors who, upon certification, are qualified to perform

all the site data collection elements required to produce an as-built, confirmed HERS

rating.

Very early on in the development of the HERS industry, it became obvious to

Rating companies that incorporating a Quality Assurance Provider organization into

their Rating company would dramatically reduce their overhead cost and increase their

profitability. This produced what is arguably the most pervasive business “model” in the

industry: the in-house Provider model. Currently, less than 6% of Quality Assurance

Providers are identified who provide completely independent, third party quality assur-

ance to Raters. Additionally, 30% of Quality Assurance Providers who perform ratings

are also RESNET-accredited Training Providers. This saves the Rating company even

more money in overhead expenses- they can train and certify their own employees at a

reduced cost, and perform the quality assurance over their own company’s work without

incurring the expense of hiring an independent, third-party provider for those services.

However, the market for HERS ratings is maturing and transitioning from small,

regional builders and custom home builders to national production homebuilders. The

national builders are, for the most part, publicly traded companies who are risk-averse

and are relying on the integrity of the HERS industry to support their marketing efforts. If

the quality assurance system breaks down, they have a lot to lose. Looking forward, ju-



risdictions that adopt the 2015 IECC will also be relying on RESNET’s Quality Assur-

ance process to ensure the integrity of the energy rating index code compliance path.

In 2013, 53% of Quality Assurance Providers had a finding of violation and some

form of disciplinary action taken against them by RESNET.

Business TheoryBusinesses (including non-profits) face a fundamental choice between generat-

ing value with their clients or extracting value from their clients. In a value generating

business, the company realizes value by creating improvements to the client’s life; in a

value extracting business, the company realizes value by extracting capital from the

client without generating improvements.

To generate value, a business must first examine the client’s business (in a busi-

ness to business operation) and evaluate what problems they are solving and what

“jobs” they have to do. I define “jobs to be done” in this context as the outcome clients

are trying to achieve when they hire a product or service. As Leo McGinneva explained

why people buy a quarter inch drill bit, “They don’t want quarter-inch bits. They want

quarter-inch holes.” Using the drill bit fills the job they actually need done. Each job 4

must fulfill a functional, emotional, and social need of the client and I look for spaces

where the job is important, the client is unsatisfied, or the job is frequent. Most jobs are

circumstance-based and have little to do with the demographics of the client. By under-

standing the client’s business, the problems they are solving and the jobs they need

done in order to solve those problems, the stage is set to establish the value proposition

with the client. In a business-to-business setting, the job that clients most often need

done is to make a profit.



Selecting the right business model is critical to the success of the enterprise and

is completely dependent upon aligning the company’s products or services with the val-

ue proposition associated with each business model archetype.

The value proposition is critical because it determines which business model

should be pursued. The value proposition is the product or service the company pro-

vides clients that helps the client achieve what they are attempting more effectively, effi-

ciently, and affordably. The value proposition defines the value gained by the client.

Once the value proposition has been determined, the next step is established by

what drives the value proposition. There are 4 elements of a business model: the value

proposition, resources, processes, and profit formula. If value generation is important, 5

the next step is to develop the resource plan, the processes, and finally the profit formu-

la. If cost is the driving force, the next step is to develop the profit formula, then the pro-

cesses, and finally the resource plan. These steps are iterative and interdependent.

Resources are defined by the value proposition and are the things that must be

in place in order to deliver the value proposition.



Processes are the way the work gets done to ensure recurring tasks are per-

formed consistently.

The profit formula includes the assets, fixed cost structure, gross and net mar-

gins needed to meet the profitability goal, the variable costs, and the break-even point

(which determines the size of the organization required). The profit formula defines the

value gained by the company.

In addition to selecting the correct business model, the company must take a

strategic look at the five market forces that drive competition: the threat of new entrants,

the bargaining power of buyers, the threat of substitute products and services, the bar-

gaining power of suppliers, and the rivalry that exists among existing competitors.6

Finally, the company must look at the potential for disruption in the industry. Dis-

ruptive innovation occurs when a product or service becomes so much simpler to use

and affordable to acquire that an entirely new group of clients becomes accessible. In 7

addition to products and services being disrupted, business models can be disrupted as

the industry matures and models shift from one type to another. The change in the in-

dustry is more intense when the business models are disrupted than when the products

or services are disrupted.

There are three generic business models described by Professors Charles Sta-

bell and Öystein Fjeldstad of the Norwegian School of Management in their paper “Con-

figuring Value for Competitive Advantage: On Chains, Shops, and Networks”. Combin8 -

ing business models within a single business leads to significantly increased overhead

expenses and complexity because the value propositions, cost structure, and driving

forces are misaligned and often competing.



Facilitated Network ModelThe Facilitated Network business model is a single organization that creates a

network of clients. The driving forces are to match clients together, and multiply the

number of connections between them. The focus is on fully utilizing the network in-

frastructure, maintaining the exclusivity of the network, devising innovative servicing and

pricing models, assessing the long-term value of clients, and identifying the clusters and

connections between clients and the different layers of the network. The companies that

make money are the ones who facilitate the efficient operation of the network. Facilitat-

ed Networks establish, monitor, and terminate relationships among the members - ad-

mitting members who are complementary and excluding those who are not. They facili-

tate matching and monitoring through standardization, increasing their value to their

members by enlarging the network and performing mediation activities simultaneously

at multiple levels. The generic value proposition of the Facilitated Network business

model is to connect users with similar jobs to be done into a system where they can ex-

change, buy and sell services, goods and knowledge with each other.

Solution Shop ModelThe Solution Shop business model uses highly trained subject matter experts to

mobilize resources to create individual solutions to client problems, and to exploit mar-

ket opportunities. Solution Shops tend to work on unique problems for each client, and

get paid on a fee-for-service model. Solution Shops are used to improve operating per-

formance, increase asset effectiveness, enable market expansion, mitigate risk, and ac-

celerate market adoption. The focus is on assessing problems and opportunities, mobi-

lization of resources, delivering solutions, managing projects, measuring outcomes, and

increasing the client’s organizational capital. Solution Shops must create a minimalist



organization to succeed, decentralize authority and use market-like mechanisms for re-

source allocation while using ownership to drive accountability within a principle-based

decision making framework. Complexity is embedded in the business, not the individual,

as they apply multiple disciplines and specialties in activity cycles, often requiring differ-

ent skills and expertise at different stages of solving the problem. The generic value

proposition is to use experts who draw on experience, intuition, and problem-solving

skills to analyze problems and then recommend solutions. Solution Shops cannot guar-

antee outcomes because there are too many variables (the client may not follow the

recommendations, for example).

Solution Shops set prices based on time, overhead, labor costs (direct and indi-

rect), and leveraging talent. They get their prices based on the value generated to the

client; the cost of the services must be less than the potential gain, whether economic or

strategic.

