Contractors Cautiously Roll into 2016
Economy, regulations could dampen enthusiasm
HVAC contractors seem to be feeling cautiously optimistic about short-term growth, at least according to ACCA, whose Contractor Comfort Index (CCI) scored a 76 in January 2016. The mark was similar to the CCI ranking in 2015, when it stood at 74. The CCI is calculated based on a survey of ACCA contractor members that measures how positive they feel about new business prospects, existing business activity, and expected staffing decisions in the short-term future. A CCI of 50 or above reflects anticipated growth.
But, there is still concern about the U.S. economy and conditions around the world in general, said Steve Lauten, president of Total Air & Heat Co. in Plano, Texas, and ACCA chairman. “Oil is near $30 a barrel, which is the lowest it’s been the last 10 years; China has economic woes; and disturbing news continues to come out of the Middle East. The companies that have a budget and a game plan for 2016 are prepared to ride out the woes of the world and will continue to thrive. Fortunately, the U.S. is very dependent on the services offered by our industry, which is why the focus of HVAC contractors should be directed toward how well we can do our jobs, not how cheaply we can do them.”
According to the Sheet Metal and Air Conditioning Contractors’ National Association (SMACNA), market forecasts indicate a 7 percent growth for the construction industry in 2016, with the market reaching $1.09 trillion — the highest annual total since 2008, unadjusted for inflation. SMACNA has conservatively budgeted for 1-2 percent growth this year, noting that while the broad industry picture is largely positive, it’s also likely to be relatively short-lived with perhaps a few years of an upcycle to capitalize upon.
“We anticipate commercial, manufacturing, office, health care, hospitality, and particularly transportation will continue modest growth in the short term,” said Guy Gast, Des Moines division president of The Waldinger Corp. in Des Moines, Iowa, and president of SMACNA. “Three years of growth for single-family and multifamily construction seems to be cooling down; however, some limited growth will continue into 2016.”
The commercial markets will continue to do well this year, agreed James Bartolotta, former executive vice president, Air Comfort Corp., Broadview, Illinois, and chairman of the Mechanical Service Contractors of America (MSCA). The largest growth will likely occur in the commercial office marketplace as well as the technology sector (including data centers, Web hosting, etc.). “Many office facilities are still operating with older, less efficient chiller plant systems, which are great candidates for upgrades and replacements to help improve operating performance and energy savings. These same factors will also drive the technology sector as that market grows and looks for more efficient ways to operate.”
That being said, Bartolotta is keeping an eye on the economy, as it plays a strong role in clients’ spending habits — although, he notes, the impact is often slightly delayed due to plans for capital investments already being in place for some time. “The recent dip in the stock market is also concerning, but I still expect 2016 to be a stronger year for contractors. There has been a great deal of ownership changes in the commercial property management portfolio and with that comes investment opportunities in new capital projects as the new ownership team takes over.”
The economy is still rather fragile, said Lauten, which means customers remain skittish and easily panicked. “I see that remaining until the presidential election is over later this year, because many people want to see what our government is going to do about numerous hot topics. But, overall, I think residential will remain strong in the replacement sector, residential new construction and multifamily housing will soften slightly, commercial will have a slight increase, and industrial/institutional will see areas of growth in some regions while others continue to struggle.”
Government rules and regulations are causing concern for many contractors this year, particularly the U.S. Department of Energy’s (DOE’s) new regional efficiency standards for cooling equipment. Lauten has significant concerns that the DOE’s sole focus is on rated efficiency instead of installed efficiency, leaving consumers to believe they will save money and help the environment when that may not necessarily be the case.
“In reality, it does no good to require high-efficiency equipment, whose ratings come from a lab, when the overall installation is much more important in determining efficiency, comfort, reliability, and energy savings,” said Lauten. “Our high-efficiency sales have increased, but our duct system repairs have skyrocketed, because we refuse to upsell on efficiency unless the end user agrees to let us do the upgrades needed to make the system operate as designed based on ACCA Manuals J, D, and S.”
Lauten is also concerned about the DOE’s proposed 92 percent AFUE rule for residential furnaces and its new freezer/walk-in cooler requirements. ACCA, along with its industry partners, has been involved at the grassroots level to modify these requirements, he said. “Research shows that the DOE’s payback modeling for the 92 percent furnace requirement is incorrect, as there is no reasonable payback that will occur in the Southern regions, and, in the North, there are many applications where the cost is prohibitive. ACCA supports energy efficiency, however, only when it’s justified and where it’s affordable. Most buildings and homes across the U.S. would benefit far more from measures that require proper installation rather than efficiency requirements.”
Pension reform is the top priority for SMACNA this year, as the association will seek to complete the third and final portion of its multi-employer pension reform proposal before Congress. “We expect a pension briefing and anticipate a Senate finance hearing or a House Ways and Means hearing to make sure the idea of hybrid plans has been fully explained and vetted,” said Gast.
Also important to SMACNA members is President Barack Obama’s executive order signed in September 2015 that establishes paid sick leave for federal contractors. The executive order applies to covered contracts solicited or awarded on or after Jan. 17, 2017, and regulations are scheduled to be in place by Sept. 30, 2016. “SMACNA is evaluating how best to educate the U.S. Department of Labor on the unique nature of the federal contracting work performed by our members and is looking at advocating a collective bargaining exemption for construction work,” said Gast.
For MSCA, multi-employer pension reform and paid sick leave are also top priorities.
“We need to have a new pension benefit plan model that allows us to continue to attract and retain the best workforce while containing the risk of plan underfunding that we currently face in this outdated pension system,” said Bartolotta. “Additionally, for those MSCA members performing direct federal facility HVACR service contracts, we’re trying to pare back the more recent, overly broad Obama administration rules that might require us to accrue paid sick leave on those contracts. We also have suggestions to improve the new proposed rules to require legal compliance certifications of these federal service contractors as a condition of a prime or subcontract award. There are also new proposals for nondiscrimination and affirmative action goals for our apprenticeship programs, which we support but recognize a need for administration reforms.”
In addition to concerns over the economy and regulations, there are other issues that contractors will face this year, including the ongoing challenge to find and retain talent. “The HVACR industry continues to be one of the best kept secrets for a profession — there will always be a need for HVACR installation and service, despite the continual changes in technology and the ups and downs in the new construction market,” said Bartolotta. “It’s incumbent on us to get the word out to those graduating from high school and college about the outstanding careers that await in the HVACR market, which now includes a great deal of technology that their generation has grown up with. Just as we should not expect clients to find us, we should not expect the best qualified talent to simply walk through our front door, either.”
The war for talent is on in full force, said Gast, as there are not nearly enough Generation X or Y workers to replace the retiring baby boomers. “The industry, as a whole, has struggled to make construction an attractive career choice for the millennial generation, but getting talented, young people into our industry is just the start. We cannot rely on old methods and spend years getting them ready. They expect us to deliver education to them faster and on their terms. It’s a challenge to find the right people to help build the company for future growth.”
Lauten agrees the labor market will continue to be a challenge across all skilled trades, as experienced technicians and installers are retiring faster than new ones can be trained. “Internet sales are also a concern, as equipment and parts are readily available for consumers to purchase online. This bypasses normal channels, which erodes credibility and confidence in the marketplace. I hope all HVACR manufacturers and distributors will review policies that allow sales directly to consumers at wholesale prices.”
There is no question the year ahead may pose some significant challenges to HVAC contractors. But, contractors should resist the urge to cave in to trends that are not in anyone’s best interest, said Bartolotta. “Instead, we should look for ways to be unique and stand out as the clear choice for customers when they consider an HVACR provider.”
Publication date: 3/14/2016