As 2008 unfolds, HVAC contractors will roll out their business plans for the next year. Some will stay the course they have been following, while others may make dramatic changes to shake things up. Some may choose to stay with markets that have made them successful, and others may want to lean over their shoulders and integrate these same markets into their own business.
One such market is design-build, which is basically a one bid, one contract, and one design-builder program. Design-build may be a key to success in a soft new construction market and it certainly can be a key to keeping the professional bar high in the HVAC trade. The NEWSasked its contractor consultants to comment on how design-build can be an advantage for HVAC contractors in 2008 and beyond.
Ken Bodwell of Innovative Service Solutions said that any economic slowdown will have a negative effect on the HVAC trade, but he is optimistic that the markets he serves will turn to design-build for retrofit needs.
“Since our company’s focus is primarily industrial-commercial service, this economy may assist in motivating customers to seek design-build retrofit projects, rather than pure replacement,” he said. “Customers will be looking for ways to extend the life cycle of the equipment, while searching for solutions to reduce operating costs and optimize production.”
“We personally feel that design-build is always a better avenue for business, but you still need some plan and spec work from time to time,” said Scott Getzschman of Getzschman Heating & Sheet Metal.
Not every part of the country will be good for design-build projects in 2008, according to Sonny Knobloch of Help! Air Conditioning & Heating. “I believe a soft economy will not affect design-build projects the same way throughout the whole country,” he said. “There are parts of the country that are experiencing tremendous growth. These areas will continue to grow and flourish. One such area is along the Gulf Coast where Hurricane Katrina removed so many buildings.”
And there is another school of thought - that design-build contractors will not have a good 2008 because of the soft economy. Hank Bloom of Environmental Conditioning Systems and Aaron York Sr. of Aaron York’s Quality A/C share that opinion.
“Customers are still afraid to invest their dollars in a slow economy, no matter where the dollars go,” said Bloom.
York added, “A soft new construction market does not mean an acceleration in design-build projects. When the economy is restrained, design-build projects generally do not become more plentiful. The number of contractors competing for the design-build projects increases because the normally new construction contractors now go after these projects. This lowers the selling price and often dampens the quality because the new construction contractor fails to understand the needs of a design-build project.”
Jim Hussey of Marina Mechanical said that public sector work, especially in his home state of California, will not slow down much and may even invite more design-build projects in the future. He noted that the soft economy would impact the HVAC trade in a number of other ways. “There will be a slight reduction in private design-build work, no impact on public design-build work, a big reduction in private bid and spec work, and a glut of bidders for public bid and spec work with the overall effect of holding prices down across the board.”
Russ Donnici of Mechanical Air Service Inc. said that energy concerns may feed the design-build process, but a slow economy can still overshadow everything. “The energy issues are driving more upgrades in system equipment selection and design,” he said.
“However, much of the new construction in our area is plan and spec work and not design-build. Sometimes building owners can be converted to design-build if they understand the benefits. Much of the time the work goes out to several HVAC vendors, and if you are the only one submitting a design-build quote, the general contractor may not be sophisticated enough to compare the bids.”
RAISING THE BARAlthough being a design-build contractor does not necessarily ensure a professional business model, being a good and well-trained design-build contractor can make a big difference in the level of professionalism in the HVAC trade.
“I believe design-build contractors definitely raise the professional bar a notch or two,” said Ann Kahn of Kahn Mechanical. “It takes imagination, technical knowledge, salesmanship, and a skilled workforce to get the design-build project done properly. When contractors are able to put these elements together, they are part of that top notch.”
It’s all about a strong team, according to Getzschman. “I absolutely feel you need to establish a strong design team, including engineers and suppliers,” he said. “If you do that, the level of project quality and the success of the project is enhanced. The key is to get a clear and precise direction, and you can build to those standards.”
Donnici believes that competent design-build contractors definitely raise the bar of professionalism and that there is room for more contractors to enter this market. But he added some words of advice for those seeking design-build work.
“Unfortunately, some contractors try to enter the design-build area without the proper expertise, and clients end up dissatisfied,” he said. “Obviously, any contractor that does competent design-build projects had to learn how to do it.
“It’s all about constant technical and engineering development and research before bidding the first project. It also is beneficial to start with a small design-build job and not a large one.”
Bodwell believes that true design-build contractors stand out among the crowd and raise the bar. “Who other than qualified, trained professional mechanical contractors understand the most efficient and cost-effective solution to a customer’s needs?” he asked. “Contractors that invest in the training to stay abreast of the changing industry most certainly differentiate themselves from the norm.”
Hussey took a different approach to the correlation of design-build to professionalism, calling the impact of design-build on professionalism limited. He said it goes beyond the size and scope of the market - it goes to the very core of the haves and have-nots.
“There are still a lot of buyers who are strictly first-cost buyers,” he said. “I continue to believe design-build clients are the minority and therefore well-matched to the minority of truly qualified contractors who tend to gravitate toward the design-build model. So the bar is constantly being elevated amongst those who purchase and provide design-build, but I don’t believe their activities have much impact on the rest of the industry.
“It is sad to watch the middle class disappear here in the U.S. We are rapidly devolving into a very few haves and a lot of have-nots. The same seems to be happening in the HVAC trade: a very few who get it and a majority (consumers and contractors alike) who do not.”
KEEPING EGGS IN DIFFERENT BASKETSWith the economy so iffy and the new construction and retrofit markets so different across the United States, the wise move for HVAC contractors to make may be to diversify and keep their options open to different business models. While design-build may be a good market to pursue, it may be the wrong time to go at it full tilt.
“I think new construction contractors need to find a way to differentiate themselves,” said Bodwell. “Certainly an emphasis on green buildings is one area, and from my marketing research, health care looks like a hot construction market. I think contractors with a strong marketing and business plan will do well this year. And yes, companies must diversify enough to withstand change but stay within their mechanical areas of expertise.”
Like Bodwell, York believes that in times of slow economic growth, it is important to stay within your own boundaries and strengthen what you do best. “It is a time to assess every effort expended and find ways to enhance the products we provide to our primary market rather than get into areas where we lack expertise, getting us in trouble and damaging our reputation,” he said. “In short, accent our strengths and strengthen our weaknesses.”
Knobloch said that now is the time to take stock of the business model and plan to ride out the storm.
“What percent of your business is design-build?” he asked. “If it is a major part of your business, then it is time to start building a strong relationship with the old as well as new clients. If it is a smaller part, then it might best service you to work to increase that other segment until your design-build clients return.”
Donnici noted that contractors who wait until the last minute to diversify may not be equipped to handle the changes. “Since we are diversified in other areas, we don’t have all our eggs in one basket,” he said. “We have found that new construction-oriented firms that try to quickly diversify have difficulty since they are not geared up for it, nor have the depth of expertise in the new area. A diversification goal should begin when times are good, so it’s planned and executed without the urgency caused by an economic issue.”
“If the money is there, the design-build project will proceed,” said Kahn. “However, a contractor that concentrates on one type of business might consider branching out. I remember all too well when the new housing construction bubble burst several years ago - a lot of good contractors went under for lack of other work to do.”
Bloom had some advice about being a have in 2008 - including and beyond being a design-build contractor. “The key to staying profitable during these times is a diversified customer base and a good service company,” he said. “Get into niche markets like biomeds, hospitals, pharmaceuticals, and high-tech companies. These are the ones that continue to grow. All customers welcome energy upgrades, too.
“We had our best year in 2007, and 2008 looks great [for the company] by being diversified.”