Value-Adding Process ModelThe Value-Adding Process business model is driven by cost and efficiency. Val-

ue-Adding Process businesses get paid based on a fee-for-outcome. They are primarily

concerned with the performance of the key activities of making, moving, and marketing

products. Marketing serves two functions: the development and refinement of the chain

by providing product specifications and volume estimates, and stimulation of the level of

demand for output to ensure stable operation and capacity utilization. The focus is on

the output of product, the efficiency of the process, the ability to respond to changes in

supply and demand, the control of upstream and downstream activities, and the inter-

face with the customer. To keep costs down, the work must be performed efficiently by

the lowest credentialed person. The generic value proposition is to provide high-volume,



scaled services to meet more pattern-recognition and rules-based "jobs to be done" at a

lower cost. Value-Adding Process businesses can guarantee the outcome.

Value-Adding Process businesses set prices based on cost (although they

should use price-based costing) and leveraging processes. They get prices based on

the value generated to the client for the use of their product or service.

The question to ask when determining whether a Solution Shop or Value-Adding

Process business model should be adopted is:

“Can you guarantee an outcome?”

If the answer is “Yes”, then a Value-Adding Process model is appropriate.

If the answer is “No”, then a Solution Shop model is appropriate.

The HERS Industry TodayRESNET

RESNET is a Facilitated Network model, creating standards for training and certi-

fying Raters and Rating Field Inspectors, credentialing Rater Trainers and Quality As-

surance Designees, accrediting software simulation tools to produce a HERS Index val-

ue, and the technical standards for both the calculation methodology and the site data

collection of energy efficient measures in the as-built home. The users of this network

include Training Providers, Quality Assurance Providers, HERS Raters, Rating Field In-

spectors, Software Providers, home builders, renovation contractors, code officials, ap-

praisers, mortgage lenders, utility companies, energy auditors, building trade associa-

tions, national research laboratories, and federal and state governmental and regulatory

agencies such as the Environmental Protection Agency, the Department of Energy, and

the Internal Revenue Service. RESNET generates value for these members by increas-

ing the clarity of the standards, improving the consistency of the standards, increasing



the professionalism of the certified network members, improving standards enforce-

ment, improving quality and consistency of training, increasing access to data on rated

homes, and expanding the network through increasing consumer-oriented information.

RESNET has been able to capitalize on talented volunteers who are subject mat-

ter experts to produce the body of standards. Additionally, a national registry of certified

HERS Raters has been developed as well as a national registry of rated homes. The

registry of rated homes has the ability to parse out the details of the rated home and

provide information ranging from building assembly types to reductions in greenhouse

gas emissions. RESNET is financially stable and does not rely upon government subsi-

dies or grants, instead using wise financial management practices and sound fiduciary

oversight from the Board of Directors to maintain organizational viability. RESNET gen-

erates revenue through an annual national conference, accreditation fees, exam fees,

membership dues, and education and consulting work to stakeholder organizations.

RESNET has established processes for developing and amending standards;

recruiting volunteers to serve on committees; performing quality assurance reviews of

Quality Assurance Providers; and accreditation of Quality Assurance Providers, Training

Providers, software simulation tools; and certifying Raters and Rating Field Inspectors,

Rater Trainers, and Quality Assurance Designees.

RESNET maintains financial stability by keeping costs down, leveraging technol-

ogy when possible, and recruiting volunteers to perform the lion’s share of the work.

“Profit” is actually the cost of being in business next year, so it is not unreasonable for

RESNET to have more income than outflow. This surplus allows investment in the future

growth of the industry and the expansion of the network. With approximately 143,000



homes rated in 2013 at an average reported rating value of $500, this represents a

market value around $71,500,000.

Software ProvidersSoftware Providers provide software simulation tools that enable Raters to pro-

duce labels, certificates, and reports on the energy efficiency of homes, increase the

accuracy of the rating through the calculations, reduce the time required to get print

permissions through participation in the national buildings registry, and improve

RESNET resources through the data contained in the registry. The predominant tools

are REM/Rate, produced by Architectural Energy Corporation, and Energy Gauge USA,

produced by the Florida Solar Energy Center, comprising roughly 90% and 10% of the

market respectively. Both tools currently require the use of a Windows operating sys-

tem, with Energy Gauge requiring the use of a PC (using virtual machines on another

operating system doesn’t seem to work). One software simulation tool licenses Quality

Assurance Providers the software and the rights to sub-license the software to Raters,

with a revenue-sharing clause for license fees collected beyond the cost to the Quality

Assurance Provider and a per-rating fee. The other software simulation tool licenses the

Quality Assurance Provider and the Rater separately with different versions of the tool,

and assesses a per-rating fee to the Quality Assurance Provider.

The software simulation tools establish a uniform process for generating the rat-

ing and assorted reports, although the process varies between simulation tools. With

REM/Rate, the software simulation file is completed by the Rater and sent electronically

to the Quality Assurance Provider who reviews a minimum of 10% of each Rater’s simu-

lation files before uploading them to the RESNET national building registry. When up-

loaded, the file is assigned an identification number and print permissions for controlled



labels, certificates, and reports are enabled. The file is then saved by the Quality Assur-

ance Provider, then the print-permission enabled simulation file is sent back to the Rater

(or in some cases, the Quality Assurance Provider prints the requested labels, certifi-

cates and reports and mails them to the Rater). Energy Gauge USA utilizes an online

database that the Rater uploads the completed simulation file to, then the Quality As-

surance Provider downloads the file to review it, then uploads the approved file to the

same database. The Rater then downloads the approved file and prints the labels, cer-

tificates and reports. Energy Gauge USA then uploads the approved simulation file to

the RESNET national building registry.

Training ProvidersTraining Providers improve critical thinking skills, understanding of the RESNET

standards, communication skills, understanding of energy codes, understanding of qual-

ity control, energy efficient programs, quality of life for the candidate, and the quality of

the candidate’s work while increasing business knowledge, understanding of HVAC,

technical skills, understanding of software simulation tools, capacity to perform work,

promotability of the candidate, and feeling of self-worth of the candidate. They also in-

duce a sense of community among their student population and reduce the amount of

time spent learning the job.

Many Training Providers combine business models, pricing their courses as a

Solution Shop while employing a Value-Added Process model to produce an educated

HERS Rater or Rating Field Inspector. Others use cost-based pricing (Value-Added

Process model), but then fail to deliver on the value proposition which leads to under-

performing Raters and Rating Field Inspectors which only increases the cost to the Rat-

ing company in rework, keeping employees who are not a fit for the industry, and the



cost to replace the worker once they are removed. It typically costs about 16% of an

employee’s salary to replace them when they earn less than $30,000 per year and

about 20% of an employee’s salary when they earn between $30,000 and $75,000 per

year.9

Training Providers use RESNET-credentialed Rater Trainers to deliver their edu-

cational programs, often in rented hotel spaces (they go to the students). Some Training

Providers have training facilities, becoming a destination training center (the students

come to them). A few Training Providers are now offering online education, while some

deliver training through hybridization that combines online and instructor-led field train-

ing, while most are continuing to deliver only instructor-led training. The difference in

these resources has a huge impact in the cost to deliver education.

