March 9, 2010
We spoke with HVAC contractors who adapted quickly and correctly to the economic downturn, to learn what actions they took to survive and thrive.

One leading residential HVAC contractor calls it the worst downturn he’s ever seen. Another, with more than 20 years in the business, has used it as an opportunity to clean house and make some changes. But regardless of their methods, they all share one thing in common: they’re doing all they can to survive the economic downturn that’s hit the U.S. economy right between the eyes.

Construction cutbacks and unemployment across many major U.S. industries has shaken consumer confidence, and has caused many construction-related businesses to flounder. Uncertainty over health care legislation, the threat of cap and trade legislation, and the general feeling that the U.S. economy has become a shadow of its former self, have contributed to the malaise. In February, consumer concern about current business conditions and the job market pushed the “Present Situation Index” down to its lowest level in 27 years.

We at Contracting Business wanted to help our readers discover how leading HVAC contractors have responded to these tough market conditions. How has the recession affected their businesses, and what have they done about it? In a price-sensitive market, have they lowered prices or resisted? Has staffing been affected? What about training? Their answers show the degrees to which quality firms can adapt as necessary in any business environment. Their answers provide more than hope for other contractors in a pinch: they’re proof that survival in these times is possible with a positive attitude, carefully selected methods, and a team that’s ready for anything.

Steady Pricing, Strategic Layoffs
Steve Marino moved to Fort Myers, FL from Cleveland, OH more than 20 years ago and started Home-Tech, a provider of HVAC and appliance sales and service. Today, the company’s 35 North American Technician Excellence (NATE)-certified technicians operate from offices in 13 Florida cities.

As happened with many companies, 2008 took Home-Tech by surprise, especially during the last quarter of that year. Home-Tech entered 2009 well-prepared for a slowdown, and the steps Marino took actually helped improve business. The first step involved minimal strategic layoffs.

“In these types of economic declines, it’s usually not very difficult to reduce staffing by about 10%, which is what we did. This consisted of employees we were able to retain comfortably when sales were good. However, as business starts to decrease, and as you become much more focused on all aspects of the business, you’re bound to discover things you can do to tighten things up,” Marino says. “From early in 2009, we started running a little bit leaner. We anticipated a flat year; however, business didn’t drop off all that much. We’re not involved in new construction, so that didn’t affect us. Home-Tech is an employee-owned company, and it didn’t take much effort to try to do the same amount of business with the reduced staffing.

And, surprisingly, customers were realistic rather than panic-stricken. “Our service contract renewal rate actually increased in 2009,” Marino reveals. “People viewed service contracts as a necessity. Additionally, the federal tax credit of $1,500 really boosted sales. We were able to use that and other utility rebates to sell 20% more systems in 2009 over 2008.”

Home-Tech kept pricing steady, in spite of its own increased costs of doing business. “Some people just didn’t have the money required for a system at our regular prices,” he explains. Today, however, a more secure consumer footing has helped bring Home-Tech’s 2010 pricing closer to where it was prior to the downturn.

“Consumers’ prospects have improved,” Marino says. “Some have recovered money they lost in the stock market, and they’re feeling better about spending. They’re also viewing these systems more as ‘investments’ in terms of lower energy costs, and as something every homeowner can do to reduce their carbon footprint. We also look to use the tax credit incentive a lot more in 2010.”

Selling ‘Total Indoor Comfort’
Home-Tech is promoting a wider variety of comfort products, including heat pumps, and what Marino calls “total indoor air comfort,” which includes cooling, heating, cleaning, and distributing the air. “

"We try to get the customer to think about cleaning the air and distributing it properly,” Marino explains. “We sell very few systems that don’t include factory-installed filtering systems, such as the Trane Clean Effects® and other electronic air cleaners.”

His teams have also been improving ductwork within homes. “Some of the new equipment doesn’t match up well with existing ductwork, so as a solution, we revamp, repair, or replace ductwork so that it better matches the new system," he says. "Systems you were selling for $5,000 or $6,000 a few years ago are going for $15,000 or $16,000. Today, if they’re sold correctly, the customer is receptive, and understands that this system is ‘the lungs’ of the home, and that you can’t piecemeal equipment in any more.”

