Utility Management – The Problem With Commission

Many companies want to know that they can trust their utility management consultant (broker) to be honest, and work hard to get them the best deals for their business. One of the biggest issues within the utility management industry is about how brokers make their fees back from clients.

There are normally three options, but not every broker will offer you all of them:

  • Fee invoiced directly
  • Commission built into your energy contract
  • Combination of the two

There isn’t anything wrong with any of these options as long as you are aware of what you are paying, and the broker is very clear about their charges. Commission can be more favourable to clients as it is often hidden and works off your rates, whereas a fixed fee can appear to be the more expensive option. But don’t be fooled. Brokers who only work on commission are often using this to hide their more expensive charges, meaning you aren’t able to properly compare pricing between brokers and therefore end up over paying for the services.

HOW DOES COMMISSION WORK?

We often get asked how the commission process works as the payment structure is sometimes unclear and these fees can be hidden or confusing. It is vital to understand how the process works before deciding whether you want to pay for your service on commission or on a fixed fee basis. Either way your broker should be clear with you about where their fees are, how the payment works and when you will be expected to pay the charges so you aren’t hit with extra bills. Many people choose commission as they think it will offer them the most cost effective way of paying their energy broker, however fixed fee often works out better and cheaper.

Energy brokers who work only on a commission basis will be being paid by the supplier, this means your energy prices are increased by the commission amount. Your bills will be more expensive than they would be otherwise, and when you pay your supplier, they then pay the broker this uplifted amount. The broker will normally tell the tendering suppliers how much commission they will want added on to the offers and in many cases these uplifts can be very high compared to a fee paid directly to brokers. A number of suppliers won’t question this and do as requested. Some suppliers might query the amount if they think it is too high and others might just have set rates. In the latter two cases there is a risk they will not be allowed to make an offer. The important issue is that the broker might exclude some suppliers from tendering if they aren’t willing to include the requested commission and therefore, you might not be getting the most competitive rates available in the whole market. Paying on commission also stops you from comparing your broker rates to a broker that works on a fixed fee basis. It also means that brokers can increase commission over time without you realising. A fixed fee will remain the same throughout your contract unless a reassessment has been agreed.

If you don’t know how much commission you are paying then you are likely paying too much. By hiding it within your energy rates brokers are able to charge you more than is reasonable for the amount of work involved. The lack of transparency enables the broker to inflate their prices. Small increases can add up to very a large total cost over the whole of your contract period.

Extra transparency is needed when negotiating a contract with a broker on commission as the customer isn’t involved in the process so can’t see what deal has been made between the broker and the supplier, so more questions need to be asked to make sure your deal is competitive and fair.

ARE LONGER ENERGY CONTRACTS MORE COST EFFECTIVE?

Longer contracts are not always the best option. By locking you in to a long term energy deal your broker possibly ties you in to paying high levels of commission and a set rate, rather than taking the opportunity to retender supplies based on the energy market prices which can rise and fall. Therefore, many unscrupulous brokers have an incentive to lock you in to long term contracts even though it is often the least cost effective strategy.

HOW DO I SPOT RED FLAGS?

There are a few things you should think about before deciding on a utility management service, and which payment structure to choose:

  • If the broker isn’t happy to disclose how much commission they are being paid it could be a sign that they are aware the commission is excessive.
  • If you are only presented with a few options and the broker is trying to steer you towards one option, it could mean they have arranged a commission that suits them more than you.
  • Ask the broker to explain how they are being paid and how it could be affected by your contracts. If the broker is vague and not transparent with their fees, it could mean their prices aren’t that competitive
  • If the broker tries to lock you in to an expensive long term contract
  • Always look around and get service prices from different broker companies to make sure you are getting the best deal, and the best service

WHAT SHOULD I ASK MY BROKER TO MAKE SURE I’M NOT OVER PAYING?

  • How much commission am I paying?
  • Can I pay on a fixed fee basis, if not, why?
  • Have any suppliers been excluded because of the commission process?
  • Am I presented with all the offers, or just the ones that will pay the broker the most commission?
  • Is my commission rate the same for all suppliers?
  • Will you outline the amount of commission I am paying before I sign up to the contract?

If you have any more questions for us relating to your utility management please get in touch on 01630 685 144 or [email protected]

Owner of Utility Management Consultants , | Website

Steve Clifford is Owner of Clifford Talbot Partnership which was formed in 1984 to provide solutions to energy and utility management issues in commerce, industry, government and the public sectors throughout the UK.