There are currently 76 Rater Trainers and 49 Training Provider companies , cre10 -

ating a fragmented market situation similar to what Quality Assurance Providers face.

There just over 4,000 HERS Raters in the country, with a projected 1,200 exams admin-

istered in 2014 (this includes individuals taking the exams multiple times). Including fail-

ure rates and multiple re-tests, this represents less than 800 individuals per year who

require training. This creates intense competition among existing companies, and the

low entry barriers make it relatively easy for new players to enter the game. This, along

with the huge variations in training quality, has created a situation where Rating compa-

nies also become Training Providers in addition to Quality Assurance Providers. Now

they are training their own employees, performing ratings, then performing the quality

assurance work on their own employees they trained and supervise. There is a docu-

mented bias that happens when a person is asked to evaluate the performance of



workers they supervise. In addition to this documented bias, the Dunning-Kruger Ef11 -

fect may be at play which will exacerbate the quality assurance and training situation. 12

The Dunning-Kruger Effect describes the documented effect of people who are com-

pletely unaware of their own incompetence in a specific domain, the incompetent’s in-

ability to acknowledge that fact when provided direct feedback, and the inability of an

incompetent to recognize competency when exposed to competent individuals, all likely

due to the incompetent person’s poor metacognition skills. The solution to overcome

Dunning-Kruger is to identify the incompetent people and provide training (which the in-

competent person believes they do not need) to bring their competency level up. Once

they have acquired more skills, their metacognition improves and they tend to realize

what they do not know, or recognize their own incompetence.

The test to become a RESNET-credentialed Quality Assurance Designee or

Rater Trainer is not specific to the roles they play; instead, the test is designed to sam-

ple knowledge of the role played by the Rater. A high score on this exam is not indica-

tive of abilities to perform quality assurance or train Raters.

Quality AssuranceQuality Assurance Providers reduce risk to Raters, improve the quality of ratings,

increase the accuracy of ratings, improve service delivery between Raters and builders,

improve communication throughout the network (since Raters are not required to be

network members), increase the profitability of Raters, reduce rework by Raters, induce

exclusivity of the network, induce community among their Rater clients, increase the

technical skills of Raters and Rating Field Inspectors, and maintain the integrity of the

system.



Most Quality Assurance Providers are incorporated into the Rating company

business, with the direct and variable costs absorbed into the overhead of the entire op-

eration. While at first glance this reduces costs, the reality is that it actually increases

the total industry cost because the market remains fragmented. With 106 Quality Assur-

ance Providers and 146 Quality Assurance Designees, the labor cost to the total mar13 -

ket is roughly between $9.3 million and $13 million. Add to that the accreditation fees 14

assessed by RESNET and the licensing fees charged by the software providers, and

the cost to the market for Quality Assurance is around $11.5 to $15.2 million per year.

There is a strong likelihood that inconsistency is a problem since there exists a

direct financial entanglement between the Quality Assurance Provider and the Rating

company. The pressure to capitulate to a financially dominant client (internal or external)

is extreme and is likely lead to a reduced level of oversight from Quality Assurance

Providers who are subjected to that pressure. Looking around at other industries that

have faced similar issues, I found the accounting profession has already faced this is-

sue. Max Bazerman, a Harvard Business School Professor and one of the world’s lead-

ing experts on decision-making, negotiations and ethics , and George Loewenstein, a 15

professor at Carnegie Mellon University, described the inherent conflict of interest and

bias between auditors and clients in an opinion piece.

“Research by psychologists and economists consistently shows that the

human mind automatically discounts information that is inconsistent with

what a person already believes or wants to believe and places dispropor-

tionate weight on information consistent with the person’s beliefs and de-

sires. Even the most professional and upright auditors will have an uncon-



scious but nonetheless real bias. This bias is all the more pernicious be-

cause people seldom believe it applies to them personally- even when

confronted with the research.

Since the bias is inherently unintentional and unconscious, attempts to de-

ter people from its influence are doomed to failure. What’s more, publiciz-

ing potential conflicts of interest to warn customers that information may

be biased is unlikely to be effective because the public, like the auditors

themselves, fails to recognize or underestimates the bias.

…Indeed, the debate about conflicts of interest in consulting actually ob-

scures a far more important problem: auditors are hired and fired by the

companies they audit. To use another trial metaphor, it is as if the defen-

dant were responsible for recruiting and paying the judge and jury.

This flaw virtually ensures violations of auditor independence. An unbiased

judgment cannot occur when an auditor has such a strong motivation to

please the client with a favorable report.”16

The HERS industry must not ignore this known bias and must recognize that it

applies to all stakeholders. If Quality Assurance Providers are allowed to perform ratings

while using an independent, contracted Quality Assurance Designee, the same oppor-

tunities and dangers exist but the bias will likely be even greater as the lone Quality As-

surance Designee faces the issue without a network of ethical support that could be

provided by an independent Quality Assurance Provider company that reinforces ethical

behavior. A possible solution that was proposed by Bazerman and Loewenstein that

could solve this ethical dilemma would be to require contracts between Rating compa-



nies and independent Quality Assurance Providers or Designees to be irrevocable and

non-renewable fixed-term agreements. The Quality Assurance Provider or Designee

would gain little from biased oversight since there is zero chance of renewing the con-

tract for a long time. Only by removing the conflict of interest can the bias issue be ad-

dressed and ensure impartiality of the quality assurance process.

Researchers have demonstrated that regulation that can be avoided due to indi-

viduals or organizations that have influence on the degree they are “regulated,” leads to

more unethical conduct than if the regulation simply didn’t exist.17

Another interesting finding is the impact of the context of time on self-deception

regarding one’s own ethicality. Prior to an episode of unethical behavior, people are very

likely to predict they will behave ethically; post-episode, they are likely to remember that

they behaved ethically. This reflects the dichotomy of the “want/should” theory and ex-

plains why our behavior is different from what we both intend to do and interpret to have

done.18

Rating CompaniesRating companies reduce risk to the builder, reduce time on market, increase the

builder’s profitability, improve the builder’s quality control, increase energy code compli-

ance, improve indoor comfort and health for the homeowner, and reduce confusion in

the marketplace for homeowners by objectively identifying high performance homes.

The Rating company utilizes certified Raters and Rating Field Inspectors to perform the

rating process, from site data collection to software simulation analysis, often leveraging

technology in the field to reduce the amount of time spent measuring, testing, and col-

lecting data.



