The first question on the list provided to me by ContractingBusiness.com editors was, “What do you believe are realistic expectations for when residential and commercial construction will resume to some kind of normality?”
The first issue to determine is, what is normality? With regards to the residential HVAC market, we don't believe that we'll return to the boom days of 2005 within the next few years. However, with current levels being down 70% from 2005, we definitely believe we'll see some gradual improvement. We're past the bottom of the new residential cycle, and are going to be in a relatively slow growth pattern for the next two to three years. Hopefully, by the end of that time, we'll be up to 67 to 75% of 2005 levels.
The commercial sector typically lags behind the residential sector by six months to a year, and we don't really feel we've hit the bottom of that market yet. There are very few jobs out there to bid, and what jobs there are often have as many as 20 HVAC contractors bidding on them. Those are the jobs you don't want. The low bidder will be the one that made the biggest error. As a result, we believe that there won't be a significant rebound in the commercial market until the early part of 2011. While 2010 will see some commercial construction, there will be so many contractors chasing so few jobs that it will be difficult to be profitable.
The service and replacement business is much more driven by the weather than by the economy. Unfortunately, we had one of the coolest summers on record, with only two real weeks of summer. There were many people — literally hundreds to whom quotes had been given — who wanted to say “let's do it”, but who were in no hurry to move forward. For weeks, there was really no need for heating or air conditioning.
Find New Ways to Market Your Company
Because of the weather and the economy, contractors are having to be more creative in their approach to their business. It's necessary to be more proactive in the way of marketing your company. This includes direct mail to your existing customer base, and selling maintenance agreements, which provide the bridge that's needed between the busy air conditioning and heating seasons.
Prices Will Rise … Eventually
Everyone in the industry needs to be prepared for the fact that, sometime in the next two to three years, most companies are going to make an attempt to raise prices. Certainly, everyone in the supply chain has pretty much had to hold the line on their pricing, given the state of the market. A lot of labor costs, and soft costs, such as insurance and similar items, have increased in price, and those increases have been eaten. As a result, as soon as a company senses that the opportunity is right, they're going to make an attempt to get back some of the increases which they've been forced to pay. We doubt that this will occur very much in 2010.
More Fabrication Shops Entering HVAC
While many of us have been encouraging all contractors to participate in the service and replacement markets, the rate of change into those fields is extremely low. It appears that the momentum and inertia in small businesses greatly reduces the number of companies making serious attempts to embrace new markets. We can understand this situation from personal experience. In 1989, our work mix was 98% new construction and 2% service and replacement. Being tired of the swings associated with dealing in the new residential market, we changed our business direction. It took some time and some culture changing, but we're now above 50% in service and replacement. Given this current downturn, we would probably not be in business if we had to rely on the new construction market.
Comprehensive Training Program
In St. Louis, we're in the process of constructing a new, 98,000 sq. ft. combination training center and union hall. This facility will provide the additional space needed for a complete sheet metal training facility, and one which can have students study all facets of the HVAC service and replacement industry. This includes technologies such as geothermal.
Apprentices being trained for the service and replacement market go through an entirely different apprentice program than the regular sheet metal apprentices. We've also established incentives. The union will assist a contractor with the added cost of having a relatively new apprentice ride with a journeyman to learn on-the-job training.
As part of the new HVAC service and replacement training program we're using a Concentrated Apprentice Program. The apprentice attends school for five weeks in a row every six months, for two years. The concept is that the apprentice will get more from the training by participating in it for five weeks at a time, rather than one week a month. We feel that this will improve the quality of apprentice education.
LEED® at the Front of the Line
Leadership in Energy and Environmental Design (LEED) is an emerging market that will provide opportunities for HVAC and sheet metal contractors. In fact, the new sheet metal school and office building is going to be a LEED project. This will allow us to show our commitment to the LEED concept. The intention to have some of the LEED systems in the building be interactive, to allow the apprentices the opportunity to work on and around actual working systems.
Technology: Software, BIM
In the world of technology, software continues to be improved and upgraded. It's therefore necessary that our employees are continually trained to properly use the new updated versions.
Building Information Modeling (BIM) is definitely the way of the future. Currently, military buildings require BIM, and we anticipate that the private sector will not be far behind. This provides an excellent opportunity for a sheet metal contractor. Our trade has typically been the lead mechanical contractor on a project due to the size and relative inflexibility of our systems. Therefore, it's imperative for us to make sure that we take a lead position in introducing BIM into our future projects. The New Horizons Foundation, a sheet metal initiative led by Sheet Metal Air Conditioning Contractors' National Association (SMACNA) contractors, is studying to show contractors as the best avenues and purveyors of the proficient use of BIM.
The next few years may see us on a relatively slow road to recovery, however, the good news for contractors is that our customers will continually have a need for our product: HVAC systems. In fact, there seems to be demand for more and more sophistication in the HVAC systems we install. This bodes well for a continually growing and vibrant market for the HVAC and sheet metal contractor.
Butch Welsch is president of Welsch's Heating and Cooling, St. Louis, MO — the 1992 ContractingBusiness.com Residential Contractor of the Year and a past SMACNA Contractor of the Year.