Contractors Expect Modest Growth in 2015
Customers Still Holding on Tight to Wallets
It seems many HVAC contractors are feeling positive about the year ahead, at least according to ACCA, which reported its January 2015 Contractor Comfort Index (CCI) scored a 74 — much higher than a year earlier when the CCI stood at 69. The CCI is calculated based on the answers given by ACCA members when asked how positive they feel about new business prospects, existing business activity, and expected staffing decisions in the short-term future. A CCI of 50 or greater reflects anticipated growth.
“Sales for 2014 were pretty good, and I think 2015 sales will continue to grow,” said Phil London, vice president of residential services, Thermal Concepts Inc., Davie, Florida, and incoming ACCA chairman. “Obviously, there are things contractors can’t control that will have an effect on sales, like the economy. The fact is, though, there are a lot of things we can control, like staff size, marketing budgets, and overhead expenses. We should be working on our individual businesses to make sure we are strong enough to weather any dips.”
Scott Berger, president, Arista Air Conditioning Corp., Long Island City, New York, and Mechanical Service Contractors of America (MSCA) board chairman, also believes the economy has turned the corner, but he anticipates only a modest increase in overall sales this year. “My sense is that the economy will grow, but defined growth, right now, really depends on a couple of factors — the types of vertical markets a contractor specializes in, as well as the location of the contractor’s market. Growth will be spread out across the verticals and will occur at varying rates in different metro areas. An area like South Florida, for example, will certainly contrast from an area like mine in New York. But, we’re all experiencing strength in distinct segments.”
Geographical differences will definitely determine how well contractors do this year, as some areas of the country have bounced back from the recession much more quickly than others. As Thomas Szymczak, president of both SSM Industries Inc., Pittsburgh, and Sheet Metal and Air Conditioning Contractors’ National Association (SMACNA), noted: “I think we will continue to see slow and steady growth in most parts of the country — not withstanding those areas experiencing large project booms right now and other areas that are simply lagging. Smart contractors are watching their overheads and are cautious not to grow too quickly. Margins are key.”
Contractors are still hoping consumers will break out of the repair versus replace mode and start buying new equipment. But London noted that although South Florida has seen an increase compared to other parts of the country, and there has been a lot of talk about pent-up demand since the economy began to improve, it hasn’t fully come to fruition yet. “There is a lot of aging equipment out there, and it needs to be replaced.”
Berger has not seen any evidence of pent-up demand, noting that even though there’s a lot of money out there, most customers are saving, not spending. “Those two points seem to be in opposition, but the key here is that the customer’s access to funds may not influence pent-up demand. There hasn’t been an appreciable increase in the amount of repair work available — it didn’t disappear, but it didn’t spike either. I think this is an overall trend that occurs during downturns in the economy. The new behaviors learned during the time of conservation become the new norm moving forward. So, the ability to delay repairs and replacements while still maintaining operations has become the new norm.”
Sometimes, contractors can encourage customers to replace aging equipment by educating them about the cost savings they will get by upgrading to new, more energy-efficient equipment, said London. “Contractors who work closely with their customers can help them plan for replacement. When we do a good job of educating our customers, we end up being able to replace old equipment before there is a total failure.”
One factor that may influence the replacement market is the Department of Energy’s (DOE) regional efficiency standard, which took effect Jan. 1. This standard elevated the efficiency requirements for central air conditioners in Southern states, and it remains unknown how it will affect consumers.
“Back in 2006, when the efficiency standard went from 10 SEER to 13 SEER, we saw a 30 percent increase in repair and a corresponding decrease in replacement,” said London. “The changes that took effect on Jan. 1 are slight upticks, so they may not have the same impact. But there is no question regional standards have caused a lot of confusion and uncertainty for all segments of the industry.
London noted that, right now, contractors are not too concerned about the standard, because there is an 18-month sell-through period for old inventory. In addition, the DOE hasn’t released a final enforcement plan for the standards, so, until that is in place and the grace period draws to a close, he doesn’t think there will be any deleterious effects on the industry.
The efficiency standards may even surprise everyone and help increase sales, said Szymczak. “Improved energy efficiency in new equipment coupled with the regulatory mandates can offer the savvy contractor a tremendous opportunity to sell upgrades. Local and federal incentives and credits can also be a significant customer motivator, as well.”
One issue most everyone agrees will have a harmful effect on the industry is the continuing skilled labor shortage. “While our labor shortage is not an epidemic problem today, we need to focus on it now so we are prepared for the near future,” said Berger. “With large numbers of baby boomers in the workforce expected to retire soon, along with the continued growth of our industry, we need to accelerate the recruitment and training now in order to meet future demand. This needs to be a high priority for our industry.”
To that end, contractors should take the opportunity to promote the HVAC industry as having great careers for the younger generation to pursue, said Berger. “Other industries ebb and flow, but our industry offers steady employment, excellent wages, great benefits, and ongoing training for those who are good with their hands and have a strong work ethic. We provide solid, middle-class careers where every day is different and interesting. So, figuring out how to recruit these youth is a goal that not only benefits the industry, but also helps us to secure and grow our individual businesses.”
London agrees, noting the industry needs to change its image in order to become more appealing to today’s youth and their parents. “A simple rebranding, re-establishing our industry as indoor environmental and energy professionals more accurately defines what most in our industry provide. Most young people don’t think our industry is a great place to earn a living, so how do we change this image? We have to start at the grassroots level and get into the schools, participating in career days and other programs such as nationwide Boys and Girls Club events.”
Contractors also have to highlight competitive salaries and benefits, such as retirement plans, health care plans, and vacation time, said London. “We also have to show there are growth opportunities through continuing education programs either through the school system, in-house training, or apprenticeship programs offered by industry groups such as the Associated Builders & Contractors Inc. and others. These are things young people are looking for, and if we aren’t offering them, they are not going to be attracted to our industry.”
Although many of these concerns are immediate, solutions will be forthcoming, thanks in large part to contractors working together in associations such as ACCA, MSCA, and SMACNA. “This participation is invaluable because it allows you to further define, understand, qualify, and even solve challenges we face in business every day,” said Berger. “It’s you and your industry partnering to address challenging issues together.”
Publication date: 3/16/2015