Rating companies often combine both the Solution Shop and Value-Adding

Process models, acting as applied building science consultants while getting paid for a

label and certificate. Pricing is often competition-based, creating a downward spiral

which generates a tremendous amount of pressure to bypass the RESNET standards

which govern the work performed. In other situations, the builder pays for an applied

building science consultant but gets a technician who is incapable of solving their prob-

lems.

Additional overhead costs and complexity is introduced due to combining Solu-

tion Shop and Value-Adding Process business models. Many Provider/Rating compa-

nies set prices based on the amount of time involved to produce a rating (Solution Shop

model), while leveraging the processes to produce the work (Value-Adding Process

model). This creates situations where Raters spend an inordinate amount of time trying

to solve problems in the field, hand-holding trade contractors, and acting as project

managers for the builder during the rating process, then run into the challenge of forcing

that customized work into a standardized process that is designed for maximum effi-

ciency. Other Provider/Rating companies set prices based on cost (Value-Adding 19

Process model), leveraging process efficiency- but then act as Solution Shops and

spend an inordinate amount of time trying to solve problems (finding duct leaks, produc-

ing marketing material, dealing with high utility bill and comfort complaints, managing

the relationship with the HVAC contractor)- time for which they are not compensated,

leading to a reduction in the amount of labor available for production.



The Future HERS Rating IndustryThere are many opportunities at many levels throughout the industry for im-

provement through the alignment of business models with value propositions. The value

proposition is critical to the success of any enterprise: no matter what clients should do,

a viable business model only exists if the value proposition helps a client achieve some-

thing they are trying to do. Looking at each group described so far, I will examine the

opportunities based on the problems they solve, the jobs their services are “hired” to

perform, and evaluate the opportunities based on alignment with the business model

they should be using.

RESNETRESNET is using the correct business model, the Facilitated Network. The op-

portunities for improvement lie in the resources and processes of the model. The great-

est potential lies in the full utilization of the Board of Directors in the development of

strategy.

Strategy is a matter of figuring out what we need to achieve, determining the best

way to use the resources at our disposal to achieve it, and executing the plan. Funda-

mentally the Board should be concerned with how to generate value for the network

participants, including the dimensions of social, organizational, intellectual, human, and

financial capital. The Board should examine the likely near-term events and results, or

at least a range of possible events and results of any particular action taken, recogniz-

ing that the action taken rarely has only the intended effect. The Board should strive to

comprehend the nature of the problems RESNET is tackling and the “jobs to be done”

the network is “hired” to perform, anticipate possible outcomes, and set a strategic

course likely to achieve the desired objective. At the same time, the Board must sense



the complex nature of this environment and be prepared for both the unexpected set-

backs and sudden opportunities that will occur.

Strategy is the process of inter-relating ends and means; ends are the the con-

crete objectives which define victory, means are the methods used to achieve the objec-

tives. There are four steps to creating strategy. First, understand the nature of the prob-

lem. Second, identify potential solutions. Third, identify the objectives of stakeholders.

Finally, identify implications of potential solutions based on likely reactions of stakehold-

ers.

The next greatest opportunity for improvement lies in the resources at RESNET’s

disposition. As the facilitator of the network, RESNET has an inherent responsibility to

ensure the integrity of the network for the members. The Board should ask these ques-

tions:

• “Who should be brought into the network to enhance its value?”

• “Who should be removed from the network to enhance its value?”

• “Who are the good users of the network, and how can we encourage

them to use the network more?”

• “How can we increase the clarity of the standards?”

• “How can we improve the consistency of the standards?”

• “How can we improve the enforcement of the standards?”

• “How can we increase the professionalism of our certified members?”

• “How can we increase access to the valuable data within the registry?”

• “How can we generate valuable data for our network members?”

• “How can we increase demand at the consumer level?



RESNET has already started working on some of these questions, but there ex-

ists opportunity for refinement and focus. A major opportunity for expansion of the net-

work lies in multi-family (including high-rise), existing homes, and modular or factory-

built homes.

One of the major reasons the standards are currently inconsistent lies in the his-

torical structure of the development process. The technical standards, which are the

foundation, are developed through subcommittees of Standards Development Com20 -

mittee 300, a balanced committee of stakeholders empaneled and managed by the

Standards Management Board, which is an independent committee appointed by the

RESNET Board of Directors. The Training and Education Committee, tasked with de-

veloping the training standards in alignment with the technical standards, was a commit-

tee empaneled and managed by the Board of Directors. This inconsistent standards de-

velopment oversight led to changes in the training standard which did not align with the

development of the technical standards. Additionally, the Training & Education Commit-

tee was not a balanced committee of stakeholders; the primary representation is of

Training Providers. Likewise, the Quality Assurance Committee, tasked with developing

the standards on performing quality assurance and certification of members, was a

committee empaneled and managed by the Board of Directors, leading to the same in-

consistency in oversight. This led to changes in the quality assurance standard which

did not align with the development of the technical standards; this committee was not a

balanced committee of stakeholders, but had primary representation of Quality Assur-

ance Providers. The solution to this dilemma was to align these two committees as sub-

committees of the Standards Management Board , ensuring that consistency in stan21 -



dards development takes place. The Standards Management Board ensures the impar-

tiality of the process and a cohesive standards development plan that aligns with the

strategic objectives of the Board of Directors is realized.

Furthermore, the policies set in place by the Board of Directors regarding the in-

dependence of Quality Assurance must be implemented, and sooner rather than later.

Extensive delays will likely cause an erosion of trust among the users of the HERS In-

dex, which are primarily homebuilders and energy efficient programs.

RESNET also has an opportunity to facilitate the deployment of advanced con-

struction technologies into residential construction by implementing a “fast-track”

process for recognition of the energy savings produced by these technologies in the

software simulation analysis. Currently, manufacturers are developing these technolo-

gies, then testing them through Building America-funded research programs which work

with home builders. After the research and testing iterations are over, the technology

often fails to grab any significant market share because the technology is not incorpo-

rated into the HERS Index calculations. If it doesn’t impact the HERS Index, mainstream

production builders won’t deploy the technology because there is no demonstrable ben-

efit to the homebuyer through the easy to understand HERS Index metric and the asso-

ciated energy savings reports produced through the RESNET network. RESNET must

recognize they are a multi-sided network that connects a number of stakeholders, gen-

erating value through those connections and maintaining that value through rigorous,

unbiased quality assurance.

As a multi-sided network, RESNET facilitates direct interactions between different

types of stakeholders affiliated with the network. Due to the network structure, there are



cross-group network effects that come into

play such as increasing the number of

Raters qualified to perform ratings which

increases the ability of builders to capitalize

on marketing opportunities; providing man-

ufacturers with an opportunity to deploy

technology to the market while builders cap-

italize on the enhanced marketing opportu-

nities reflected in the HERS Index; Raters

can deliver verification services to builders

for the ENERGY STAR and Building Ameri-

ca programs; and builders can connect with

mortgage companies that recognize the in-

creased value of energy efficient homes.

