Contractors View State of Industry

March 13, 2006
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Jeff Schaumann (left) and Jordan Berands get ready to run a service call at Penning Plumbing, Heating, and Cooling.
It seems that contractors have had the same issues since the dawn of time: Finding and keeping qualified employees, rising health care costs, boosting productivity, and maintaining (or increasing) profitability. Combine those issues with concerns about the economy and product availability, and many contractors feel they are juggling too many items at once.

The good news is that the Sheet Metal and Air Conditioning Contractors' National Association (SMACNA) reports that man-hours were up slightly in 2005. In addition, many firms are experiencing improvements in profitability and balance sheet strength. Also, overhead expenses as a percent of revenue were lower and revenue per employee increased and reached a historical high.

Of course, how a contractor performed last year depended in large part on where in the United States he was located. Some contractors along the Gulf Coast had a tough time obtaining enough equipment in the wake of Hurricanes Katrina and Rita, while those in parts of the West were kept busy by record high temperatures throughout the summer.

Regardless of location, contractors still have their share of universal concerns.

PRODUCTIVITY PROBLEMS

For Jim Penning, partner, Penning Plumbing, Heating and Cooling, Grand Rapids, Mich., the biggest concern is how to keep employees productive. "We have really good people, but our single biggest issue is lack of productivity. Associated with that is how do you discipline those really good people without losing them? And how do you keep them excited over incentives? We try to motivate them towards productivity, and while I see short-term benefits, they never last for long."

Penning has employed best practices methods from no less than four different organizations over the past 20 years to try to address the issue of productivity. They have worked hard to find and train the best people, give them the resources and tools they need, provide on-going training and encouragement, and bestow incentives on those who perform above expectations.

"Unfortunately, there's no best practices method that tells you how to spot the leaks, cracks, and crevices that employees always manage to find in the system," said Penning. "And there's almost no information on discipline. The typical advice is to fire the employee, but that's not the answer. There has to be something else."

Many contractors have found that installing Global Positioning Systems (GPS) on their trucks helps boost productivity by keeping track of where technicians should be and where they're going. Penning has GPS installed as well, but as he noted, "It worked really well for six months. However, I have 10 technicians riding around the countryside seeing different people all day, making decisions on their own for what needs to be done, where they have to go, and what they have to do. You can't monitor all that. You can't sit there and look at the screen all day and say, he's supposed to be over here, and he's going over there."

And if employees are not where they should be according to the GPS, they often have an excuse such as "I had to go around a train," or "My mom called and had an emergency." As Penning noted, human nature often seems to lead people to make poor choices or forget about their responsibilities for the moment when it's not in their immediate interest.

"People make short-term decisions, forgetting about the long-term impacts. While we have honest, dependable people, it is too easy for them to make decisions that little by little eliminate company profits. We want our people thinking equally in the best interest of the customer and our company."

Customer Service Representative Michele Schaumann takes a call at Penning Plumbing, Heating, and Cooling.

SOFTENING ECONOMY

While most manufacturers, distributors, and contractors had a profitable year in 2005, there are some concerns that the economy might be softening a bit, particularly in residential new construction. That's a big concern for Gary Pennington, executive vice president, Lozier Heating and Cooling, West Des Moines, Iowa.

"We're mainly a replacement contractor, so we'd like to see the new house market stay strong, because that keeps the new house contractor in their market and out of ours," said Pennington. "Right now, it seems to be stable to slightly soft, but I hear there's quite a bit of inventory out there."

Being a notch above the competition is one way to combat a slowing economy. SMACNA noted that many of its residential contractors are differentiating themselves by emphasizing quality. This means 24/7 radio dispatch, uniforms, longer warranties and warranties free on weekends, customer pledge, very professional salespeople and office staff, etc. Other contractors are striving to become a source of "unbiased" information relating to homeowners' HVAC needs.

In addition to the economy, insurance costs and employee retention are also concerns. Pennington stated that health insurance would be about 7 percent to 8 percent higher this year, although he's hoping that his business insurance will go down.

He is also cognizant of the fact that it's easier to keep an employee than it is to find a new one. To that end, his company provides 401 (k), vacation, health insurance, sick leave, paid holidays, etc., in order to minimize turnover.

Going forward, Pennington is concerned about big box retailers and large supply companies getting into the HVAC industry.

"We don't want to see heating and cooling products becoming a commodity, much like plumbing fixtures have over the past 10 or 15 years. Kohler used to be exclusive to plumbers, but now you can get their products anywhere."

Pennington noted that his company grew about 8 percent in 2005, with much of that growth on the installation side.

"I would like to think that 2006 will be as good as 2005, but we're coming into an election this fall, and I think that always makes some difference. The interest rates and the new housing market are going to determine it for us."

PRODUCT AVAILABILITY

A softening economy is also a concern for John McMillan, president, Hearth and Home, Melbourne, Fla. "There is definitely a slow down on the new construction side, but we are focusing more resources on residential replacement and upgrades to meet our forecasts."

A more immediate concern for McMillan, however, is the lack of product that is currently available. "Many of our distributors did not adequately prepare for the large order of 12 SEER equipment at the end of 2005. In order to fulfill those orders, the production of the new 13 SEER product is behind schedule, and we are faced with delays in getting equipment."

Exacerbating the problem of product availability is the fact that the hurricanes last fall drained the Gulf Coast of any additional heating and cooling equipment. Many contractors in this area are still trying to catch up, although finding products to install is problematic. Some contractors have driven across several states just to buy heating and cooling equipment and bring it back to the affected areas.

On top of all these issues are the sharp increases in product costs and transportation costs. "We've seen a tremendous increase in actual product cost to us, not to mention that transportation costs have gone up because of fuel prices," said McMillan. "We're paying more in transportation to bring the product into the state, and distributors are charging a delivery fee now. That all adds into the cost matrix."

McMillan also cited health insurance as an ongoing concern, noting that it will "continue to be a major impact to the bottom line if something is not done."

Just what can and will be done to solve these issues will be an ongoing debate. What can be certain, though, is that quality contractors will soldier on, providing the best possible service and products to their customers, while keeping a wary eye on the bottom line.

Publication date: 03/13/2006

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