Economics Challenge Contractors
March 26, 2007
Contractors rode much the same roller coaster that manufacturers and distributors did in 2006. The ever-changing HVAC industry and the multiple factors that affect it brought instability to the arena as contractors adapted to the changes and challenges.
The HVAC contractor market primarily mirrored 2006’s construction market. Residential HVAC experienced an expected cooling-off period, but commercial HVAC continued its three-year climb.
According to the National Association of Home Builders (NAHB) Wells Fargo Housing Market Index, the market topped out during the middle of 2005 at around 70, but by September 2006, the market was down to 30.
Single-family housing permit issuances “have been in essentially a free-fall,” as the residential market contracted significantly, noted David Seiders, chief economist for NAHB. “The housing market is really in retreat and it is putting a heavy hit on the economy.”
OBSTACLES CHANGE BUSINESSOne of the biggest challenges of 2006 was 13 SEER. The units were bigger. The coils were bigger. Everything about 13 SEER was larger than before and it caused contractors trouble when it came to transporting, storing, and installing them. System matches became an arguable nightmare and TXV shortages created logistical problems, slowing installation rates.
“In the initial post 13 SEER period, availability was an issue until inventories were established at the distribution centers,” said Ken Bodwell, CFO and partner, Innovative Service Solutions, Orlando, Fla. “Our biggest challenge was in retrofit applications where line sets and concrete slabs had to be replaced, often due to space requirements for the new equipment.”
Not only did contractors face physical struggles with the new units, but they also faced some psychological struggles. The good, better, best selling model had to be altered as the better became the good. End users and homeowners were required to accept a larger unit on their property and a larger equipment bill in their mail.
“It appeared that the challenge seemed to be the acceptance of the higher SEER rating,” commented Russ Donnici, president, Mechanical Air Service, San Jose, Calif. “Convincing customers to pay for value-added service and systems has been difficult,” said Tom Borowske, vice president of operations, Environmental Conditioning Systems, Mentor, Ohio.
Workforce concerns continued to rise in 2006. The graying of the labor force, along with the lack of vocational trade interest, made hiring, training, and retaining technicians an even more difficult task than usual. Also, the highly charged immigrant worker issue blipped on HVAC’s radar this past summer, leaving liability questions on the workforce table.
“I have to think that qualified manpower is a No. 1 issue,” said Bodwell. “We are utilizing a larger number of Hispanic technicians, but that is creating a new communication problem both internally and externally. As our workforce is aging and approaching retirement, there are not enough replacements.”
Training concerns didn’t only apply to the incoming workforce. Certifying installers became imperative as the requirements for proper design, installation, and commissioning were no longer considered best business practices, but mandatory.
“It is very aggravating to see systems installed that are underperforming,” said Donnici. “Many contractors have confused quickly done, poor quality work with efficiency. Many other contractors, however, are working to improve themselves and the systems they deliver to clients.”
Money concerns hit contractors on every front. The cost of doing business soared while legislators argued about health insurance. Some contractors passed the price of increased medical costs onto the customer and others split the difference with their employees. Vehicle and liability insurance added to the expenditure pot, and as the underlying tide of the economy wavered and gas prices climbed, consumers spent their money cautiously.
“Money was being spent, but customers held on to it longer,” noted Jeff Somers, vice president and chief operating officer, Monsen Engineering Co., Fairfield, N.J. “They weren’t proactively replacing equipment as they did in the past.”
FORWARD THINKINGIn 2007, contractors have a full plate of new affairs to handle.
“As an industry, we face technology changes, political changes, manpower shortages, and the list goes on,” said Bodwell. “The only way to deal with it and to stay ahead of the pack is through continuing education.”
After recuperating some from the 13 SEER changes, contractors are beginning to gear up for the 2010 R-410A refrigerant mandate, replacing R-22. “It seems that contractors are hesitating to embrace this and educate their clients about the phaseout of R-22 and the reduced availability of it in 2010,” commented Donnici.
Emerging technology changes include the advanced onboard diagnostic systems and the myriad of software and devices designed to make business easier, more accurate, and more efficient.
“We need to embrace technology and constantly look for new ways to do business,” said Somers. “Technology, however, should be used wisely and carefully. It’s easy to be overwhelmed and make a bad choice, or worse yet, no choice.”
According to Jim Hussey, president and CEO, Marina Mechanical, San Leandro, Calif., in the short term, technology has a lot to offer in the improvement of efficiency and productivity. He sees lean manufacturing and production as migrating to lean contracting, which he considers to be the next tool for contractors to protect margins.
“Long term, I am concerned that technology - particularly the ability to self-diagnose and report pending failures directly to the manufacturer - may eliminate the need for the contractor and leave them with the high-risk role of labor broker as their only value proposition.”
Workforce issues will continue to plague the HVAC industry in 2007. Not only will the manpower shortage make it difficult to control escalating labor costs, but also the number of retiring Baby Boomers will increase.
The largest challenge to tackle, however, is the economy. Economists are currently arguing as to whether or not 2007 is a year of impending recession. According to the Sheet Metal and Air Conditioning Contractors’ National Association (SMACNA), about one-half of the economists, like Nouriel Roubini, professor of economics, New York University, predict that “we’re in for a much nastier, deeper, and more protracted recession than the one in 2001, as sales of existing homes decline and inventories rise.”
“As the economy goes through an overhaul this year and the phone stops ringing, we are going to see many contractors fold,” said Bodwell. “Those that are planning for a slowdown in the economy are going to grow and prosper.”
In the midst of economic change, a housing market slump, and countless consolidation concerns, politics will be another factor affecting the local contractor.
“I think this may be a lame duck political year that will generate some major turmoil,” noted Bodwell. “We as an industry need to unite and lobby for what’s important to our business health. The key issue in 2007 is business survival.”
Publication date: 03/26/2007