Key to maintaining this value that RESNET

generates is the quality of the data produced by the Rater.

Software ProvidersPerhaps the most disruptive innovation can take place among the Software

Providers. So far, they have only produced sustaining innovations to their products. If

the Software Providers would look at their products through the lens of the “jobs to be

done” by the users, they would find significant opportunities to help the users do those

“jobs” more effectively, conveniently, and affordably. So, how can Software Providers

help their clients make a profit?



The first place to look is at the Quality Assurance Provider level. Many of the

standardized review items we evaluate manually can be automated by the software tool.

From ZIP code checks, Rater and Provider ID verifications, logic checks for surface ar-

eas and volume, mechanical equipment values, energy consumption of equipment, ap-

pliance efficiency ratings- all can be automated with currently available resources and

technology. Another opportunity is for quality assurance to be improved by providing

standardized site data collection that can be compared to the simulation file inputs, thus

allowing true quality assurance on the process used to produce the rating.

Many of those automated review checks would also increase the velocity of the

Rater’s work- one of the keys to increasing the affordability of HERS Ratings while im-

proving the profitability. Looking at the compensating behavior of Raters and Rating

Field Inspectors, the lack of integration between site data collection and simulation file

creation causes intense frustration, many opportunities for human error, and an inability

to provide oversight in a timely manner. To compensate for these things, several com-

panies are producing third party project management software tools that integrate with

the simulation tools- but why aren’t the simulation tools doing that already?

In keeping with the Value-Adding Process business model, Software Providers

should be working on helping Raters and RESNET achieve what they are trying to do at

a lower cost. That cost isn’t necessarily economic, but is represented in reduced pro-

ductivity due to unstable “updates”, technical glitches, and the lack of integration that

unnecessarily increases the complexity of performing a HERS rating.

Another opportunity for Software Providers is in training the users of the simula-

tion tools. This can be done completely online using a self-paced learning platform that



provides training in the data input, case studies for practical application, and automatic

grading of the work produced by the candidate. The technology to do this exists today

and is used elsewhere- why not in this industry?

I would envision such training leading to a RESNET certification of “HERS Ener-

gy Analyst”, further generating value to the Rating company by providing a qualified in-

dividual at a lower cost to perform the simulation file inputs.

Training ProvidersTraining Providers should be using the Value-Adding Process business model,

leveraging technology to reduce the cost and improve the quality. This is the only way to

cost-effectively increase the number of certification candidates and produce educated

Raters and Rating Field Inspectors (and potentially, HERS Energy Analysts). Hybrid

programs which incorporate online education with instructor-led, in-person classroom

and field training, “flipped” programs which drive critical thinking by providing the educa-

tion materials prior to the class where the Socratic method of teaching deepens the

candidate’s understanding, job-specific task training, the use of simulators to supple-

ment (not replace) field training by establishing the process of performing tasks, and

separating education from training are all spaces where Training Providers can find 22

opportunities. Using the Value-Adding Process business model requires the Training

Provider company to start with the price and establish the profit formula, then work

through the processes required to deliver the education at that price. The resources that

will be required to transition from classroom and field based training to technology

leveraged training include good instructional design for the media employed, a platform

that provides on-line access to education for students, and engaging instructors who

provide meaning to the subject matter. To ensure Training Providers deliver on their val-



ue proposition, the Quality Assurance Provider should also track who trained the certi-

fied Rater or Rating Field Inspector. High error rates among a statistically significant

number of students would provide RESNET the opportunity to provide valuable feed-

back to Training Providers- essentially providing quality assurance over them as well.

Continued poor performance of certification candidates after such feedback should be

grounds for corrective action to be taken by RESNET, reducing the potential for poor

training to contribute to inconsistent and unreliable HERS ratings.

Trainers employed by the Training Provider should be removed from (or con-

strained in) the process of evaluations and assessments on students they have trained.

There exists a powerful motivation for the Trainer to address inequity by overstating or

understating observations in order to “help out” those they feel are deserving, or to hin-

der those who are believed to be undeserving. Using a combination of simulation as-

sessments along with recorded observations using the RESNET Field Evaluation Tool 23

would provide the needed constraints.

Quality AssuranceRESNET’s Board of Directors adopted policies regarding Quality Assurance at

the fall Board meeting held in San Diego, CA, in October 2013. These policies stated:

• Quality Assurance Designees and Delegates must serve as agents of

RESNET.

• Quality Assurance Designees and Delegates must have neither a finan-

cial interest nor an employee/employer relationship with the entity per-

forming the rating

• RESNET quality assurance standards maintain the current requirement

of annual quality assurance review of raters consisting of 1% field re-



views and 10% building file reviews with provisions through modification

to the standard to add additional oversight of HERS Raters when errors

are found in these reviews

• Establish limits on input variables for whole-house ventilation systems

and others in the RESNET Standards

• Determine bounds checks that can be incorporated into software to limit

or warn users when input variables are beyond reasonable limits

These policies were adopted by the Board of Directors based on recommenda-

tions from a HERS Index Consistency Task Force created at the request of production

builders concerned with inconsistent Index values on their homes.

Some scenarios that are likely results of those policies include:

A. Quality Assurance Provider/Rating companies that facilitate quality as-

surance contracts between rating companies and independent Quality

Assurance Designees/Delegates

B. Rating companies that contract with independent quality assurance

companies

C. RESNET hires employees to staff a quality assurance department that

performs all the quality assurance for the industry

D. RESNET contracts quality assurance file and field reviews to indepen-

dent quality assurance companies

E. Software vendors perform simulation file reviews and contract field re-

views out to independent quality assurance companies



F. Software vendors perform simulation file reviews and RESNET con-

tracts field reviews out to independent quality assurance companies

Each of these scenarios have profound implications on the industry as it currently

exists. Some of the likely consequences are listed here for each of the scenarios- but

this list is far from comprehensive.

In-house Provider/Rating Company Facilitated Network Model (Scenario A)Under this facilitated network business model, the vertically-integrated Quality

Assurance Provider/Rating company contracts independent Quality Assurance De-

signees to perform quality assurance on the rating company’s work, while facilitating

contracts between those independent Quality Assurance Designees and independent

rating companies. There is at least one Quality Assurance Provider who is already suc-

cessfully using this business model in the midwestern area.

There are a few challenges with this model. The independent Quality Assurance

Designee may also perform ratings, and may be a competitor to a rating company that

is being audited for quality assurance compliance. To avoid having the competition per-

form that function, the rating company would have to hire a Quality Assurance Designee

that is outside the rating company’s market area which will increase the cost incurred for

quality assurance. There’s another opportunity for ethical dilemmas posed when all of

the Quality Assurance Designees in this network are also working Raters within the

network. This can create a situation where the pressure to let quality assurance items

slide is enormous, fueled by a quid pro quo conflict of interest and bias.

This model still faces the inherent, overwhelming bias and conflict of interest

found whenever an auditor is directly hired by the company being audited.



