The HVACR industry is caught in the middle of a trade war between the U.S. and China. Trade tariffs began in the first quarter of 2018, and both countries have continued to set retaliatory trade regulations throughout the summer. The most recent went into effect on Sept. 24, and there may be more to come. These actions have increased the prices of sheet metal and aluminum, among other items, and they seem to be having a trickle-down effect for commercial HVACR contractors. Some have not directly felt the effects as of yet, while others are hustling to put a plan in place that accounts for price increases and strained customer relations.
INCREASING COST OF BUSINESS
Prices and bidding are two elements of these trade tariffs that commercial HVACR contractors are facing directly. The costs of both raw materials and equipment is on the rise, which is causing contractors to not only have to compensate for the added expense, but also adjust their business strategies and bidding processes.
“The rising cost of equipment increases the total cost of projects, which has a direct impact on our sell rate,” said Ken Misiewicz, president and CEO of Pleune Service Co., Grand Rapids, Michigan. “Every dollar of increase also carries with it additional sales tax, which further impacts the cost. We are spending more time providing new budgets and proposals for work that was quoted within the last 120 days due to price increases, and we have shortened the time we honor quotes to as little as seven days depending on the equipment.”
John Sedine, project manager for Engineered Heating & Cooling, Cedar Springs, Michigan, said his company has been overwhelmed with requests for bids recently.
“We aren’t sure if people are trying to lock in prices before any more increases or if they are trying to lock in due to the uncertainty of midterm elections,” he said. “It’s probably both.”
Customers that Sedine has talked to aren’t happy about the fact that materials and labor are going up, but they acknowledge that if they don’t build, they don’t make money.
The staff at Enervise, a commercial HVAC, controls, and energy solutions company in Blue Ash, Ohio, is putting extra effort into negotiating price increases with clients on existing construction contracts. Although most customers are approving the increases in advance contracts, those that have been previously negotiated are not as quick to accept.
“We primarily perform short-duration mechanical retrofits, and the tariffs have affected our pricing on materials — primarily steel,” Tom Winstel, president of Enervise, said. “We are building price changes into our estimating to help mitigate these changes. You have to deal with real costs and pass them on to the end user.”
MCAA HELPS CONTRACTORS MITIGATE TARIFFS
Understanding that many commercial contractors would be facing rising costs in light of the steel and aluminum tariffs, the Mechanical Contractors Association of America (MCAA) released the management methods bulletin, Recovery of Material Escalation Costs Arising From Steel and Aluminum Tariffs.
The eight-page bulletin explains the legal definition of tariffs and provides insight as to how contractors may be able to recuperate some of the lost revenue costs stemming from the tariffs. It acknowledges that the risk of material price escalation is traditionally borne by the contractors in fixed price contracting and shows them options of how to handle current conditions as well as how to prepare for this in advance if recuperation is not possible.
According to the document, one option for recovery comes when a force majeure event results.
“Force majeure events typically include acts of God, strikes, war or other hostilities, acts of the government or other third parties, and other similar events that are not caused by either [contractor or customer] party,” it said. “Because the tariffs are unforeseen acts of the federal government rather than market-driven escalation, the risk of which is normally allocated to the prime contractor or subcontractor, they have greater potential to constitute a force majeure event for which the contractor and subcontractor may obtain a time extension or be excused from performance of the contract or subcontract, if the event precludes performance of the work.”
Other recovery efforts explore impacts of delay by customers and higher-tiered contractors and the enactment of price adjustment clauses in contracts. The MCAA bulletin suggests that contracts can be written with adjustment floors and ceilings that provide risk sharing when prices increase and benefit sharing when prices decrease. It also addresses the tariff-based price increases that may provide contractors with another avenue of recovery.
“Forecasting the possibility and extent of governmental tariffs is beyond the reasonable risk profile for most contractors and subcontractors,” as stated per the document. “As a result … contractors and subcontractors should include a clause in any quotation they provide that reserves their right to recover for the increased tariff cost. The clause needs to be included or incorporated into the resulting contract or subcontract. If a price is being submitted after the enactment of the tariff, the prices should include the impacts of the tariff.”
SUPPLY AND DEMAND
The supply and demand situation of raw materials affecting the HVAC industry is currently in flux as well. There is a fair amount of steel and other raw materials in the market, but as prices increase, some commercial contractors will pre-buy as much as possible to help meet demand at lower costs.
“Those who use steel and aluminum are saying it is having a significant impact on their ability to be profitable on fixed contracts, and it is creating some supply issues, as purchasing has increased with speculation of additional cost increases,” Misiewicz said. “In the short term, I think that we will continue to see the price of steel and aluminum go up, as the commodity pricing has shown some decreased/leveling over the last 30 days. But by trend and with additional tariffs being enacted, it will continue to strain the market’s ability to meet demand at pricing that reflects the contract pricing that suppliers have agreed to.”
Publication date: 10/15/2018