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Who knows what the HVAC environment will be like for contractors 10 years from now? It’s a good question, but one that the New Horizons Foundation (NHF) believes it has a handle on.
In the HVAC and sheet metal industry initiative’s most recent research study, “The HVAC and Sheet Metal Industry Futures Study: Industry Trends and Drivers Shaping Alternative Futures,” NHF paints a different picture for contractors and this industry than the relatively homogeneous market of today. Per the study, prepared and conducted by construction industry researchers FMI Corp., the contractor of 2018 will have to compete in a highly niche-oriented market.
It is expected that, in an effort to become more focused to meet market demand, HVAC contractors will find themselves participating in one of the following business models:
1. large, full-service, designed-orientated firm;
2. installation-only firm;
3. fabrication-only firm;
4. energy/environmental specialist; or
5. niche specialist.
(For a breakdown of each business model, see the sidebar “2018 - Do You Fit In?” below.)
“The successful HVAC contractor in 2018 is expected to be more focused, more sophisticated, and more productive than the contractors of today,” the report states.
“At no time in the past have challenges and opportunities been so clearly defined,” expressed NHF chairman George “Butch” Welsch, who doubles as a contractor from St. Louis. “This research report provides a very valuable tool. From the contractor’s perspective, the report makes it clear that today’s markets and services will have little relevance to prevailing markets in five to 10 years.”
Welsch admitted it is difficult to imagine what’s ahead 10 years from now, but quickly added, “But I have to say, though, the findings are - when you really stop and think about it - on target.”
RESEARCH SAYS ...One point stressed in the report is that lean, building information modeling (BIM), and other business improvement and/or productivity-oriented tools will be embraced and commonly employed by the HVAC contractor of the future. By 2018, BIM will have become standard operating procedure on virtually all mid-size to large projects. States the report: “The BIM movement was initially led by the owners, then moved to the larger construction managers/general contractors, and then permeated the entire building process. Significant cost savings will be realized through BIM, and any contractor doing new construction and/or large renovation work must be BIM proficient to survive.”
In the end, the leaders within the HVAC contracting community will be expected to be leaders in energy management, green building, and/or sustainability practices.
This expertise “will provide these firms with the opportunity to be on the front-end, value-creation side as opposed to the back-end, commodity side of the value chain,” the report states. “The firms will have project managers certified at the highest levels of Leadership in Energy and Environmental Design (LEED) existing in 2018, who will be writing the standards for future certification levels.”
Reading the report, Welsch concluded that the expected leaders within the HVAC contracting community will develop “intelligence” as a core competence.
“Whether it is technical intelligence as it relates to new equipment and systems; labor intelligence, as it relates to attracting and retaining key people; or cultural intelligence, as it relates to the future multilingual work force, this core competence typifies the successful HVAC organization of the future,” the report states.
Breaking down the research, a few of the more significant expectations for the HVAC industry of 2018 include the following:
• Residential and nonresidential building is expected to become heavily focused on energy conservation, sustainability issues, and green (environmentally friendly) construction.
• The demand for retrofit and service work is expected to grow at a rapid pace to meet the future building performance expectations and to serve an ever-growing supply of building inventory.
• The emerging trade of energy/environmental specialists is expected to be a highly desired discipline in the future, with a requirement for a highly skilled workforce to meet future demand.
“With this enormous opportunity comes the challenge of choice and focus,” the report states. “Individual contractors and suppliers, labor organizations, trade associations, and other industry organizations will be required to clearly target the markets where they choose to participate.”
Questions, of course, still remain. For example, the residential market has long been a declining market for contractors and union labor. The report asks: Will the new market dynamics provide the impetus for getting reengaged in this market?
In addition, new technology, such as photovoltaic (PV) energy systems, is expected to be in demand for residential and nonresidential buildings. The question then is: Will this become a mainstay for the HVAC contractor or abdicated to the other trades?
Also, the emergence of the energy/environmental specialist will be seen particularly in the nonresidential market. The report asks: Can the HVAC industry quickly mobilize to lead and control this market?
