Small Contractors Have Big Concerns

July 28, 2005
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Do these concerns sound familiar? "The competition is cutting prices too low, quoting low-end equipment, and creating an environment of low profit margins."

"Insurance is the single highest monthly operating expense and continues to rise."

"I need qualified workers who can take over for me so I can concentrate on increasing sales, profitability, and cash flow."

The quotes above are part of a sampling of the more than 300 responses that The News received from its first ever "News Small Contractor Issues Study" conducted in late spring 2005. If you can identify with these concerns, then you are not alone. Thousands of small business owners face the same issues every day - small HVACR contractors, to be specific.

What is a small HVACR contractor? The Small Business Administration (SBA) considers "small" to be $6 million for most retail and service industries, $28.5 million for most general and heavy construction industries, and $12 million for all special trade contractors.

Pick your own definition, but it is safe to say most HVAC contracting companies will meet the criteria. According to the SBA, small businesses represent 99.7 percent of all employers.

Through informal questioning and anecdotal conversations, The News learned a commonly held belief is that nearly 80 percent of all HVACR businesses are probably less than $1.5 million in annual revenue. With that premise in mind, the BNP Media marketing research department constructed an in-depth study to ascertain the most important current business concerns that are shared by most contractors - considering that most contractors own small businesses.

The study is based on a survey of The News' contractor subscribers that had been cross-referenced with a list purchased from Dunn & Bradstreet. The survey is representative of smaller companies, but does not exclude responses from larger companies. Of the 2,000 surveys mailed out, 303 contractors replied, yielding a response rate of 15 percent. (As a comparison, a good direct mail campaign might yield a return response rate of about 3 percent.)

The top three concerns identified in the survey are profitability, insurance, and the worker shortage. What follows are some of the most significant findings of the "News Small Contractor Issues Study."

Demographics Of The Study

The survey led with questions to determine the number of employees (Figure 1), years in business (Figure 2), annual sales volume (Figure 3), purchasing authority, and geographic area for each company.

The initial premise that the vast majority of contracting companies are relatively small was validated by the survey results; 41.9 percent of respondents said their annual sales volume was less than $500,000; 58.1 percent were more than $500,000. However, the mean (average) number of employees per company is 12.24. The median (middle of all responses) number of employees is seven. Also, 80.7 percent of all companies had 15 or fewer employees. The numbers of employees indicates many companies that are likely less than $2.5 to $3 million in revenue.

Most contracting companies start up with a very few employees and grow larger. However, the respondents to the survey revealed that the average number of years in business is 24.48. This would indicate that even given longevity in business, the relative size of most contracting companies is probably small.

Approximately half of the companies had been conducting business for two to 19 years; approximately half had been in business for 20 years or more. Seven contractors reported being in business for two years; one company had been in business for 116 years.

All of those responding said that they currently specify, recommend, authorize, or purchase equipment, components, and/or other services for their company. Company owners, presidents, and general managers/partners made up most of the respondents, as only 4.1 percent of respondents were classified under some other business title.

Top Concern: Profitability

Each contractor was asked to list his or her three biggest business concerns. The survey included several suggested concerns, but contractors were invited to write in their own answers.

Then, in a second question, respondents were asked to list their No. 1 concern, and explain why they made that particular choice. Figure 4 shows responses to the second question (which asked respondents to list their single greatest concern).

In the end, profitability ranked No. 1 as 26.7 percent of respondents cited it as the major business concern. It is a given that any business needs profits to grow. Rising costs and high overhead can put a strain on the budget and cause many sleepless nights. Successful contractors are able to make a plan and stick with it, riding out high insurance costs, an unsteady economy, and competitive price cutting.

But even the most successful contractors have concerns about profitability, as evidenced by the respondents to The News' study. As one respondent summed it up, "[There is] no reason to stay in business without a decent profit."

Some contractors who complained of lower profit rates pinned the blame directly on the lowballers, who cut prices just enough to maintain a steady, yet seemingly unprofitable, workflow.

"We need stronger safeguards against low-quality, price-cutting, uninsured, unlicensed people that are here today and gone tomorrow," said one contractor.

Not only does price cutting lead to lower profits, it also may hinder a contractor's ability to hire and retain good, experienced workers, another concern voiced in The News' study.

Insurance Is No. 2

Insurance warranted enough concern from contractors for it to take second place in the survey; it was listed as the primary concern by 18.2 percent of all respondents.

The last few years have brought more attention to the HVACR industry as a result of in-door air quality (IAQ) issues and especially from excess humidity and mold problems.

Some carriers in the insurance industry have even abandoned coverage for these particular liabilities, which contractors require in order to protect their businesses.

As one respondent noted, "Insurance costs are going up excessively and appear to be out of our control."

Insurance costs seemed to be a recurring theme of contractors, whether it is mentioned in regard to liability or benefits. Many of the respondents said they have been forced to make hard choices when deciding which types of insurance to pay for and which types to ask employees to pay for. Asking an employee to shoulder some of the costs can have disastrous results.

As one contractor put it, "Good insurance keeps good workers, but costs are rising too high. We fear losing our great employees."

Cutting benefits is not an option for some contractors; they need good insurance packages to attract and retain employees.

Does it mean raising prices to cover increased costs in an already competitive market? One contractor who completed the survey hopes not.

"We need tort reform for all insurance or these costs could rise uncontrollably and cause us to cut employee benefits, or raise prices so high that we price ourselves out of the market."

Worker Shortage Is No. 3

Of those contractors responding to the survey, 17.6 percent cited the worker shortage as their major concern. With the demand for qualified service technicians and installers on the rise and the interest in the trade waning among young job seekers, there is a great deal of competition for workers among HVACR contractors.

The future is bleak, according to one respondent. "Without good help and people willing to learn, my company and the whole industry is in trouble," he noted.

Another contractor summed up the situation this way: "The lack of qualified employees is slowing company growth, and I do not see any change in the situation."

Why aren't young people interested in the HVACR trade? That's an age-old question that produces some familiar answers. But the answers provide little consolation to some contractors, like this respondent:

"Young people are not interested in technical or dirty work," he said. "The level of service will decline, and our industry will get a bad rap."

In some areas of the country, the labor pool is so tight that fear of losing an employee - any employee - can lead to drastic measures. "By not having qualified techs and installers we are forced to put up with employee problems that we would not normally tolerate," stated one respondent.

Now What?

While the study sheds some light on the top concerns of HVACR contractors, another purpose of this survey was to suggest ways to address these concerns.

The News is planning to conduct follow-up interviews with contractors to get their input about methods they are employing to address these concerns.

Our goal is to open up idea sharing and facilitate finding the best possible solutions to increasing profitability, controlling high insurance costs, and finding and keeping employees.

Do you agree or disagree with the contractors polled in this survey? Do you have other concerns that The News should look into?

We encourage any readers who would like to have input to contact John R. Hall at johnhall@achrnews.com. You can also contribute to follow-up reports by filling out a copy of the study - just make sure you request one. Future issues of The News will contain more feedback from smaller-volume contractors and further analysis of the key issues facing the HVACR industry today.

Publication date: 08/01/2005

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