The economic conditions of the last few years have been tough for HVAC contractors. Many have had to scale back operations, lay off personnel, or in some cases, even go out of business. While some economic indicators point to a modest recovery underway, contractors may need a little more convincing, as evidenced by the Contractor Comfort Index (CCI), which decreased in the months of December and January before rising a bit in February.

The CCI is calculated by the Air Conditioning Contractors of America (ACCA), based on a survey of the association’s contractor members, who are asked how positive they feel about new business prospects, existing business activity, and expected staffing decisions in the short-term future. Weighted and averaged into one number, a CCI of 50 or above reflects anticipated growth; for January, the CCI was 56, down from 61 in December. The February number just released is 60.

Joe Nichter, president, Comfort Systems USA Southwest, Chandler, Ariz., and current national chairman of ACCA, noted that the poor economy has definitely taken a toll on the HVAC industry, including his company, which specializes in commercial/industrial design and maintenance. “The economic downturn that started in 2009 has resulted in a 37 percent decline in our revenue. As a result, we have had a 50 percent reduction in workforce, which affected the lives of many tradesmen.”

That being said, Nichter added that the economy shows signs of a modest recovery, and he anticipates that it will pick up a little speed at the end of the second quarter.

SLOW BUT STEADY

Thom Brazel, general manager, West Coast Florida Operations, Hill York, Sarasota, Fla., and current national chairman of Mechanical Service Contractors of America (MSCA), noted that the economy will continue to be a concern; however, he is heartened by the fact that there is increasing activity in the marketplace as compared to a year ago.

“Here in Florida, it’s safe to say that the residential new construction market won’t be booming anytime in the foreseeable future,” said Brazel. “As for commercial, I am not sure I see growth - I see a shift in what some customers are focusing on. Some are battening down the hatches and cutting costs wherever they can for the sake of saving a buck. Others are looking to cut costs in conjunction with improving overall performance and marketability of their buildings. As a full-service, commercial energy solutions provider, our focus is on the latter.”

As with many companies, Hill York has had to restructure and right-size itself in response to the economy, as well as to the needs of its current and future clients. “There is an obvious shift from new construction to retrofit and energy solutions opportunities, and we believe we have put ourselves in a position to effectively respond to our clients’ needs,” said Brazel.

One way in which Hill York repositioned itself was to launch its hygreen performance services group in 2008, which is dedicated to providing strategic energy-saving solutions to new and existing buildings. This division partners with companies that offer products and services that optimize, sustain, and measure energy performance for commercial and industrial businesses.

Comfort Systems USA Southwest has had an Energy Services Division for many years, but Nichter noted that customers are showing a renewed interest in energy efficiency and the products and equipment associated with these improvements.

“Customers have become more interested in detailed analysis that justifies more efficient systems with a good return on their investment. In addition, we have seen some modest recovery in the interest for design-build projects. Construction is still slow, but there has been a continuous flow of small health care projects, light industrial, manufacturing, and public sector stimulus projects,” Nichter said.

On the residential-light commercial side, Stan Johnson, president, Stan’s Heating and Air Conditioning Inc., Austin, Texas, and former national chairman of ACCA, also responded to the economic downturn by stepping up the energy performance side of his business, which included adding geothermal and plumbing services.

“Replacement work is trending up - in fact, 2010 was our best replacement year ever - and home performance work is a significant part of that increase,” said Johnson. “New construction has been - and continues to be - weak compared to three years ago, but it is stronger than it was and seems to be ticking up. Commercial new construction is still sliding, but it is supposed to recover in this market this year … we will see.”

Johnson does not believe the reduction in federal tax credits for energy efficient equipment will adversely affect his company, as he is located in a rather unique area that is supported by strong energy conservation programs. In fact, Johnson predicts that sales will increase this year, as customers continue to choose to replace rather than repair.

