Benchmarking for Commercial HVAC Contractors

Benchmarking for Commercial HVAC Contractors

One of the best ways to determine the future of your company is by adopting common best practices used by the leaders in the commercial HVAC industry.

There are many ways to gauge success and high performance in corporate America. Financial statistics come to mind, such as quick ratio, debt/equity ratio, operating profit percentage, and others. These numbers are easily determined with a good income statement and balance sheet. But while they give insight into the financial health of a company, they're only fleeting glimpses of overall, long term company health. They tell you how the company has done in the past and is presently doing, but not how it will do in the future.

As a consultant focused on the commercial HVAC industry, I'm charged with assessing companies' overall “health,” and spotting areas that need improvement. I'm also involved in a lot of acquisition work, and constantly need to quickly evaluate companies based on limited information.

As mentioned earlier, financial statistics are certainly useful, but they don't give the whole picture. More ammunition is needed. I decided that one of the best places to start would be to examine some of the best contractors in the U.S., to find any common threads in those well-run companies. But where to start? With an industry as big and fragmented as ours, how could I determine which companies are “the best?”

In my 20+ years in this industry, as an owner of a large commercial contractor, and an employee of a larger public contractor, I've seen, and come to know many companies. In fact, my last job for a very large industry company was to lead their effort in growing their commercial service division through acquisition. I evaluated more than 100 companies across the U.S., and brought several on board. Through this effort, I felt I had a good idea of what it took to be successful in our industry, but I had to be sure.

To validate my knowledge, I decided to do some research on the best companies in the country. But how do I know which companies in America are the best ones? Who am I to judge? Well, it's already figured out for me, every year. ContractingBusiness.com, arguably our industry's leading trade journal, annually names one company as the Commercial Contractor of the Year. The awards committee evaluates a large number of companies and looks at many aspects of the company to determine the winner. These award winners were an excellent place to start with my benchmarking study.

The Survey

Based on my experience in evaluating HVAC companies, and with the help of some industry “gurus”, I created a comprehensive survey that examined 14 different attributes of a business. These attributes include: financials, client diversification, community connection, culture, human resource management, innovation, leadership, marketing, product line diversity, productivity, safety, sales, strategic planning, and training. Granted, each of these business attributes could comprise a complete multipage survey on their own, but I needed a high level approach that looked at overall common trends.

Once I settled on these particular attributes, it was time to dive in deeper with some specific questions that got to the heart of the matter. I spent a lot of time thinking about specific questions in each of these areas. I went through a lot of revisions before I settled on the final questions. These questions needed to be straightforward and unambiguous. They mostly needed to be “yes” or “no” closed-end questions or numerical ones, so that averaging could be done to determine some benchmarks. Most importantly, they needed to be simple and easily answered. They were designed so that the owner, president, or leader of a company could, within an hour or so, complete the survey without having to pass it off to others to fill out. If an owner, president, or leader of an HVAC company can't answer the questions in the survey on his own (or with minimal help from others in his company), I believe he or she doesn't have a very good handle on what's happening in the company, and should re-evaluate how they're spending their time.

Attributes Any Company Can Develop

The survey also tries to uncover common trends of leading companies that aren't dependent on size of the company, such as leadership. A successful company needs great leadership, regardless of its size. The contractors surveyed (the last 25 Contractor of the Year Award winners, as determined by ContractingBusiness.com magazine) ranged in size considerably — from approximately $5 million in sales to nearly $300 million in sales, and everything in between. This benchmarking group was a great cross-section of industry players in size, geography covered, and markets pursued. As the data was tabulated into a master scoring matrix, the common trends were very apparent.

These companies have stood the test of time (with the exception of perhaps two) and have remained successful even in the toughest of times. The average length of time these companies have been in business is 48 years, with the range being from 25 to 73 years. That's a long time to be in business in any industry. And, as each of these contractors has emerged from a recession, they've come out stronger, which is another testament to their success.

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The Trends

There are many common threads apparent in these benchmarking companies, too many to go into full detail in this paper, but I will hit a few highlights.

Here are a few of the interesting trends:

  • Billed in excess: the top contractors in the U.S. do an excellent job of “staying ahead of the billing curve,” in that they bill ahead of their costs coming in. The benchmarked group bills an average of 40% of their monthly revenue ahead of incoming costs. This is an excellent way to produce healthy cash flow trends.

  • Collections: the top contractors do an outstanding job of collecting money due to them. On average, these outstanding contractors have only 10.9% of their total A/R aged over 90 days. A percentage such as this is very good considering the economic headwinds we are all facing. This achievement is a testament to their excellent efforts in the credit/collections arena as well as a testament to the quality of their client base.

  • Product line diversity: the more the better. The benchmarked group had an average of nearly 11 different service offerings for their clients. The more services you can sell your clients, the more they need you — and the less likely they'll be to turn to a competitor.

  • Specialized sales efforts: 91% of the benchmarking group had a specialized sales force, meaning that they had separate project sales personnel and contract sales personnel. Nearly 100% of these companies have significant maintenance contract bases. The best and fastest way to get there is to focus with specialized sales.

  • Focusing “on” the business instead of “in” the business: The leaders of the top HVAC contractors in the country spend a significant amount of time focused on strategically improving their business. They don't get wrapped up in the details of day-to-day issues. In fact, on average, the leaders of the benchmarked group spent more than 30% of their time working “on” their business.

Attention to Training

The top contractors sent nearly one-third of their technicians each year to receive training provided by product manufacturers. This number surprised me, considering the cost of this training. In retrospect, however, it's great to see so much effort and expense being put into training.

Many of you have heard of this exchange:

Q: “What if you spend all that money on training an HVAC technician, and then they leave?”

A: “What if you don't spend all that money on training and they stay?” Which is worse? I leave you to decide.

  • Marketing: within the benchmarked group, 55% have a professional PR firm on retainer to produce and distribute press releases. This number was surprising to me, and it shows the level of marketing sophistication of our industry has increased significantly in the last 25 years. We're no longer the purely “face to face” sales business we used to be.

  • Technology usage: 91% of the top contractors surveyed indicated they were on the “leading edge” or even “bleeding edge” of technology. The use of technology whether it is in the field or in the office is now a requirement of business. Those that don't embrace it will be left behind.

  • Website presence: in light of the technology statistics mentioned above, it's surprising that only 45% of the top contractors have a website that's updated a minimum of every 60 days. Statistics have shown that only websites that are updated frequently are the most effective.

This relatively low percentage would indicate that perhaps the visibility and usage of websites isn't as important today in our industry as it is in others. My guess would be that this number will go up over time.

These trends and surprises from my benchmarking survey are just a few of the insightful nuggets of information that emerged from this study. For other commercial contractors, I suggest that the best way to get the most out of this study is to participate in the survey yourself.

Alan Barnes, Jr. is president of Mechanical Insight Consulting, Inc., Atlanta, GA. Barnes began his career with Aircond Corporation, his family's commercial HVAC service contracting business. He was later named chief operating officer of Aircond. When Aircond became part of the EMCOR Group in 2002, Barnes continued as president, and later as executive vice president in charge of acquisitions for the mechanical systems division. He has more than 20 years of experience in HVAC business management. Visit www.mechinsight.com for details on how to take the benchmarking survey, and receive the Mechanical Insight newsletter.

This presentation is based on “Key Characteristics of Leading Mechanical Contractors,” which Alan Barnes, Jr. presented during the ContractingBusiness.com Commercial HVAC Symposium, Sept. 24-25, in Nashville. Visit www.cgbconference.com for information on this year's symposium, Sept. 22-25, Baltimore, MD.

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