Making the Jump from Residential to Commercial HVAC
Tips designed to help a residential contractor expand into the commercial sector
Residential HVAC contractors often spend considerable downtime contemplating ways to increase revenues. But, aside from improving efficiency, greater revenues are often realized only through greater sales. Additional work can prove hard to come by in competitive local markets.
So, where does one go for new opportunities? Well, instead of laboring to wring every last drop out of the current residential market, maybe it’s time to expand the market itself. Perhaps it’s time to look into commercial construction.
This statement likely caused a great deal of apprehension and uneasiness, which is understandable. To those not yet indoctrinated, commercial construction can appear daunting. Suddenly, there are architects, engineers, liquidated damages, bonding, and a cast of wealthy business clients with short attention spans and scary-sounding law firms on speed dial. There are new regulations, strict protocols, and new competition.
Well, I was there once. I was in residential construction 10 years before getting into commercial work, which is 25 years and counting now, and I can attest the transformation from residential to commercial construction was (in no particular order) exciting, terrifying, exhilarating, frustrating, and rewarding.
Let’s see if we can make the transition to commercial construction a little less intimidating by breaking the process down into less-threatening, more-acceptable doses.
FINDING COMMERCIAL WORK
As a residential contractor, new work likely came via local advertising, the company’s website, personal referrals, and industry contacts (i.e. real estate brokers and material suppliers). These are still great strategies for acquiring work in commercial construction (CC), but now there are other avenues and opportunities in place. One of these is collectively known as reporting services, sometimes colloquially referred to as Dodge Reports (an ode to F.W. Dodge®), but there are a host of firms that offer similar services such as BidClerk® Construction Market Data®, Government Bids®, and more. While services vary, most of these places publish information about competitively bid CC projects in a contractor’s area, CC projects in the planning or negotiation stages, and CC projects that have recently been awarded.
These services are for construction managers, general contractors, subcontractors, suppliers, and anyone with a vested interest in CC work. Most include pertinent details regarding the project, such as a description of the work itself, the architect/engineer (A/E), the owner, and even bidding companies currently holding plans. They’ll also give a bid date/time and may even tell a contractor how to go about acquiring bidding documents (many sites even offer downloadable electronic versions).
Depending on a company’s area of expertise, management can find information on construction opportunities ranging from nuclear work to waterpark construction. If there’s a niche, there’s probably a reporting service for it. But, just a heads-up — most of these services are available only via paid subscriptions (or other fees), so management may need to do a little homework and even shell out a little cash to determine which site is best for the company.
CONSTRUCTION ORGANIZATIONS AND PLAN ROOMS
CC opportunities are also available through local construction organizations, such as the Associated General Contractors (AGC), Associated Builders and Contractors (ABC), and a host of other groups that represent a wide and varied array of subcontractors, suppliers, support agencies, and government bodies. A contractor may already belong to one of these associations. These groups also often sponsor local and/or area plan rooms (both physical and online) where blueprints and specifications on upcoming/bidding CC projects can be viewed or, in some cases, checked out or downloaded for management to perform takeoffs and estimates. Again, some ask for a fee and others don’t.
Depending on the project delivery method, a contractor may be able to acquire bid packages (plans and specifications) directly from the project A/E. This often requires a fee/deposit, and a contractor may find, if the operation is a second-tier subcontractor or supplier, that these firms are selective over who/how they distribute bidding documents (many only cater to prime contractors, such as general contractors (GCs) or construction managers (CMs). If the firm is willing, the contractor may have to go through a prescreening process (involving references, financials, and experience) before being put on their select contractors list, but it’s definitely worth the time and effort. Being on these short lists allow the company greater access to the designers — and even the owners/clients — who potentially provide an advantage when it comes time for bidding a project.
Speaking of architects and engineers, a residential contractor’s involvement thus far with A/E firms has likely been infrequent, if it’s existed at all. This changes once the company enters CC. There are a number of reasons for this. First, CC work is generally much larger, more intricate, and more costly than residential undertakings. And, with so much at stake, it’s not surprising the CC client doling out so much cash wants to feel comfortable knowing the project is in the hands of highly trained, appropriately licensed, and formally credentialed individuals or organizations.
But, another more practical reason a contractor will be seeing more A/E’s in CC is simply due to the fact that most metropolitan U.S. jurisdictions require commercial plans and specifications to be stamped by a licensed architect or engineer before building permits will be issued. This generally isn’t the case with residential work, unless the homes are exceedingly large or complex.
Surprisingly, one of the most edifying and enlightening things I came across in my own transition to CC had less to do with the process and more to do with the nature of CC clients. I loved them. Again, I’m generalizing, but I found that, as a group, commercial clients were far easier to work with than my old residential customers, as they were seasoned business professionals. They understood that things happen in business, and day-to-day hurdles were something to calmly fight through until they were resolved.