Don’t Sell on Price
Marino says it’s essential that HVAC contractors avoid selling on price, and not lose site of reasonable profit margins.

“Value the service you provide," he cautions. "You won’t be in business long if you don’t know your costs and a reasonable profit margin to maintain a quality business. Stop worrying about what your competition is doing – focus on your business.”

“Educate-Educate-Educate. Intelligent businesses
survive in all economies.” — Steve Marino

Marino firmly believes consumers want to do what’s right for the environment, and that HVAC contractors have a custom-made answer. “Replacing their HVAC system is probably the biggest contribution each homeowner can make to reduce climate change,” he says. As far as additional sales opportunities are concerned, he believes in the value of the service agreement and system selling.

Environmental Benefits and System Selling
“Work on selling or converting more customers to your service agreement or maintenance contracts,” he advises. “This creates a ‘contractual’ agreement between your company and your customer. Sell the $1,500 federal tax credit, utility rebates, manufactures discounts, and annual energy savings. It’s ‘found’ money, Also, terms such as no interest, no payments, or attractive credit still makes it easy to buy now, and pay later.”

Marino says times like these can be opportunities to do things differently from a staffing perspective, as uncomfortable as that might be.

“Clean house now. Get rid of negative attitudes and other staff that truly will not take you to the next level,” he advises. “Take advantage of the large, hungry, intelligent pool of youth that, for the first time in decades, is looking to the trades for a career. Educate-Educate-Educate. Intelligent businesses survive in all economies.”

‘Lean and Mean’
Contracting Business advisory board member Vince DiFilippo, and his team at DiFilippo’s Service Co., Paoli, PA, have adjusted income goals for the company’s service, installation, and service agreement departments, and came just $40,000 short of its $2 million sales goal. And, they did it with two fewer technicians.

DiFilippo says there’s “a ton” of work to be found within the company’s existing client base, and they’re out to get some of it. A “lean and mean” mentality is also taking hold. “We can all do better at reducing expenses and becoming more productive, so we can do more work with the same staff count,” he says.

As the year progresses, DiFilippo — a past Air Conditioning Contractors of America (ACCA) Contractor of the Year, and the National Comfort Institute's Contractor of the Month for March 2010 — is sharply focused on helping customers save energy.

“We're directing our efforts towards helping clients save on energy through equipment replacements and tax credits and rebates, maintenance check ups to save fuel and electricity, and zoning, to allow clients to heat/cool specific areas of the home instead of the whole home,” DiFilippo explains. “Additionally, ductwork remediation and air balancing will ensure that the heating and cooling they’re paying for gets delivered to the home. We’re also promoting programmable thermostats and add-on comfort items, such as humidifiers and air cleaners,” he says.

Profit Centers & Fundamentals
Dewey Jenkins, president, Morris-Jenkins, Charlotte, NC, is focusing on sales, margins, and expenses, which represent key profit drivers. Jenkins, the 2009 Contracting Business Residential Contractor of the Year and a CB advisory board member, anticipates 15% growth in 2010.

As is the case with Vince DiFillipo, Jenkins hopes to accomplish that growth within Morris-Jenkins’ existing customer base, with some help from Uncle Sam.

“Our sales emphasis is on equipment that qualifies for the federal tax credit, and making our customers aware of this opportunity. For those customers that are cost conscious, we’re emphasizing that a few hundred dollars spent on preventative maintenance will save thousands of dollars by preventing major breakdowns,” Jenkins says.

Jenkins trimmed margins slightly during the recession, however, he hopes to return to normal margins in time for a busy summer season. The company must look to the future.

“When you run the numbers, you see that even a small reduction in margin has a huge impact on profit, and it’s almost impossible to make up the difference in volume. Margins for replacement sales, when including sales commissions in cost of sales, should be at least 50% and service margins should be 70%.”

“Even a small reduction in margin has a huge impact on profit, and it’s almost impossible to make up the difference in volume.”
— Dewey Jenkins

Jenkins says the company is looking at expenses very pragmatically. “We’re examining every expense, especially the ongoing ones, by asking the following question: ‘If we had never incurred this expense before, would we do it now?’”

