HVAC Light Commercial Market / HVAC Commercial Market

Commercial Service Goes National

May 2, 2011
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MSI Mechanical Systems, Inc. will not even bid on a construction job if the HVAC equipment is prepurchased, unless the equipment is turned over for a reasonable mark-up.


The poor economy has been hard on all types of commercial businesses, as evidenced by the vacant office buildings that can be found in just about any community. In order to survive, property managers and building owners have continually looked for ways to cut costs, which have often included eliminating their in-house maintenance departments and outsourcing those services to an outside entity.

In some cases, HVAC contractors still have service agreements with local malls and office buildings, but more often than not, that work is being outsourced to national maintenance organizations. Some of these organizations provide only HVAC service, while others offer a menu of options, from pest control to parking lot maintenance.

The reason for this comes down to economics, said Bob Keingstein, president, HVAC/plumbing division, Boss Facility Services Inc., Ronkonkoma, N.Y. “With payroll, insurance, and miscellaneous costs continuing to rise, we believe more and more retailers will look to outsource much of their facility needs, and we believe this market will continue to grow in the years to come.”

HVAC contractors from around the country have partnered with these organizations. Some sing their praises while others now turn and run.

A TOTAL PACKAGE

Providing service and maintenance to more than 10,000 sites in the United States, Boss Facility Services is basically a one-stop shop. The company offers commercial service in the areas of HVACR, plumbing, lighting, electric, glass, gate, floors, locks, general maintenance, pest control, snow removal, painting, handyman services, fire protection, disaster services, IAQ, and mold remediation.

“We will also handle rollouts, temporary spaces, and warranty repairs for national manufacturers that provide fixtures to the retail industry. Virtually anything that needs repair or maintenance we will handle,” said Keingstein. While the company currently has service contracts primarily with retail and office spaces, it plans to move into the restaurant and hospitality markets in the near future.

For end users, part of the allure of signing up with a national maintenance organization is that they are able to make just one call - or send one email - in order to request service. Boss handles all the clients’ requests in order to track warranty issues and assign multiple vendors, as would be the case if an HVAC unit leaked water through a ceiling. In that instance, Boss would first send an HVAC vendor to repair the leaking unit, then contact a drywall contractor to repair the ceiling, followed by a painter to repaint the area. The client does not need to put all the trades together, as Boss coordinates and manages the total process, as well as associated costs.

With Boss, a contractor’s low bid does not always get the job. “The quality of the vendor, response times, technical ability, and the ability to communicate are more important than low price,” said Keingstein. “We make sure we assign the right vendor based on the system installed, the type of client, etc. We understand - as do our clients - that quality service costs money to provide. By only looking at the lowest price, the results will generally be subpar.”

Maintenance is usually part of Boss’s contracts, and many clients request quarterly service. Based on the number of systems at each site, Boss provides a cost for maintenance per visit per site. All service requests for emergency repairs are generally emailed to a call center for immediate action, and each emergency request is handled on a time-and-materials basis.

Once Boss sets up a client for maintenance, an HVAC vendor is assigned to the site (from more than 5,000 partner contractors nationwide) to perform the predetermined number of maintenance visits. This vendor must also respond to emergency service requests as needed in a timely manner. By handling the sites in this way, the vendor is held accountable for the proper repair and operation of the HVAC equipment.

“We do assign a back-up vendor, and at times, a third back-up, in case the assigned vendor cannot respond for whatever reason,” said Keingstein. “Each vendor knows what we expect ahead of time, as well as the circumstances involved if we need to call the secondary vendor.”

National maintenance organizations ultimately benefit the commercial contracting community, said Keingstein, as contractors receive a steady flow of repair and maintenance work, with a company like Boss providing all the sales and marketing, and essentially bringing clients to the contractor.

National maintenance organizations rarely allow contractors to change the price of a job, which is why Advanced Mechanical Services always obtains permission before performing any extra work.

OPTING OUT

While some contractors embrace the business model set up by national maintenance organizations, others do not find it to be a good fit with their existing way of doing business. One of those contractors is Brian Hooper, vice president of operations, MSI Mechanical Systems Inc., Salem, N.H., who used to have service agreements with several retail malls in his area. After trying to work with the national maintenance organizations that took over his previously held service agreements, he decided to give up retail service entirely.

“It was a hassle to get paid,” said Hooper. “After numerous phone calls to each individual business, we wanted to know when we might be expecting a payment. It would be very frustrating. I would do the service call, but then it was difficult to get the store manager to sign off on the required paperwork, and if I didn’t get the paperwork exactly right, the management company wouldn’t pay me. I always had to watch the 90- or 120-day timeframe that we were on the job, because then we’d lose our rights to take out a lien. We would set up a calendar, and on day 70, we would start making phone calls for our outstanding invoices. On day 85, we’d only have five more days to put on the lien, and you have to have a lien in order to get paid.”

