ACHRNEWS

Cut Production Costs, Not Value

March 30, 2009


At a time when consumer insecurity is affecting all business sectors, cost cutting might seem like a viable means to increase customer interest in what you have to offer. But common sense says that the effects of cost cutting in the HVAC industry can have disastrous effects, if value is cut along with costs. Callbacks and warranty work can drill a deep hole in the bottom line.

We decided to ask visitors to The NEWS Website, www.achrnews.com, to answer a few questions on how they keep their costs down without cutting value. Their replies might inspire you to institute a few cost-cutting measures of your own. The savings can be applied to your company’s profits, passed on to customers, or a little of both.

LABOR COSTS

While the average contractor has a plethora of costs, labor costs are some of the most expensive for contractors. If businesses are able to keep labor costs in check, it can really help the bottom line.

To keep labor costs down at the jobsite, “We’ve instituted a delivery system for ductwork so it can be dropped in the area of installation, rather than delivering to a central site and having to move materials several times before installation,” said Patty Hess of Applied Mechanical, Reno, Nev.

“We plan the job so as to not have unneeded people there,” said Richard P. Bernaiche, Yankee Gas Services Co., Meriden, Conn.

Many contractors also conserve resources at the jobsite by doing as much work as possible at their headquarters. “We prefab as much as we can at the shop,” said Steve Harvey, Soefker Services LLC, Memphis, Tenn.

“You can prefab a lot. There’s plumbing fixtures (a setup for risers that have 10 floors, where you can mock up a room and prefab all of your plumbing outlets), or you can prefab your piping so that it can be picked up by a crane and welded in at the fit points.” Valve connections can also be prefabbed to air handlers. “It’s just easier, makes it quicker, and it’s like working in laboratory conditions until you get to the field and you have to tie it in,” said Harvey.

In addition, the company’s GPS system “allows for tighter dispatching and lower fuel costs.”

Controlling and consolidating deliveries can save big bucks. “We take deliveries direct from vendors on all eligible items,” said Matt Todd, Entek Corp., Vancouver, Wash.

“We’re finding that if we package enough stuff together, we can get them to drop shipment directly on pallets. It takes our warehouse and merchandising people out of the loop.” The contractor has one purchasing person for projects and another for parts.

One of the easiest ways to control labor cost is to keep an eye on how much overtime is being paid to employees.

“We cut out all overtime and work less-costly labor personnel where we can,” said Anthony Crowe, Miller Air Conditioning, Birmingham, Ala.

In order to accomplish this, planning is necessary. “We do our best to plan and look ahead,” said Greg Crumpton, AirTight Mechanical, Charlotte, N.C. “Do we really need two men on site or can one man handle the job? We don’t run two-man crews. We provide the second man as needed and provide the second man on the jobsite.

“That person on the jobsite has to be able to communicate with whomever they’re communicating with,” he added. “The biggest problem we find is that a lot of contractors don’t require a lot of communication from the technician back to the office.”

An important prerequisite of controlling costs is spending the proper time planning. Making sure everyone is on the same page makes the process easier and more effective.

AirTight uses Tuesday-morning planning sessions to prep for the following week. “We go over service calls pending, parts we’re waiting on, anything that has to do with technical manpower,” said Crumpton. “We look out two or three weeks, knowing it will change. We try to predict slack time and communicate it out.”

To contain costs, the company is definitely not cutting back on training. “We continue to spend our educational dollars, but we educate on the right things, not the same old hoopla,” Crumpton said. “We educate towards the horizon - it’s company specific. Interpersonal skills are huge. What do you bring to the customer other than a pipe wrench?

“We’re getting asked to talk about cost,” he continued. “I was in a meeting with a good customer, a property management customer, and they’re being told by their client, ‘You’ve got to get competitive bids.’ That can be a price check, or in areas like landscaping, they’re looking to get a cheaper provider. A good portion of what we do is to go to work on relationships, and get that feedback - yes you’ve got to submit a price, but we don’t necessarily have to pick the lowest price.

“If you have that relationship where they see the value - stuff that they live and die by - it’s key, not just now but especially now,” Crumpton said.

Many contractors realize that training is a needed investment, not a luxury. “We train and instill that we are all responsible for the success or failure of a job or project and lead by example,” said D. Brian Baker, Custom Vac Ltd., Winnipeg, MB, Canada.

MATERIAL COSTS

While labor takes up its fair share of the businesses budget, material costs also have a huge effect on the bottom line. In order to keep a handle on material costs, “We use the same delivery system that allows for less ‘losing’ of materials. Items are kept in a bin until ready for installation rather than sitting loose around a jobsite where they can be ruined or misplaced.”

Sometimes controlling costs comes down to following the basics. “We engineer properly, buy in bulk, and install properly to avoid waste,” said Bernaiche.

Other contractors are finding strength in numbers. “We are a member of the Unified Group, which gives us buying power,” said Harvey. “We also prepay materials for contracts to get the best discount. If you prepay when you make the order, then you can receive 1-3 percent discount.”

