It’s fairly easy to make money in a strong, growing economy. Doing so in a down economy takes planning, efficiency, a degree of finesse, and the realization that consumers will be more tightfisted with their cash.
Business FinesseMilton Baum owns Keil Heating and Air Conditioning, a mainly residential contractor in Riverdale, NJ. Like others, he has been preparing for the downturn for several months — since January of 2001, to be exact. “I did not want to wait for the last minute to be caught.
“My preparations include taking every discount possible with my suppliers, even motivating them to think of new ways to give me discounts by my paying them early,” he said. “We have made major inventory purchases and in so doing, have seen deep discounts in what we pay for stock.”
Another smart inventory move is to use a “just-in-time” inventory system to replace stock when it is needed. “Our reserve stock in the shop is reduced and only the service tech on call has the fully stocked truck,” said Vince DiFilippo, president and owner of DiFilippo’s Service Co., Paoli, PA. “The other techs share the remaining stock, since our service area is only a 12-mile radius.”
Brad Swanson is president of M&S Plumbing, Heating & Air Conditioning, Manhattan, KS. He says contractors need to act instead of react. “Business is down 10% from last year, but still gaining ground, and with our current workload, we may match last year’s numbers.”
Still, the signs of a slowdown are there. “Last year was real busy until the end of December,” said Swanson, “and then it was like someone turned off the switch at the first of the year. It was the first time in our 23-year history we had to borrow money to keep up with payroll; and we don’t want to do it again.”
DiversityDan Trombly of Trombly Plumbing and Heating, St. Johnsbury, VT, says that in the last year, two major factories in the area (commercial customers of Trombly’s) started to go through an economic slowdown. This caused the contractor to lose some business. He says the current economic status may create even more of a downturn with his commercial customers.
The company’s strategy lies in its diversity. About half of the business is in commercial contracting; the rest is residential service.
Tri-City Mechanical (TCM)/Comfort Systems USA, Chandler, AZ, shares a similar strategy. According to president Joe Nichter, “We remain very diverse at TCM; no job is too big or too small. If it’s mechanical we will engineer, fabricate, install, service, maintain, or provide full turnkey service. Any capabilities we don’t have, we are very confident one of our sister companies can provide the additional expertise that may be needed in one of the phases.”
He added, “We encourage everyone within our team to concentrate on building relationships with our customers; everyone is in sales and is responsible for maintaining our customers’ trust.”
TCM’s management had already anticipated a slowdown. “However,” said Nichter, “the magnitude is not clear, especially with the current chain of events. We have been involved in the budgeting of resorts and condominium projects, and we are anticipating possible postponements and delayed starting dates, but there have been no cancellations to date.
“Any slowdown in the economy always creates a sense of urgency to backlog work,” he said. “As a result, we anticipate competition to be tough and margins to shrink.”
Consumer TrendsMost contractors are seeing a drop in solid leads. “This winter, I see the ‘just fix it’ mentality to be a major issue for contractors,” said Baum. “I do not think that homeowners are going to want to take on added debt or make any major cash purchases unless they have to — especially when it comes to heating and cooling.”
To counter the reduced leads, Swanson said his company raised its “show-up” fee to diagnose the problem by $25, “and doubled our base rate for labor in our flat-rate system.
“The results have been a bit amazing,” he continued. “Here we thought we would have nothing but complaints and lose customers — but we were wrong. It has been two months since we raised rates, 296 service calls, and only one complaint on being high priced.”
“Since we are a service-only business, the anticipated slowdown usually means an increase in revenue for us,” said DiFilippo. “Clients will spend money to repair rather than replace.
“We do everything possible to be sure to explain the benefits of replacement vs. repair and even tell them about special financing available to them. We feel it is our responsibility to push the replacement of a 12-year-old furnace that needs major work, rather than make the profits from the repair.”
TCM encourages current and potential customers to use accelerated maintenance and planned service to increase system efficiency and schedule shutdowns, which are less costly than responding to emergencies. The contractor also tries to get involved in system design as early as possible. “We have a proven track record of accurate budgets with the most efficient system and meeting completion schedules,” said Nichter. “This is money in an owner’s pocket and early involvement saves a great deal of time.”
Brian Nalley, owner of Northside Heating & Cooling, Benton, AR, said he has seen less disposable income available for emergencies, like a/c repairs. That fact alone has customers scurrying for warranty repairs. “With this kind of mindset, dealers are forced to extend warranties to meet customer expectations,” he said. “Should we call it hvac HMO?
“What happened to the medical, pharmacy, and optometry industries when managed care took over?” he asked. “There was controlled pricing — no markup on repair parts and low labor rates. That sure sounds like manufacturers’ extended warranty plans, doesn’t it?”
Generating Work, ProfitsBeyond the goal of generating profits, contractors need to keep their technicians working. “We have more than ever been preparing our people for the eventual downturn by reviewing our open-book management teachings and about the importance of saving for a rainy day,” said Baum.
“To keep our technicians working during the slowdown, we share the responsibility,” he said. “We may have to provide our customers with system discounts, and/or [technicians] must help generate their own future work by educating homeowners of the advantages of maintenance, equipment replacements, setback thermostats, and other energy-efficient accessories that benefit the homeowner. At the same time, the company must always be searching for new and innovative ways to generate work.”
“We have good techs and a good customer base for our area, but we are not up to par on the number of service agreements we’d like to have,” said Swanson. “We have aggressively addressed this situation this year by offering four different plans, and by offering monthly payments instead of the usual annual pay-in-advance method. It took some doing with our bank. We had software to purchase and install, but we’ve got everything rolling now.
“This is being well received by our customers, and all but one have set themselves up on the monthly plans,” he said. “We charge extra for those wanting to pay for the whole year. This is done to keep the paperwork for renewals down to a minimum.” Monthly plans are renewed automatically. “With this plan in effect, we hope to have regular monthly income whether the phone rings or not.”
The company also is training its techs to look over customers’ equipment more closely, and make recommendations such as add-on accessories. General training has been increased from monthly classes to weekly. “Currently, during preseason furnace servicing and inspections, it is daily training classes for one hour,” said Swanson.
New heat exchanger video monitors is helping the contractor’s sales. “Our first five inspections during preseason furnace checks generated $17,940 in equipment sales,” he said. “We look for this to provide many leads missed in the past.”
Play Where You’re NeededAccording to Trombly, it is important for contractors to focus their attention on where they are needed. If the commercial market begins to decline, there is always a residential market that will need services.
This is no different than the changing seasons, he added. When summer comes to an end, it is time to take the technicians away from air conditioning work and point them in the direction of heating.
“I’ve learned how to do every phase of the mechanical business,” said Trombly. “We don’t specialize in one thing, we do a little bit of everything. When one sector slows down, you move your technicians to another.”
News editors John R. Hall, Greg Mazurkiewicz, J.J. Siegel, and Mark Skaer contributed to this article.
Publication date: 10/08/2001