The fundamental building blocks of training, service agreements, and accessory sales are also seeing an increased emphasis at Morris-Jenkins. Each technician will receive a minimum of 60 hours training between now and the start of the air conditioning season. They're focused on our existing customers, to make them aware of the savings possible from our maintenance agreement services, and they're offering specials on all accessories, because accessory sales have a tremendous impact on margins and profit.

Training translates to better service and happier customers. As such, Jenkins technicians are superior achievers in the North American Technician Excellence (NATE) certification program. A large tote board in the company’s meeting room tracks technicians’ progress in obtaining additional NATE certifications. Additionally, technicians who reach the summit of company training objectives earn a “Supreme Comfort Specialist” designation.

Dewey Jenkins is always thinking positive, and this recession has done little to dampen his optimism. “Tough times make good companies even better,” he says, “and it’s our intention that we will be better this year than we’ve ever been.”

‘A Fantastic Year’ Ahead
The year 2009 was “painful” for Eric Buchalter and his team at DesignAir, Inc., Hillburn, NY. He managed to squeak out a small profit and survive, but he says customer hesitation was everywhere to be found.

“Quite a few customers preferred to tough it out and forego repairs,” Buchalter says. “Those who decided they wanted air conditioning chose to repair rather than replace older systems. Overall, both our replacement and service business was down. It was ‘the worst of times’ from March to June, and the cool summer didn’t help.”

Buchalter therefore had to find ways to reduce overhead. Employees hours were cut, overhead was reduced, and 30% of his workforce was laid off. “Our reaction time was slow, but in June, in this industry, you’re generally not going to be cutting your field staff. Who knew it would be 55F in June?” he asks.

“By the third week of July, we realized the summer wasn’t going to happen, and downsized.” Still, DesignAir’s service agreement base was a key to making it through the year, in addition to some business generated by the various assistance programs.

“Service was down, but not as much as installations,” Buchalter says. “We helped customers take advantage of the federal and state stimulus dollars, and New York State’s Home Performance Program, which provides additional incentive dollars for replacing and upgrading comfort equipment. HVAC contractors and other tradesmen, such as windows and insulation contractors, were all advertising the benefits of the rebates. By September-October, customers started calling again.”

Regrouping in Down Time
The slower pace provided DesignAir time to devote some attention to key support areas. “Because we had some down time, we were trying to implement more efficient information systems,” Buchalter says. “We’ve been using our existing software systems more efficiently. This includes our GPS for vehicles and dispatching.”

Buchalter tried adding solar thermal water heating to DesignAir’s services, but it never caught on. “The length of payback was the issue,” he explains. “With the price of natural gas at a 15-year low, the payback wasn’t attractive enough, even with the tax credits. An increase in energy costs would make solar water heating take off. Now, it’s at a 14-year payback.”

Buchalter looks forward to increased business in 2010.
“We’re in much better shape, with a two-week backlog,” he says. “People are opening their wallets again. The panic is gone. I think this is going to be one of the best rebound years we’ve ever seen. There’s lots of pent-up demand, and it’ll be like two years in one. I predict it’ll be a fantastic year.”

Business as Usual
“A fantastic year,” at a time when growth is considered my many to be impossible? We’ll resist the lemonade analogy, but you get the message. There are customers hiding behind every obstacle, and indoor comfort and air quality are still essential consumer needs. These winning contractors have resisted any inclinations to panic, and instead, have marched forward with strategic, well-thought out modifications to their business plans.

With cooling season around the corner, their prospects for a good second half of 2010 are promising. Do the same, and you’ll have a great year in spite of the economy swirling around you.

Commercial HVAC Market Observations

Be a Stand-out Company
"Have a powerful day.” That’s how Alex Bardi, co-founder, president, and CEO of Bardi Heating and Air Conditioning, Norcross, GA, signs off his voice mail greeting. His reason: Anyone can have a “nice” day; but a “powerful” day is much nicer!