Those bulk numbers add up, but smart contractors also realize the importance of watching the turnaround. “We buy bulk when appropriate,” said Todd, “but we also reconcile so we minimize inventory. The contractor also allows stocking vendor’s work in its own warehouse. “They own it until we actually use it and then we pay for it - but it sits on our shelf.”

These suppliers “can pull pieces and parts from their inventory in our warehouse,” he said. The procedure has “converted what we were normally buying, but we’re not buying it until we already use it. It places responsibility for inventory with the manufacturer and reduces overhead for us.”

A little competition can help. “We shop all of our material costs with no less than three vendors,” said Crowe.

Oh the other hand, “We work with very few vendors who know us, we trust them, they trust us, and that equals getting the best deals,” said Crumpton. “We try to take advantage of early-pay discounts when they are offered as well.

“We have a very select few vendors, by design,” he said. “It goes back to relationships. We all know what our expectations are, and we know that if we meet our expectations, we’re going to get good service. Our commitment to them is to pay on time. If we have a choice to buy a piece of pipe from Company A or Company B, I’m not beating them up on price. But I’ve got to have that delivery so I don’t have the guy sitting around on the jobsite with nothing to do.”

NIFTY TOOLS

When it comes to tools that help keep costs in line, these contractors had quite a few good ideas. Hess, for example, reiterated their use of bins for delivery.

“We have a set of Pro Lifts to move rooftop units around the roof to save crane costs. We also use tube-cleaning machines,” said Harvey. He said he found the Pro Lifts at the AHR Expo. “They’re 90 pounds a piece, they lift up to 2,000 pounds. You get the crane and you only have to get it up to the roof. We made our own to lift bigger units.”

Similarly, Todd said his company uses “Pole Lifts.” “It’s a little lift that one person can operate. It’s a levered lift, it swivels. We snagged a couple of those and the guys just rave about them. You can actually place a condensing unit on the job with one person.”

Cell phones with two-way communication and e-mail are Crowe’s favorite jobsite tool.

And don’t forget those basics. “Any tool and/or piece of equipment saves you time and money as long as it is in the proper state of repair,” said Crumpton. “Spend money to keep your stuff maintained and serviced, and it can save money by being able to be utilized when needed as opposed to getting something out of the warehouse, going to the job, only to find out it doesn’t work.”

“Good tools and equipment are the key to high productivity, as well as ensuring safe and proper use of same,” agreed Baker.

TYPICAL SAVINGS

By employing the various methods described here, our survey respondents estimated savings ranging from 5 percent up to 25 percent, depending on which method is used and how it is applied. “We saved 21 percent on fuel costs after adding the GPS,” said Harvey. “The Pro Lifts probably save 5 percent.”

Todd said that using a two-man crew saves 2-4 hours/day, “on smaller projects that can be turned around quickly.”

“In the whole year, the compellation of all of those small things go directly to the bottom line,” said Crumpton.

Sometimes it’s hard to put a number on it. “How do you measure something that has always been,” asked Baker. “All we know is many of the others that we see coming and going, in our opinion, go out of business because of poor practices in managing people, materials, and equipment, not because they didn’t know how to do the work.”

Whether or not the savings are passed along to customers is naturally discretionary. Hess estimated that roughly 5 percent is passed along. Bernaiche, on the other hand, said his company passes all of it on to the customer. “It’s how we get the jobs.”

“We have dropped our fuel surcharge,” said Harvey. “We also allow any of the savings we can use in order to get the bid. The fuel surcharge dropped because the price of fuel dropped, but GPS also helped.”

“Savings right now are being gained through simply remaining competitive in a receding market in hopes of maintaining margins,” said Todd. “We just refuse to sacrifice our value. At times like these, superior quality is of greater value.

“That whole price thing is something that we just haven’t gone to,” he said. “That makes no sense for us, because there isn’t anything that the price has gone down in. Those people (cutting prices) don’t know they’re broke yet.”

MORE GOOD IDEAS

Once the good ideas start rolling, it’s hard to put the breaks on. You don’t want to, really.

“We train our guys to work hard and we try to use less people as often as possible,” said Harvey. “If they’re going work here, they’re going to work hard. We’re a union contractor and some of that old mentality can spill over. If we train our own apprentices, we do better.”

It’s especially important not to lose sight of what’s going on. “We watch all aspects of the company from the time a service call or job is started, until the final invoice is sent out,” said Crowe. “This has a three-fold check-and-balance system to ensure we have given the customer what they have paid for, and we have not lost or missed any billing opportunity.”

Sometimes having one really sharp person can help keep everyone on their toes. “Our operations coordinator, Shonda Ruland, is the epitome of efficiency,” said Crumpton. “Shonda does a great job executing the plans and the process; we have to in order to be efficient. We started with a lean mindset 10 years ago, we still subscribe to it, and it still works.”

Baker summed it up as “attitude! I keep this and teach it.”

Publication date: 03/30/2009