Contractor Economics: Hanging on to Dollars and Sense
February 23, 2009
[Editor’s note: This is the first article in a five article economic series offering tools and suggestions to help contractors during changing economic times.]
The turmoil of the current economic climate does not negate the fact that homeowners want comfort in as cost effective a way as possible. Few are ready to move into a log cabin in the wilderness and use candles instead of electricity and an outdoor privy instead of indoor plumbing. And in terms of HVAC, they are not willing to give up the mechanical creation of that comfort and instead rely on chopped wood in the winter and an open window in the summer.
But there are new dynamics in play today.
The current downward economic spiral can be traced to sub-prime mortgages and other matters in the housing market, with one result being record numbers of foreclosures. Those with homes are watching their money more carefully than ever.
So what is a contractor to do to generate more business in the residential market these days? A number of persons who watch these dynamics point to a variety of possibilities. Working with the holders of foreclosed properties to keep those houses saleable once the market improves is one angle. Appealing to the nesting urges in terms of the importance of homes - as was the case following Sept. 11, 2001 - is another angle.
Entering into all those equations are the multiple ways to pay for HVAC upgrades from reliance on possible economic stimulus packages to closer attention to consumer financing. The bottom line for contractors, though, is convincing the consumer to invest.
THE MARKET“There is little question that residential air conditioning contractors are feeling the brunt of the slowdown,” said Ken Bodwell, a contractor with Innovative Service Solutions of Orlando, Fla., who is also a member of The NEWS’ Contractor Panel. “But going forward, I believe the residential contractors will get a jump start by mid-year. I look at the foreclosed and abandoned houses and think about the mold and mildew growth. So I would say that indoor air quality and remediation industries would be called on first. Banks that now own these homes could be exposed to future liabilities. So I think they will recognize their exposure and look for preventative or refurbishing measures.”
The nesting following Sept. 11, 2001 involved many homeowners putting more money into their homes, in effect considering those structures as shelters from a turbulent world.
“Comfort is a basic need,” said Steve Howard, a consultant with the ACT Group. “A replacement comfort system can provide more benefits than anything else a customer can buy with the same money.” And ironically he said, “The greater their comfort, the higher their energy savings.”
“Customers are buying increased efficiency, comfort, and longer warranties,” said Dave Hutchins of Bay Area Air Conditioning in Crystal River and New Port Richey, Fla. “We do see a few that are making other improvements, even additions to their homes as they now plan to stay long term.”
As part of that, Hutchins said his company is also focusing on owners of older homes with older HVAC systems.
PAYINGThe issue is how, in a tight economy, to pay for the improvements that are wanted. Bodwell sees a potential within the federal government. “Depending on the stimulus package being offered by the new administration and possible rebates for efficiency, homeowners could be motivated to upgrade existing systems.”
At the time this article was written, Charlie McCrudden of the Air Conditioning Contractors of America (ACCA) noted some then current aspects of those incentives. “The American Economic Recovery and Reinvestment Plan modifies and expands the tax code provisions granting incentives for homeowners that make high-efficiency improvements, and commercial building owners that install geothermal heat pump systems,” he said.
“Under current law, homeowners can claim up to $500 in lifetime cumulative credits for installing qualified appliances, such as furnaces, air conditioners, heat pumps, hot water heaters, and more.
“The bill that passed in the Ways and Means Committee would remove the lifetime cap and allow homeowners to claim up to $1,500 in credits for the tax years 2009 and 2010. Also, the per appliance limits are removed, meaning that a home- owner could claim all $1,500 for a new high efficiency furnace, or all $1,500 for a new high-efficiency air conditioner or heat pump.
“Current law allows taxpayers (or corporations) to claim 30 percent of the costs, up to $2,000, for the installation of a geothermal system. The bill approved would remove the $2,000 cap and allow the taxpayer to claim the full 30 percent in tax credits for installing a geothermal system.”
Beyond such government incentives, Howard sees a variety of possible sources of financing such as manufacturer rebates, local utility rebates, banks, credit unions, savings, and even “shifting planned purchases” to HVAC.
He urged contractors to be familiar with what options might be available to a customer. Whatever the method, most involved in the issue say customer financing continues to be the way to go.
Howard said people will look at financing when “value exceeds price, they want your solution to their problems, and they are able to afford it.”
He noted that, “Comfort appreciates. It really pays for itself, and comfort cost per square foot is a bargain.”
The homeowner’s concern about energy costs can enter into the equation too, he said.
“In most parts of the country, 40 to 60 percent of all energy goes to home heating and cooling. Depending on old equipment efficiency, energy rates, and hours of operation, your customers could reduce their air conditioning costs by up to 60 percent and heating costs by over 40 percent with a new comfort system.”
VOLATILITYAnother factor that might work to the contractor’s advantage is to note the recent volatility of energy prices. While prices spiked during the summer of 2008 then plunged later in the year, the general trend, according to most experts, is upward.
When looking at new, more energy-efficient equipment, “They’re choosing their energy bills for the next 20 years,” Howard said. “Help them choose wisely.” But at the same time, Howard said, “Don’t talk about reducing their energy bills until they know how you’ll improve their physical comfort.” Then he encouraged contractors to ask to see a homeowner’s energy bill and “explain how a new system saves money. Show estimated savings and use the longest financing term possible. Show the effects on a monthly budget and, remember, the larger the down payment, the lower the monthly payments.”
To reach those homeowners and get them thinking, Hutchins of Bay Area A/C said he has put more emphasis on being proactive in terms of his technicians dealing with customers. “I believe in training our service technicians to get the homeowner interested - more so than traditional advertising or certainly just waiting for the phone to ring.”
Publication date: 02/23/2009