“We always like to stand out and be exceptional,” Bardi says. “In today’s market, you have to differentiate yourself from the competition. Bardi Heating and Air Conditioning is a family-owned commercial and residential HVAC business serving Atlanta since 1989. Originally a commercial HVAC contractor, Bardi added residential service and replacement in 2001.

The competitive HVAC market in the Atlanta region has become all the more challenging due to a steep business decline, which Bardi says is the most competitive he’s seen in more than 20 years. “The real estate market in Atlanta hasn’t hit bottom yet, but we still forecast a downturn in our commercial revenues,” he says. “Banks just aren’t lending the money that entrepreneurs need to expand, especially if you’re in the construction business. The only money out there right now is stimulus bill money, which has trickled in for government funded projects—schools, installing energy efficient equipment, rebates for furnaces and environmental concerns.”

Many Chasing the Same Work
Bardi’s overall margins in commercial HVAC construction have declined by about 4% compared to 2008. Competition is fierce, as the decline in residential HVAC has caused contractors to enter the light commercial market.

“A lot of people are chasing the same work. One project we recently won with the county had bids from 32 general contractors,” Bardi says. “Some larger mechanical contractors are performing work at cost, and that’s impacted us tremendously. They think they can get the work, then make it up by browbeating the subcontrators to charge even less. The competitive environment creates a domino effect of reduced profit margins for our industry.”

His advice to commercial contractors: be certain of your break even numbers and track them daily. “You need to know how much gross margin you must generate to keep the lights on,” Bardi says.

“Our sales teams used to be revenue driven, now they’re gross margin driven. Each salesperson has a monthly gross margin target. We’ve also identified how much backlog we had going into 2010, extracted the estimated gross margin of that work, and subtracted that from our budget’s total gross margin. It helps the sales team decide on bid day if we can go after a job that may have $300,000 gross margin. Even at 10% profit, we evaluate whether or not it will contribute mightily to our break even gross margin before tackling the job.”

Staying in touch with customers continues to be a priority.
“After every job, we send our commercial customers an online survey to evaluate our performance, then tweak whatever’s necessary to make the experience better next time," he says. "Hopefully, in an economy like today’s, happy customers will call you back.”

Stop the Insanity!
“Someone defined insanity as ‘doing the same thing and expecting different results.’ Well, it’s time to stop the insanity,” says Steve Saunders, CEO of TexEnergy Solutions, Inc. and Tempo Mechanical Services, Dallas, TX. What he means is, that he’s going to stop saying this year can’t be any worse than last year, and be prepared for anything. To better handle what “might” become a bad year, Tempo is increasing its backlog of good projects. Tempo did just that in 2009, and saw a 3% revenue growth.

It’s also refusing to accept work that's below margin. “We increased our year-over-year total company gross margins by more than 9%,” Saunders says. “Some of this was undoubtedly due to luck, but some of it was because we were brave enough to turn down low margin construction work that would have delivered revenue, though not profits.”

But Don't Stop the Training!
Saunders — a Contracting Business editorial advisor — says Tempo increased its training budget in 2009, and has increased it again in 2010. “Everyone wants to be more effective, and my current belief is that we have the finest and most dedicated group ever. Yet, we could be even better,” he admits. According to Saunders, any training effort will be worthwhile. Even if you don’t add positions, this could be the time to “trade up” in caliber, experience, or effort, through advanced training.

“This is the best time for finding talent you’re likely to ever experience,” Saunders advises. “Be creative. Think ‘performance pay.’ Offer people trial employment. Give folks the opportunity to prove that they can pay their own way.”

Saunders says Tempo is embracing the environmental movement, in spite of naysayers who claim global warming is a fabrication.
“Even if we find out that the global warming forecasts are 100% inaccurate, there are plenty of other economic drivers for a “green” megatrend that’s currently happening, and will continue to grow in coming years. The core of all “green” building programs is energy efficiency. The core of all energy efficiency is HVAC. That is, “heating”, “air conditioning” but also the often overlooked “ventilation.”

Tempo is going to focus its efforts on existing buildings, expand into a greater number of Leadership in Energy and Environmental Design (LEED®) projects, and help customers understand why.