This was starkly different from breaking the painful news to Tom and Tina Freshface (the 25-year-old, starry-eyed newlyweds) that the sprawling, exquisite dream home they’d pictured in their minds was far in excess of what their dreams could actually afford.
CONSTRUCTION SPECIFICATION INSTITUTE
When preparing a typical competitive CC bid, company management will, more often than not, be working from information consisting of working drawings (plans) and a specification manual (often separate and bound in book form) along with any relevant correspondence or addenda (changes to the bidding documents after the publication date) that pertain to the package. This is commonly referred to as the bid package. Most companies are already familiar with drawings but the manual, or spec book, may be new to some and it’s often (for private projects) laid out in Construction Specification Institute (CSI) numerical order.
CSI is a private organization founded in 1948 by specification writers of government agencies who came together to improve the quality of construction specifications. The institute’s efforts were essential in improving construction specification quality so it could meet the demands of post-war construction booms.
There are many divisions and sub-divisions and the actual numbers/divisions used reflect the type and scope of project being bid. As a CC, it’s imperative to read and understand all divisions.
BONDING AND SURETY
Of course, there are exceptions, but, on a whole, I think it’s fair to say that CC projects tend to be more expensive than residential jobs. With more at stake — and given that construction, by its very nature, can be risky and volatile — it’s little wonder bonding companies exist. Commercial clients are often business leaders, and commercial construction projects are major investments. It simply isn’t good business to gamble on a contractor going belly-up in the middle of a project. This is where the bonding company comes in.
Bonding companies, sometimes referred to as sureties, offer what is known as surety bonding. This additional insurance provides the client enhanced peace of mind by assuring them the hired contractor will enter into a contract for the originally quoted price of work (a bid bond) and/or complete the work as promised and pay their own workers, sub-contractors, and suppliers punctually and according to the language set forth in the contract thus thwarting any sub or supplier liens that might potentially come back to haunt the owner once a punch list is complete and the contractor is off site (a performance and/or material payment bond).
The surety bond gives the owner a fall back in case a default should take place. The surety company allows its financial resources to be used to back up the commitment the contractor has made to the owner. If the contractor defaults, the surety steps in to finish the job and sort out the mess. Of course, the surety company doesn’t do this for free. There is a fee for such service, and it’s often included in the bonded contractor’s bid. When first starting out, less-experienced commercial contractors may pay a higher premium for bonding. They may even be denied a bond altogether.
One of the harsh facts about CC is that it can take years of gaining experience, building a positive reputation, and creating a sound financial history before a reputable surety company will take a chance on providing the company a bond. But, it’s absolutely worth the trials. Once bondable, the company will gain more bidding opportunities due to the fact that many commercial clients simply won’t allow firms that fail to gain bonding to bid their projects. Premium fees are generally assessed as a percentage of the contract cost of work. After a company has been with its bonding company a while and demonstrates a positive, proven track record, rates will be periodically reviewed and, if the surety is satisfied, be reduced.
THE SUBMITTAL PROCESS
Once awarded a contract or purchase order for a CC project, it’s common for the owner’s representative (normally the GC or CM) to request a submittal package from the contractor before the rep will allow work to proceed. The submittal process is a checks-and-balances system that helps to ensure clients and designers that the company is indeed providing the proper, specified products and installation methods required of the bid package. With virtually all CC projects, a contractor is required to bid the project plan and spec. A contractor may suggest a substitution, which may or may not be accepted, during the bid period, but this does not relieve the responsibility to provide the product or method as it was originally specified.
The submittal process may include shop drawings, specification/detail sheets, samples, demonstrations, and even mockups of a particular construction assembly. The specification manual will tell a contractor what is expected.
CONTRACTS AND SCHEDULES
And, while we’re on the topic of schedules, another thing a contractor may not have encountered in residential work is scheduling penalties. As a CC, the company will be expected to perform all work skillfully, completely, and on time. Contractual agreements and project schedules are extremely important in commercial construction. Not making pre-set milestones and completion dates can serve up substantial penalties for those involved. Known as liquidated damages, this penalty is normally assessed as a fixed dollar amount paid back to the owner for every day the contractor is late delivering the project. On the flip side, there may also be bonuses for finishing ahead of schedule, so be sure to read the specification manual and all contracts.
Of course, this is but a fraction of what a contractor will likely encounter in its new CC life, but, hopefully, it gives a residential contractor some insight. And, like most things in life, all the important items can be addressed and conquered over time.
Perhaps the best advice anyone could receive is to be persistent, enthusiastic, and prepared to battle through some adversity. After a while, there will be far more good times than bad. And, if the company remains steadfast, honest, and sincere in its commitment to provide quality workmanship, safety, and customer relations, it will have no problem attaining success.
Publication date: 3/28/2016