Independent Quality Assurance Company Model (Scenario B)For many Rating companies, particularly the ones who currently are their own

Quality Assurance Provider, the cost of the rating will go up if they are required to con-

tract directly with independent Quality Assurance Providers and the quality assurance

market will remain fragmented (increasing the total cost to the industry) if a plethora of

Quality Assurance Provider companies spring up. The Quality Assurance Designee

would become a specialized profession within the industry, while RESNET may lose ac-

creditation revenue if the number of Quality Assurance Providers is reduced or gain ac-

creditation revenue if the number of independent Quality Assurance Providers increas-

es. This scenario could produce increased consistency in ratings than what currently

exists and the quality could improve.

Some vertically-integrated Provider/Rating companies may try to circumvent the

Board policy on independent quality assurance by releasing their Quality Assurance

Designees who then set up their own independent quality assurance companies that

are, in turn, contracted by their former employer. If RESNET uses the IRS rules to de-

fine what constitutes an employer-employee relationship, this particular scenario would

not withstand the sniff test. Under the IRS rules, an employer-employee relationship

may exist depending upon the degree of control and independence in three different

categories (behavioral, financial, and type of relationship).24

The overwhelming bias reported by Bazerman and Loewenstein still exists within

this scenario, and it is very likely that the independent Quality Assurance companies

whose revenue is dependent upon the Rating companies being audited will constantly

face ethical dilemmas, not all of which will be successfully navigated.



RESNET Staff Quality Assurance Model (Scenario C)If RESNET hires staff to perform the quality assurance role, the overhead will in-

crease significantly and would likely require much higher membership dues to be as-

sessed to recover the indirect overhead cost of managing that number of employees.

In a staffing analysis I conducted , approximately 70 Quality Assurance De25 -

signees would be required to perform quality assurance work on 220,000 homes (esti-

mated at 70% HERS ratings and 30% ENERGY STAR) if the Quality Assurance De-

signees were located remotely and within a 2 hour radius of the majority of ratings. A

relatively simple analysis of the national buildings registry can provide the information

needed based on ZIP codes to establish those locations. This is a reduction from what

currently exists in the industry and the consolidation represents an estimated total in-

dustry savings between $4.8 and $6.7 million dollars per year in direct and indirect labor

costs alone. These savings occur as a direct result of consolidation and could be

achieved with either the RESNET-contracted Quality Assurance Provider companies or

RESNET staff performing quality assurance scenarios.

Additionally, if RESNET takes on the role of directly performing quality assurance

work through staff, it is very likely that greater consistency between ratings would be es-

tablished, a stabilization of rating prices would occur, and RESNET would receive a

revenue increase from assessing quality assurance fees per rating. Also, Quality Assur-

ance Provider companies would go out of business- and there may be legal issues in-

volving economic damages created by that event.

RESNET Contracts Quality Assurance Model (Scenario D)If RESNET contracts directly with independent Quality Assurance Provider com-

panies who do not perform ratings, the quality of the ratings will likely increase, rating



prices would likely stabilize due to standardized quality assurance costs, greater consis-

tency between ratings would likely be achieved, and RESNET would gain revenue from

quality assurance fees assessed directly to Rating companies while losing revenue due

to the reduced number of Quality Assurance Providers. This scenario also has a direct

effect on Software Providers; while Energy Gauge USA revenues would likely be unaf-

fected, Architectural Energy Corporation would lose revenue they currently receive from

licensing REM/Rate to Quality Assurance Providers. However, that revenue loss could

be mitigated by assessing licensing and per-rating fees directly to Rating companies.

There would also be a reduction in the number of Quality Assurance Designees

and Delegates due to consolidation in the market.

Software Providers QA Files, Contract Field QA (Scenario E)Perhaps the greatest disruptive innovation that can occur lies in shifting the role

played by the Software Provider. If we look at the quality assurance process, it breaks

down into two distinct parts: the software simulation file review and the field evaluation.

As mentioned earlier, many of the reviewed elements can have that function automated-

and if the software vendors build in a site data collection function that exports the col-

lected data with the current simulation file outputs, the complexity of both the rating and

review tasks become simpler while the simulation file review itself becomes more mean-

ingful. Who in the industry is best positioned to take on the role of simulation file re-

views?

Imagine a Rating Field Inspector using the RESNET standardized site data col-

lection tool in the field. The data entered gets pushed into the simulation tool and the

Energy Analyst in the office gets notified. They check the inputs, customize or verify as

needed, and upload the file to the Software Provider. The Software Provider performs a



series of automated checks, comparing site data collected with simulation file outputs. If

approved, the file is uploaded to the RESNET national buildings registry and the print

permission enabled simulation file is sent back to the Rating company. This method

would ensure much greater consistency in the ratings and guard against bad data get-

ting into the national buildings registry.

Now imagine a Rating Field Inspector using the software simulation tool in the

field on a tablet, using built-in RESNET standardized site data collection and bar-code

scans of installed equipment (HVAC, DWH, appliances, fans, etc). These scans pull the

required data from the various databases that currently exist in multiple locations and

the HERS Index is calculated based on what is collected in the field. This technology

currently exists and if leveraged, would dramatically reduce the amount of overhead ex-

pense and time required to produce a HERS rating.

Once a Rater had 5 of their simulation files uploaded to the national registry, a

notification would be sent to the closest Quality Assurance Designee contracted by the

Software Provider to perform a field quality assurance review. Once the Rater crossed

the 100 home (and following 100 home increments) threshold, another note goes out to

the Software Provider-contracted Quality Assurance Designee.

This scenario is loaded with deep implications, ranging from industry cost sav-

ings by consolidating and reducing the number of Quality Assurance Designees, to in-

creasing the uniformity of ratings, to increasing the value of the simulation tool to the

Rater, to virtually eliminating bias and conflicts of interest in the quality assurance

process. It would also go a long way toward stabilizing prices for the home builders.



Due to the inherent efficiencies in this value-added process business model, the

costs to the rating company would decrease and the quality of the work would increase.

Additionally, 100% of the simulation files could be reviewed at a fraction of the cost re-

quired to have humans do the same work, increasing the value of the data collected in

the national building registry.

Software Providers QA Files, RESNET Contracts Field QA (Scenario F)In this model, the Software Providers perform the quality assurance reviews of

the simulation files, while RESNET contracts the field quality assurance work to inde-

pendent Quality Assurance companies who do not perform any ratings. This has all the

benefits of Scenario E, with the added benefit of establishing a separation between file

quality assurance reviews and field quality assurance reviews. In Scenarios E & F, vir-

tually all the ethical issues are eliminated by eliminating financial entanglements be-

tween Raters and Quality Assurance auditors, while the Quality Assurance auditor is ful-

ly engaged as an agent of RESNET in Scenario F. Additionally, any employee/employer

relationship with any rating company is eliminated.