“We train our clients. We train our competitors. We support utility programs. We will look high and low for a way to offer value and differentiate our services,” Saunders proclaims.

“Dale Carnegie was right 50 years ago when he said, “the best way to get what you want is to help others get what they want.”

Ken Otteni, president, Miller-Bonded, a large commercial HVAC mechanical contractor based in Albuquerque, NM, also credits a significant backlog with helping the company survive 2009. Most of those were won with fairly decent margins, and gross profitability was up slightly.

“We got through the year because we had good work on the books,” Otteni (pronounced, ot-ney) says. The company also appealed to employees to evaluate their workloads in 2009, and go to 32 hour weeks.
“If they didn’t think they needed to work 40 hours per week, we asked them to voluntarily cut back to 32 hours per week. About 40% volunteered to go to 32 hours. Doing so allowed us to get through the year with reduced payroll and no layoffs,” he says.

New construction in the region’s been dry as a desert.
“Vertical construction has indeed dried up. There’s no private business to speak of at this time. We’re doing 90% of our work in the public sector. Whereas, from 2003 to 2006, our private sector work was at 85% and our public sector work was at15%,” Otteni explains.

Employee Input, BIM
Miller-Bonded's employees have contributed some valuable, cost-saving ideas, says Tom Payne, Miller-Bonded’s director of business development. “Some of the ideas are very simple; for example, emailing confirmation of direct deposits for payroll rather than mailing. We’ve looked at all of our processes to eliminate any duplication of effort, and eliminate rework.

“We’ve refined BIM coordination processes, and we now provide 3D scanning. We scan a building to create a CAD drawing that’s accurate to 1/8-in. It’s great for remodels and for ‘as-builts’ after the fact,” Payne adds. “We’ve also added energy auditing through our service department. Those audits lead us to make recommendations for upgrades that will provide payback for the customer.”

“Below cost work is worse than none at all.” — Ken Otteni

Otteni says Miller-Bonded is working through 2010 as a leaner company. “We’re trying to cut waste, and have gotten leaner on Design/Build margins, without losing money. We remain optimistic that 2011 will see the beginnings of a comeback,” he says. Miller-Bonded is walking that positive walk, not just talking the talk. To prepare for more business that’s sure to come, it’s building a 16,000 sq. ft. manufacturing facility addition. “We want it completed by December 2010, so we’re ready to go for 2011-2012,” he says.

Otteni advises HVAC contractors to tighten up on expenses as much as possible. “And, don’t panic by bidding projects too low. Below cost work is worse than none at all,” he warns.

Retail Sites Especially Challenging
Mark Barraclough, president, Alpine Mechanical Services, has been in the industry since 1980. He opened the doors on Alpine in 1988. In 1994, Barraclough started Field Diagnostics, makers of innovative, technology-based solutions that enhance the reliability of building energy systems and reduce energy costs.

Alpine's customer base is national retail chain stores. Barraclough says he enjoys having the ability to acquire multiple locations through one sole decision maker. But the demands are by no means any simpler.

“When you deal in different types of retail stores, there are different requirements from store to store, and chain to chain. For example, our Victoria’s Secret stores have a different clientele than our Sports Authority customers. The retailer —who knows what people in the store want — provides us with the store’s comfort requirements. It’s our responsibility to maintain those requirements in the space,” he says.

Chain Closures Hurt Retail Service
The economy affected Alpine’s work in two areas, starting in mid-2008: some chain stores suffered bankruptcies, which caused a small decrease in our total number of stores, and there was also a downturn of non-essential maintenance work.

“Because we’re strictly a service business, we’ve stayed pretty consistent through this downturn," he says. "There have been some who have reduced their preventive maintenance from four per year down to two. We try to get them to understand that maintenance is a minute dollar amount when compared to the total service budget, and, it helps control the energy cost. A store system that’s not maintained properly will use 20-40% more energy to maintain a comfortable space.”

Technology is improving technician efficiency. Alpine's technicians carry Blackberries that are fully integrated to corporate office servers. They get their schedules, close their tickets, and obtain purchase orders and work histories through their Blackberries.