CLOUDS ON THE HORIZON

The economy may be improving slowly, but there is concern that increasing fuel and equipment prices could derail the fragile recovery. “Fuel prices always affect the cost of servicing a customer, one way or another,” said Brazel. “Every gallon of gas in every service van has to be paid for. Equipment prices are also rising due to increased labor and raw materials costs, and that is always a concern. We will always look for alternatives to rising costs - whether it be limiting gas consumption of our fleet with GPS technology, to purchasing commodity materials such as piping in bulk when prices are low and stockpiling them until needed.”

With a 180-vehicle fleet, Nichter is definitely concerned about rising fuel prices. In the short term, he will not increase prices, as he plans to focus on better travel management. “All of our vehicles have GPS, and our dispatchers are instructed to always have first calls assigned the night before. We also try to plan each technician’s day with a mix of service and maintenance accounts grouped geographically to limit the amount of travel. Unfortunately, if prices continue to increase, we will evaluate the need for a fuel surcharge to be added to each call.”

Nichter added that in addition to fuel, his company is seeing higher prices for copper, steel, information technologies, and insurance. “We have been dedicated to becoming paperless and to make this happen in the field there will have to be a considerable investment in IT over the next couple years. We have seen insurance rates in all sectors continue to rise as well, including health, liability, and auto.”

Rising health care costs and government regulation are definitely concerns for Johnson, who noted that the recent health care bill “overreached.” “If left as is, its effects will be bad, moving us further towards European-style socialism. In addition, the federal bureaucracy has wasted a lot of time and money writing rules that they can’t get passed through Congress. The majority of these rules will affect small businesses and/or the HVAC industry, and they were done with input from the environmental industry but not the HVAC industry. The industry needs to work on slowing down the bureaucrats who are pushing all the rule making they can while they have nobody controlling their excesses.”

One issue that does not seem to be causing any lost sleep is the availability and price of R-22. Nichter noted that his company purchased almost 16,000 pounds of R-22 in 2010, and they had no difficulty in securing it. The cost of R-22 has increased about 5 percent over the last year, although Brazel speculates that the price could rise further during the summer months.

While the economy in 2011 may not be particularly robust, most economists agree that the worst is over. The good news is that many attractive tax incentives and rebates are still available for energy-efficient equipment and alternative technologies. Contractors who embrace these opportunities - as well as focus on energy solutions - will likely emerge from the downturn stronger than ever.

Sidebar: Trends

Several trends are starting to take shape in the commercial market, including one that keeps Thom Brazel, general manager, West Coast Florida Operations, Hill York, Sarasota, Fla., up at night: Residential new construction contractors moving into the commercial market in order to stay busy. “These residential contractors are securing business on price, and in a sense, this is contributing to the commoditization of what was historically a service business. This is driving many commercial companies out of business, as they strive to compete solely on price. Those who are differentiating themselves with value-added competencies (e.g., energy solutions) are finding their niche in the market and will be much better off when the economy does pick up again, and all those contractors left standing will have their fill of work.”

According to Nichter, a troublesome trend gaining momentum is general contractors who are starting mechanical divisions. “If they choose not to become involved in a project, they still end up buying the equipment and taking it out of our scope of work. If this trend continues to gain more popularity, we will see many mechanical contractors filling the position of labor broker for projects. If this is the role we will be left with in the future, a considerable increase in labor will be needed to cover the risk associated with our scope of work. Normally our markup on the equipment and materials covers a portion of the risk associated with the labor.”

Another trend Nichter has seen over the last two years is the significant increase in specifications calling for modular central plants. They have been used effectively in all market sectors, and great strides in modular solutions and prefabrication are being made on a continuing basis, he noted. “This move is reducing direct costs, not only for the HVAC portion of the project, but the entire building.”

Integrated Project Delivery and Building Information Modeling (BIM) will also cause a considerable change in the way buildings are constructed in the future, said Nichter. “These delivery methods will take advantage of lean construction techniques and shorten the time it takes to build projects in the future. We are becoming more and more technical, and we need to make sure that our teams are properly trained on the new technology.”

Publication date: 03/14/2011