Hooper said he was initially excited to start working with national maintenance organizations, because he assumed he was going to be paid in a timely fashion. “In a short time, we had 30 outstanding invoices, and we’d only been paid on five, so we started putting liens on properties where we were owed payments. We had to move quickly before our timeline had expired for our right to a mechanic’s lien. After going through this process, we would get paid, but the companies didn’t want to use us anymore, and that was actually a blessing.”

Another issue that Hooper had was with retail big box stores that would prepurchase the HVAC equipment for new construction or whenever units needed to be replaced. “I would be asked to come up with a bid that separated out the equipment from the labor. Say, for example, a mall needed 15 rooftop units, and my bid would be $125,000 for the equipment and $75,000 for labor. The maintenance company would then let me know that the rooftop units had been prepurchased, so they were going to take $125,000 out of my bid and want me to do the whole job for $75,000, plus warranty it for a year. Part of the way I make money on a job is to mark up the equipment, but they would take that out of the equation.”

Hooper likens this scenario to going into a McDonald’s with a frozen hamburger patty and asking to borrow their grill. “Would anyone really go into a restaurant with their own meat, and ask them to cook up the burger you brought? Oh, and by the way, can I borrow a bun? You just don’t do that in real life, so how come it’s done in my industry? Basically the company is giving me a rooftop they bought, and asking me to install it for free.”

That’s why Hooper stopped working in the retail market and will not even bid on a construction job if the HVAC equipment is prepurchased unless the equipment is turned over for a reasonable mark-up. “I don’t know where the equipment comes from or if it’s sized properly or if it’s the right fit for the customer, so I’m just not going to bid it. I wish that all contractors would stand together and not bid this work, because if we don’t make a stand, they’re just going to keep doing it this way forever.”

Some retail big box stores prepurchase their HVAC equipment for new construction purposes or whenever units need to be replaced, which eats into the profit margin of many commercial contractors. (Courtesy of MSI Mechanical Systems Inc.)

SET UP FOR SERVICE

Jerry Sharr, president, Advanced Mechanical Services, Orlando, Fla., has been in the HVAC service industry since 1972. About 14 years ago, he saw that national maintenance organizations were taking over more of the commercial service in his area, so he restructured his business to accommodate their business model.

“I saw that these nationals were gaining a larger part of the commercial market, so we re-designed our company to work with them. About 45 percent of our business now comes from the national organizations, and the rest is our own service agreements with commercial customers in a six-state area,” said Sharr.

Working with multiple national maintenance organizations can be an organizational nightmare, noted Sharr, because every company requires different paperwork. In order to keep track of all the work performed, Sharr invested about $75,000 in software, so his staff can stay on top of open invoices. Occasionally he has to take out a lien in order to get paid, but he noted that does not happen very often.

Sharr also has to keep track of all his own paperwork, because every so often a national maintenance company will ask for an invoice audit - typically on larger invoices. When that occurs, Sharr must send copies of his receipts for the parts used on a repair, to make sure he stays within the agreed-upon mark-ups. Sharr stated that the audits are necessary because some contractors agree to do the work for a certain amount, then they turn around and add 20 to 30 percent to their original estimate.

This added cost may be due to mark-up, but it could also be a result of extra repairs that the contractor performs in the field. In the latter instance, Sharr warned that contractors should first obtain permission before performing any extra work. “Very few nationals will allow you to change the cost if you go over the original estimate. However, if we’re on site and find there’s additional work that needs to be done, we’ll put together a quote right away and call the national immediately and ask if we can get an increase on the job. Usually they give us a PO number - which we make sure we immediately put into our system - and we can make the repair while we’re there.”

It is important for contractors to realize that the national maintenance organization is their customer, not the end user. As Sharr noted, “The national is our customer. If we run into problems, we call the national, talk with them, they then guide us on how they want us to handle it, and we do that. It’s their responsibility to notify their customer of what’s going on.”

Keingstein affirmed that this is the case, stating, “All communication, suggestions, questions, and requests for additional services must be communicated to our office. The contractor must understand that we - Boss Facility Services - are their client. We have all communications with the client. We do welcome comments and suggestions from the contractor and review each one accordingly.”

Working with national maintenance organizations may not be in the best interest of every contractor, noted Sharr, but his company has benefited. “My company is set up to work with the nationals, so we’re used to it. It may not fit every operation’s mode of doing business. From my perspective, though, it’s really a pleasure working with most of the national accounts.”

Publication date: 05/02/2011

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