“To position the HVAC industry for future success, these are just a few of the decisions that will likely result from the industry’s planning efforts,” the report states. “To successfully compete in the HVAC world of 2018 will require thoughtful consideration of these potential market changes and a careful challenge of the industry’s current direction and strategy. FMI and NHF encourage industry stakeholders to begin this planning process now to capitalize on these opportunities.”
The findings outlined in the report represent the collective thinking of more than 80 people in the industry, coupled with primary and secondary research by the FMI project staff.
KEY NONRESIDENTIAL FINDINGSIn the end, four primary factors are expected to drive the HVAC industry of the future: sustainability, globalization, workforce, and technology.
“From all indications, the industry will undergo radical change and is poised to realize unprecedented growth and opportunity,” the report states. “This future demand will be performance-driven, code-driven, and consumer preference-driven, and it will represent a unique confluence of factors that will result in enormous levels of HVAC work, albeit work that may be different from today’s work.”
Some of the expected and, perhaps, not-so-expected findings in the nonresidential building sector include the following:
• The major nonresidential markets are expected to realize modest growth with the health care, education, and power-related markets deemed to have the greatest upside. One major market that may experience a downturn is the traditional commercial office market with more and more telecommuting/office-at-home workers expected in 2018. Also, a modest decline is expected in the industrial market with more and more manufacturing done offshore.
• Like the residential market, much of the building activity will take place in the Sunbelt and occur in urban areas. Drivers include energy costs, weather, employee preference, and perceptions regarding quality of life.
• Everywhere one looks in the industry, the color is green. According to the report, it will have become an accepted, and even required, industry practice. “Although green building is somewhat amorphous today, it will be a well-defined practice that will be understood and ingrained in the way business is done in 2018,” the report states.
• Of all the opportunities in the nonresidential building market, the retrofit market is expected to grow at the fastest pace. “This is particularly true for the HVAC market with a tailwind provided by energy management; indoor air quality; testing, adjusting, and balancing (TAB); commissioning; and related work. Again, the combination of performance requirements, code requirements, and owner preference should guarantee a vibrant retrofit business for many years.”
RESIDENTIAL PERSPECTIVEMeanwhile, despite the current downturn in the residential market, the report indicates that this sector will continue to be strong in future years. The demographics are such that demand for residential building should remain in the 1.6 million to 2.0 million units per year range in the next decade, it stated.
Other residential predictions include:
• Expect a large shift in the mix of single-family units versus multifamily units. The growth in the latter is expected to be fueled by a variety of factors, “including the desire to live closer to work, the high cost of single-family units, retirees moving to urban areas, greater demand for assisted living, and other factors,” the report states. “This creates a different type of residential structure with different building and HVAC requirements.”
• The average size of both single-family and multifamily structures is expected to decline in terms of square feet. “This would reverse a long trend to increase the dwelling size and is driven by the belief that building costs will significantly increase due to material escalation and land costs as well as code and compliance-driven cost increases.”
• Increased efficiency in the building process will result through such tools as BIM. “Most of the study participants believe that these efficiencies are required to help moderate the cost increases and will result through the numerous improvement opportunities available in residential building. BIM is one of a number of improvement tools expected to be used in residential building.”
• High expectations exist for remodeling, renovations, and retrofit work in the residential market. “Code-driven, performance-driven, consumer-driven opportunities will be staggering, particularly for trades such as the HVAC and electrical contractors,” it stated.
• The general sentiment from those who participated in the study concluded that the residential market will become even more nonunion. The apparent inference is that the union work practices, wage scales, and lack of focus will contribute to the ongoing share decline for all trades, the study concluded.
The study “The HVAC and Sheet Metal Industry Futures Study: Industry Trends and Drivers Shaping Alternative Futures” is available on the New Horizon Foundation’s Web store at www.newhorizonsfoundation.org. For more information about the New Horizons Foundation and its Summit Challenge, contact executive director Dennis Bradshaw, 703-222-9001.
Sidebar: 2018 - Do You Fit In?Based on the New Horizons Foundation’s recent research study, “The HVAC and Sheet Metal Industry Futures Study: Industry Trends and Drivers Shaping Alternative Futures,” in order to be a successful contractor in 2018, one must gravitate to one of these business models:
• Large, full-service, design-oriented firms: These firms will become the preferred source on larger project work, both new and retrofit, and “will work with the ‘megageneral’ contractors in an alliance-type relationship.” Some of these top-tier contractors will serve as full mechanicals and as mechanical-electrical-plumbing engineers (MEPs) on major nonresidential work.