Another opportunity for RESNET to enhance the network in the domain of quality

assurance is to provide standardization of site data collection, simulation file reviews,

and field quality assurance reviews.Currently, there is no standardization in those activi-

ties leading to deficiencies and uneven application of quality assurance protocols.

Quality Assurance Providers (in whatever form they may take in the future) must

recognize the appropriate business model and design their businesses accordingly. For

the Value-Adding Process model they need to start with price-based costing (the Qual26 -

ity Assurance Provider establishes the price for the service), then leverage technology

to use standardized processes to deliver the services, and finally, use the lowest cre-



dentialed person allowed to perform the required work. Quality Assurance Providers can

guarantee an outcome: if the software simulation file and home is rated appropriately, it

will be approved and uploaded to the national building registry.

The question to ask is:

“If we were to design this system today to reflect current market condi-

tions, how would we design it?” and avoid the trap of relying on adapting

the current systems.

Rating CompaniesRating companies (whether a large corporation or a company of one) must also

realize that they need to select the correct business model for their market. For exam-

ple, in emerging markets a Solution Shop business model is needed with the HERS

Rater acting as a consultant and setting value-based pricing. Existing homes also re27 -

quire a Solution Shop model because every home is unique, with occupant behavior

and construction/renovation history driving many of the circumstance-based problems.

This is why franchises for home performance contractors struggle to succeed; they are

trying to apply a procedure-driven, rules-based job value proposition to a market that

requires individual solutions to unique problems, solutions which fundamentally cannot

guarantee an outcome due to lack of control over occupant behavior.

Programs such as ENERGY STAR, Net-Zero Ready Home, and LEED for

Homes and other green building programs also require a Solution Shop business mod-

el; there are no guarantees that the home will qualify for program certification. Most, if

not all, of the Rating companies working with those programs have tried to combine the

Solution Shop model with the Value-Adding Process model.



According to Harvard Business School professor Clayton Christensen, in the his-

tory of business a company that was a leader using one business model has never suc-

ceeded in becoming a leader using a business model that was disruptive to the original

model unless the disruptive model is established as a completely different business unit

under the corporate umbrella and allowed to compete with the original model. Addi28 -

tionally, combining Solution Shop and Value-Adding Process business models leads to

an increased “cost of complexity” because these models cannot “effectively coexist” be-

cause their processes and profit formulas are opposed to each other.29

However, as an emerging market matures or in a market dominated by produc-

tion homebuilders, a Value-Adding Process business model is more appropriate and will

require the Rating company to disrupt their business by shifting from the Solution Shop

model to the Value-Adding Process model in order to stay viable. A Value-Adding

Process Rating company will utilize Rating Field Inspectors for site data collection (the

lowest credentialed person permitted to do the work) and perhaps a new class of certifi-

cation would be created by RESNET, HERS Energy Analyst, to perform the software

simulations. The work of these two groups could be supervised by a single certified

HERS Rater, reducing the cost to perform the work and improving the profitability of the

Rating company. This shift from consultant-type work to technician-type work will require

a paradigm shift in the Rating company and a different set of expectations from the

homebuilders.

Within mature markets, there will still exist a need for Rating companies that em-

ploy a Solution Shop model for new construction, particularly dealing with custom



homebuilders and architects. This would be a niche market and reflect the different

needs of the client.

ConclusionsThe home energy rating industry is relatively young and is on a growth trajectory.

Many businesses within the industry have combined business models, trying to be all

things to all customers and performing all roles poorly. This misalignment and failure to

recognize significant, inherent bias and cognitive errors among those who play the vital

role of quality assurance has created the situation where a critical decision has to be

made about the fundamental architecture of the industry in order to maintain integrity

and validity in the marketplace. This disruption will provide the opportunity for most in-



dustry players to align their business models and value propositions for maximum effec-

tiveness in delivering their products and services to the marketplace, something current-

ly not done. This alignment between value proposition and business model necessitates

a hard look at what those businesses should be doing, and more importantly, what they

should not be doing. Those constraints will improve profitability and affordability, particu-

larly if the correct price setting model is also utilized.

The three generic business models are:

1. Facilitated Network: value proposition is to connect users with similar

jobs to be done into a system where they can exchange, buy and sell

services, goods and knowledge with each other.

2. Solution Shop: value proposition is to use experts who draw on experi-

ence, intuition, and problem-solving skills to analyze problems and

then recommend solutions.

3. Value-Adding Process: value proposition is to provide high-volume,

scaled services to meet more pattern-recognition and rules-based jobs

to be done at a lower cost.

RESNET, a Facilitated Network business model, should fully utilize the Board of

Directors for strategy development, and actively look for ways to enhance and increase

the viability of the network. This will require a significant adjustment to the architecture

of the industry with respect to the system for providing quality assurance oversight. Ad-

ditionally, aligning training and education standards development and quality assurance

standards development with the technical standards development will increase the clari-

ty and consistency of the standards. Bringing that alignment under the management of



the independent Standards Management Board will provide a balanced approach to

standards development. It will also allow the Standards Management Board to imple-

ment a cohesive strategic standards development plan based on the strategy developed

by the Board of Directors. RESNET can improve network utilization through standard-

ization of site data collection, simulation file inputs, and quality assurance- and provide

a mechanism for better quality assurance at a lower cost to the industry. Independent

quality assurance and standardization will also set the stage for consolidation among

Rating companies, further stabilizing prices in the market.

Software Providers are a Value-Adding Process business, and have a great op-

portunity in front of them if they will capitalize on it. Tremendous savings to the industry

can be made through the automation of certain tasks that are currently being performed

manually, both from the quality assurance review side and the site data collection-simu-

lation file interface. Using standardized outputs would allow a high level of comparative

review between site data collected and simulation file inputs, permitting quality assur-

ance to be performed remotely, further reducing the cost to the industry while increasing

the integrity and reliability of the value network provided by RESNET. Software

Providers, perhaps more than any other group, have the most potential to solve more

problems than any other group mentioned so far.

Training is a Value-Adding Process business model that requires leveraging

technology and processes to meet the price the market is willing to pay (not what the

market can bear, as that only sets the company up for price-based competition and

wastes company resources). Different training methods should be employed, focusing

on using engaging instructors to educate while qualified individuals with job experience



train the candidates on the job-specific tasks involved. RESNET can employ standard-

ized quality assurance elements to certified Raters and Rating Field Inspectors (and

HERS Energy Analysts) to make determinations about the quality of instruction received

from the Training Provider, further enhancing the value of the network and providing ad-

ditional quality control for the industry.

Quality Assurance, a Value-Adding Process model, needs to focus on price-

based costing and design service delivery around efficient processes that leverage

technology, enabling people with the lowest credential permitted for that role to perform

the work more effectively, conveniently, and affordably.

