The American economy is growing. The White House predicts the unemployment rate to fall below 5 percent by the end of 2016, the lowest since before the Great Recession, and foresees economic growth of 3 percent in 2015 and 2016, signifying the best performing consecutive years since 2004 and 2005, in a recent economic forecast.
As the economy continues to rise, the price to do business is following suit. Recent studies suggest HVAC system construction and maintenance services are on the rise. Additionally, mechanical equipment prices are increasing, HVAC shipments are surging, and contractor confidence is high.
As the indoor comfort industry continues to thrive, now is as good a time as any for HVAC contractors to consider raising prices.
Market Supply and Demand
Furthering the White House’s stance, a recent IBISWorld study reports demand from key downstream markets like residential and nonresidential construction has increased substantially, contributing to moderate price growth between 2011 and 2014.
Moderate price growth is expected to persist through 2017 as the construction sector expands and investment from local and state governments returns to growth.
“The biggest boon to the HVAC industry is the recovering economy. As the economy continues to recover and move into a normal growth phase, demand will only continue to grow,” said Jordan Weinstein, procurement research analyst, IBISWorld.
“Additionally, the evolution of public policy on emissions and energy-efficiency standards will facilitate the need for new and improved products. The requirement of up-to-date and up-to-standards machinery will garner continuous demand for
Cleveland-based Freedonia Group Inc. released a study in November titled “HVAC Equipment” that also depicts a surging HVAC market, reporting demand in the U.S. for HVAC equipment is projected to increase 5.1 percent in 2015.
Advances will be stimulated by growth in residential and many types of nonresidential construction spending from a low 2010 base, a rising interest in energy-efficient HVAC systems, and public and private incentives that will encourage owners to upgrade to models with efficiency ratings that are at or above Energy Star levels.
Average Price Per Hour
The aforementioned IBISWorld report states the benchmark price for HVAC system construction and maintenance services in 2014 was $61.40 per hour.
Because contracts are negotiated on a case-by-case basis, the price range for HVAC services is medium and prices vary from about $34 to $108 per hour.
And, according to the study, the average price of HVAC system construction and maintenance services is expected to increase at an annualized rate of 3.3 percent to 2017. The increase will result largely from growth in demand during the period. Most importantly, the value of construction is projected to rise at an annualized rate of 5.4 percent, leading to heightened demand for new HVAC systems.
The contractors we spoke with had differing opinions when asked to compare their costs to IBISWorld’s $61.40 average construction rate.
Rob Minnick, CEO and president, Minnick’s Inc., said his company considers training, travel time, and many other factors when pricing a job. As a result, he said his company’s costs are well above the $61.40 suggested average.
Toby Sweeney, service manager, Pleune Service Co., Grand Rapids, Michigan, said the posted $61.40 average is pretty much spot on for the construction rate in mid-Michigan.
“In our area, the typical industrial or commercial contractor is in the $85-$95 range for a contract customer and $100-$110 for a street rate. The residential contractors in our area are in the $75-$85 range. On the service side, that number would be way low.”
Rich Morgan, CEO, Magic Touch Mechanical Inc., Phoenix, called IBISWorld’s $61.40 absurd.
“We are well above that number. In fact, I’m surprised to see that number is so low and the companies sampled are in business still,” he said. “If that number refers to the hourly cost to the company (loaded labor), that number is very high.”
The Price of Doing Business
While adjusting prices involves careful attention to several factors, including consumer perception, the cost of the competition, and the observed value of service, several contractors recently told The NEWS they’re not afraid to increase their prices.
Steve Moon, president, Moon Air Inc., Elkton, Maryland, said not changing prices as costs increase is the kiss of death. “I tried to resist, but not raising my prices hit my bottom line so hard that, with all other costs going up, it almost put us out of business,” he said. “I’ve raised my prices over the last couple of years and intend to do so in 2015. We must not forget that we’re in business to make a profit.”
Sweeney said Pleune aims to raise rates incrementally about every two years, based on wage and material inflation. “The upward pressure on technician pay is a factor in raising prices. If you’re looking for a guy with five to 10 years of service experience, you can bet all the other contractors are looking for those same technicians. The pool is shrinking,” he said. “Our service rate went up twice what was considered normal, and our plumbing and electrical rates recently moved 10 percent, which we considered fairly substantial. As of now there have been no negative repercussions with our well performing customers and only a few poor-performing customers have left.”
Matt Bergstrom, president, Thornton & Grooms, Farmington Hills, Michigan, said the company has had to raise prices to keep up with rising prices across what seems like every other aspect of business.
“While the economy may have been soft here in the metro Detroit area over the last five-plus years, it has not stopped my insurance company from raising general and health care rates, it has not stopped my equipment vendor from raising prices, and it has not stopped fuel from rising,” he said. “Every year, we look at how can we cut expenses and still offer the level of service we need to provide to be the best at what we do, and, unavoidably, it usually means we need to raise prices. This year was no different — we had a 3 percent uptick in general insurance, a 10-plus percent increase in health insurance, and 2-5 percent increases on equipment. By the time we’re done, we’ll see about a 15 percent increase or more on water heaters this year.”
Butch Welsch, owner, Welsch Heating & Cooling, St. Louis, said certain industry segments aren’t recovering as quickly as others in the Midwest. “While things are better than they were at their lowest point, they are far from robust. We are optimistic things may improve somewhat this summer, but, so far, the commercial sector, specifically, remains slow.”
Welsch said it’s been difficult to raise prices as the company is still down more than 50 percent from its peak year, and many contractors could handle more work, which also makes raising prices difficult.
“We’ve had labor increases and we’ve attempted, and been successful, in some cases of being able to raise prices to cover those labor increases,” he said. “For us, the replacement market is not as price sensitive as the new-construction market because potential customers who come to us pretty much know we are not going to have the cheapest price. However, they know they’re going to get an excellent installation as well as exceptional after-the-installation service.
“As equipment manufacturers and supply vendors submit price increases to us for the materials we purchase, we pass that additional cost on to customers,” Morgan said. “Regarding the labor rates, little changes over the short term, so, that portion of the cost remains relatively the same.”
Roger Grochmal, CEO, AtlasCare, Oakville, Ontario, Canada, said, in addition to rising prices, Canadian contracting companies have to compete with a currency that’s falling in value when compared to the U.S. dollar.
“The Canadian dollar is in the 80 cent range [compared to the U.S. dollar]. The U.S. economy is roaring back, the price of oil is down by more than half, and the U.S. housing sector is making a good comeback. The net result of all of this is that prices are going up — significantly,” he said. “The consensus price increase being levied today averages about 9 percent. The problem is that this is likely the first shoe to drop. I’m hearing talk of additional price increases, especially if the dollar stays low for a while.”
Grochmal said the cost increases are impacting HVACR companies industry wide, and he expects savvy contractors to adjust prices accordingly.
“Whatever you do, don’t bite the bullet and swallow the price increase as the cost of doing business. This is the fastest route to the unemployment line,” he said. “You may be busy as a result, but one old-timer told me, ‘Every contractor he ever saw go bankrupt was in their busiest year in business.’”
Publication date: 3/16/2015