• Installation-only firms: These firms will install duct and equipment on residential and/or nonresidential work, be a subcontractor to the mechanical or MEP in the nonresidential market, and deal directly with the builder on residential work. “The orientation will be more of a labor broker with a focus on productivity and cost control,” the report stated.
• Fabrication-only firms: These firms will become the major source for duct fabrication and will often sell directly to the owner, general contractor, or other buying entities. “Plans will often be provided directly to the fabricator with no involvement by the installing contractor. Building information modeling (BIM) and other tools will frequently be used in this process.”
• Energy/environmental specialists: These firms will become “the sought-after technical specialists that understand energy management, sustainability, indoor air quality (IAQ), testing and balancing (TAB), commissioning, and the myriad of niche specialties provided by the HVAC contractor of today, including service.”
It is expected that these firms will also include new disciplines, such as photovoltaic (PV) and other alternative energy controls systems. Monitoring, service, and systems remediation will be managed by these firms, it said. “These firms will be, in effect, the general contractors of the buildings’ energy and environment,” the report stated.
• Niche specialties: These firms will be smaller firms, “providing support to energy/environmental specialists and working independently on small project work. The report states: “Some firms will be focused on specialty residential applications and residential service, but many will focus on the nonresidential market.”
Sidebar: Business PredictionsThe recent research report from the New Horizons Foundation also peeked into the respective business and future work force environments. From a business standpoint, a much more consolidated industry is expected to exist 10 years from now “as mergers continue through both vertical and horizontal consolidation. … The private equity market will continue to provide exit opportunities for HVAC business owners.”
Other business environment points include:
• Competitors in the HVAC contracting business are expected to emerge over the next decade. Of particular note is the expectation that utilities will reenter the HVAC market via acquisitions and “will be positioned to own their market in the sense that they would own, monitor, and maintain the HVAC system in a lease back-type situation, primarily in the residential market.” In addition, it is believed that several HVAC manufacturers will become contractors via acquisitions to control their destiny in the market. And, last, home centers and other suppliers are expected to become more influential in the residential market.
• In the nonresidential market, larger HVAC firms are expected to expand to “full mechanicals (even mechanical/electrical/plumbing (MEP)) to be better positioned to partner with the larger construction managers and/or general contractors and program managers.”
• Most participants in this study also expect that globalization is inevitable in the HVAC industry. Examples of this globalization include the emergence of large non-U.S. suppliers entering the market. “The outsourcing of labor by the equipment manufacturers is already evident, and even the contractor is expected to outsource engineering services and duct fabrication,” the report states.
• Larger HVAC contractors are expected to enter the design market in an effort to remain a value-added entity in the nonresidential building process. “Many believe that failure to do so will relegate the remaining firms to a second-tier role in the market and more of a commodity position.”
Looking at the work force environment of the future, the study flat out stated that the industry “has a severe image problem that will be extremely difficult to overcome.” Even with the current residential downturn, the report stated a labor shortage in the HVAC industry exists that will continue to grow through 2018. The report also states:
• The old model of “one-size-fits-all” training will become a relic of the past. “The many different HVAC applications require different skills, significantly different training, different people, and a different reward system to remain successful,” it said. “A more flexible just-in-time training model will exist to enhance efficiency, and a culture more oriented to ‘pay-for-performance’ will evolve.”
• Labor unions in the building industry are expected to decline without reorganization, consolidation, and repurposing. The expectation is that fewer, larger multitrade labor organizations that have fewer work rules and jurisdiction guidelines will exist in the future. “It is generally felt that, without these changes, labor unions will lose significant influence and even more market share,” it said. It added that, to be successful, unions must have a presence in the Sunbelt and where markets are growing.
• Labor unions are expected to have a more tiered structure in the sense that there will be different skill requirements - ranging from duct installers to environment/energy controls technicians - “that necessitate different training (length and type) and different compensation levels.”
Publication date: 10/20/2008