Rating companies need to examine their value propositions and align their busi-

ness operations with the correct business model for their value proposition. They first

must recognize that conflating the Solution Shop and Value-Adding Process models in-

creases the cost of complexity and reduces their effectiveness. Next, they should de-

termine the optimum business model for their situation. In emerging markets, they

should start out as Solution Shops and transition to Value-Adding Process businesses

as the market matures. If they have primarily production homebuilders as clients, they

are a Value-Adding Process business and need to organize around price-based costing.

If the Rating company has custom homebuilders or architects as the primary client, they

are a Solution Shop business. If they participate in ENERGY STAR, Net-Zero Ready

Home, LEED for Homes, or other green building programs, they are a Solution Shop

business. For maximum effectiveness and affordability, this differentiation will force

them to create new business units that have different cost structures, pricing mecha-

nisms, processes and resources to handle the Solution Shop work if they are going to



continue to perform HERS ratings in a Value-Adding Process for production builders. If

the Rating company works in existing homes, they are a Solution Shop business and,

for maximum effectiveness, need to organize around their resources.

Aligning value propositions and business models presents the members of the

HERS industry value chain the opportunity to have the most profound impact on achiev-

ing energy efficient, sustainable residential construction effectively and affordably.

About the author: Brett Dillon is CEO of The Dillon Group, Inc, a consulting firm that serves the housing industry, manufacturers, and small business through strategy, education, media, and building science. The Dillon Group, Inc., owns IBS Advisors, LLC, a company that quality assur-ance to the HERS industry, and the Intellectual Ferret and Skaldic Media brands. He can be reached at [email protected] or 423-838-5095.

www.thedillongroupinc.comwww.ibsadvisorsllc.comwww.intellectualferret.comwww.skaldicmedia.com


mailto:[email protected]

http://www.thedillongroupinc.com

http://www.ibsadvisorsllc.com

http://www.intellectualferret.com

http://www.skaldicmedia.com


There is a great debate between using site energy or source energy in these calculations. The 1

electric industry focused on site energy, while the gas industry focused on source energy. The idealogical clash between the two industries is referred to in the RESNET universe as the “fuel wars”. RESNET dealt with the controversy by using normalized, modified, end-use loads in the calculation methodology instead of consumption. Loads cause energy use, but do not use ener-gy, creating a more neutral comparison between fuels through the calculation methodology.

Source: https://www.census.gov/construction/nrc/pdf/newresconst.pdf2

Source: https://www.census.gov/construction/nrs/pdf/newressales.pdf3

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www.rites-of-passage.com/images/Levitt_TheMarketingImagination.pdf

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Built?”. Harvard Business School Case Study, Harvard Business School, 2009.

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Chains, Shops, and Networks”. In Strategic Management Journal, Vol. 19, 413-437,John Wiley & Sons, Ltd., 1998.

Boushey, Heather, and Sarah Jane Glynn. “There Are Significant Business Costs to Replacing 9

Employees”. Center for American Progress, November 16, 2012.

Retrieved from http://www.resnet.us/professional/programs/qualified_rater_trainers and http://10

www.resnet.us/professional/programs/training_providers, February 18, 2014.

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Retrieved from http://www.resnet.us/professional/programs/test, February 17, 2014.13

Salary ranges for QADs seem to be between $50,000 and $90,000 per year, depending on 14

the market and ability to negotiate salary.

Retrieved from http://www.hbs.edu/faculty/Pages/profile.aspx?facId=6420, February 19, 2014.15

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Gino, Francesca, Erin L. Krupka and Roberto A. Weber. Working paper “License to Cheat: 17

Voluntary Regulation and Ethical Behavior”, 2012.

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Often their labor costs are based on piecework, creating a situation where the labor cost is a 19

variable cost instead of a fixed cost.

Subcommittees are not required to be balanced, but do require subject matter expertise to be 20

a member. Additionally, they work as drafting committees and hold no binding votes, only votes to provide an indication of consensus to the SDC.

This was the result of the action taken by the RESNET Board of Directors on February 23, 21

2014, when they authorized the approval of non-ANSI RESNET Standards to be handled by the Standards Management Board.

Education opens and enriches the individual’s mind, producing a thinking worker. Training 22

teaches an individual how to perform job-specific tasks more efficiently and effectively. Different skill sets are required for this; job experience becomes critical to trainers, while educators do not need job experience.

The RESNET Field Evaluation Tool is a tablet-based program that allows video and audio 23

recordings of candidates performing required tasks in the field, with the results and assess-ments uploaded to a cloud database that permits progression tracking across the minimum competencies for the certification.

Retrieved from http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Indepen24 -dent-Contractor-Self-Employed-or-Employee, May 19, 2014.

I used the following assumptions: 220,000 homes split 70% HERS rating and 30% ENERGY 25

STAR with 15 minutes for rating software file review, 45 minutes for ENERGY STAR documen-tation review performed at a rate of 10% for each group; 4 hours round-trip travel time for field evaluations performed at a rate of 1% per group; 4 hours per field evaluation for HERS ratings and 5 hours per field evaluation for ENERGY STAR; 18 minutes per rating for administrative work. This produced a total time required of 115,060 hours. With only 1,536 hours available per Quality Assurance Designee (2080 hours per year - 10 federal holidays - 2 weeks vacation - 20% non-billable time = 1,536 hours), it would require 68 Quality Assurance Designees, and an additional 2 to handle issues such as backup for emergencies and illnesses.

Price driven costing was advocated by Peter Drucker in his column "The Five Deadly Busi26 -ness Sins" for the Wall Street Journal published on October 21, 1993. Most Western businesses use cost-driven pricing, adding a profit margin on top of their costs to establish the price. How-ever, it is not the responsibility of the consumer of the product or service to ensure the business makes a profit- and using this method to set prices ignores the interests of the consumer and often does not generate value to them. In price driven costing, the price is established by what the market is willing to pay, and then the product or service is designed to deliver the product or service profitably at that price point.

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee


Value-based pricing uses the customer's perceived value of the product or service as the dri27 -ving price setting force. This approach requires a deep understanding of customer needs, value perceptions, and willingness to pay, and is especially relevant in highly competitive industries. Source: Hinterhuber, Andreas, and Stephan Liozu. “Is It Time to Rethink Your Pricing Strategy?”. In MIT Sloan Management Review, Summer 2012, Vol. 53, No. 4, 2012.

Christensen, Clayton, and Mark Johnson. "What Are Business Models, and How Are They 28

Built?”

Wanamaker, Ben, and Jeff Wheeler. "What to do about the ailing general hospital business 29

model?". Retrieved from http://www.christenseninstitute.org/what-to-do-about-the-ailing-general-hospital-business-model/ on February 19, 2014. Clayton Christensen Institute for Disruptive In-novation. Originally published July 18, 2013.

http://www.christenseninstitute.org/what-to-do-about-the-ailing-general-hospital-business-model/

Documents

Home Energy Rating System Industry Business Models