Field Diagnostics, founded in 1994, makes and markets the HVAC Service Assistant. “It gives us a competitive advantage, because we’re using technology to diagnose faults in HVAC equipment. It provides consistency in our product offering,” he says. “Retailers are in a very competitive market, one that can experience peaks and valleys, and they’re understandably concerned about costs. We’re committed to using the best technology and the highest quality work to provide them with a strong return on investment,” Barraclough says.

A Sales Recovery Process
by John & Vicki LaPlant
Expand the number of services you offer to customers. These can include:
• whole-house contracting
• testing and measuring
• maintenance agreements
• commercial service contracts
• duct cleaning
• Indoor Air Quality
• ductless applications
• blown-in insulation
• dual-fuel.

Customers expect more, and the contractor in 2010 needs to be ready to deliver, and prove it with certifications The recession of 2008 and 2009 has redefined the retail sales process. It will generally take more time, require more content, and require more follow-up.

The consumer wants reduced risk to the purchase transaction. This naturally means adopting a philosophy of “educate-educate-educate.” Educate the consumer about the value of total comfort system solutions — and the potential penalties associated with using non-professionals. The good news is, that there will be fewer objections to the purchase. The customer is looking for a deal — also know as value. Bundling is the solution.

• Build a company brand and make that brand more friendly to women. Half of the U.S. workforce is comprised of women.
• Plan, plan, plan — whether it’s a business plan, or a plan for marketing, training, lead generation, human resources, or sales —put some thought into your changing business climate. As the old adage goes: “If you keep doing what you’ve always done—you keep getting what you always got.” Develop a new playbook.
• Maximize resources of website and customer database for lead generation. Drive customers to the website, use specials only available on the website, and make the website interactive. Make use of social media opportunities.

John and Vicki LaPlant operate Vital Learning Experiences, a consultancy for HVAC, plumbing and refrigeration contractors and distributors (; 903/786-6262). Vicki LaPlant’s column — “Venus, Mars & HVAC” appears in Contracting Business every other month.

You Control Your Destiny

Paul Rauseo, managing director of business consultant George S. May International, Park Ridge, IL, — now in its 85th year —says business owners must realize that they — not “the industry” are in control of their destinies.
“We typically like to look at the industry and assume we’re all going to be down, and so we enter a state of paralysis. Contractors must move from paralysis to action, and start by using the word ‘I’ as in, ‘I will establish myself as an industry expert for my current clients and future clients,’” Rauseo proclaims.
But you’d better know your stuff. “People expect you to be an expert, because of the large amount of information they’re finding on the Internet. They expect you to be equally astute or more,” Rauseo says.

“Main St. America is what will turn this
economy around.” — Paul Rauseo

One way to establish your expertise, he says, is to publish a newsletter with articles authored by the company owner, on helpful comfort topics, such as programmable thermostats, regular system tune-ups, helping those suffering with asthma or allergies breathe easier with high-efficiency filtration. Despite the economy, these issues still persist in homes.

Then, he says, pick a specialty and pursue it wholeheartedly. “If you’re not going to tune up systems, get into the replacement business. If you’re not going to replace, get into the service business. Rauseo advises contractors to develop a plan to reach customers with a one-two punch: old business and new business. Harness old business for repairs and prevention, and new business for installations.

It’s vital for contractors to stay in touch with customers. “Do you have email lists? Do you use mailing lists? Do you use telemarketing? Try hiring high school students from 2 p.m. to 7 p.m., on commission only, to call customers and remind them about the need for repairs and inspections. Take care of clients, and they’ll take care of you,” Rauseo says.

Rauseo is against cutting margins. “You can’t cut your way to profitability. Sales and service are closest to the customers, and only customers can help you out of a crisis. They want to continue buying, and will have a vested interest in the well-being of your company if you have a vested interest in them. “

"You must understand that your clients have many choices, and you must make it easy for them to buy from you. Get in from of your customers every month. If you mail once a year, what’s the chance you’re going to reach them at the time they need you? Now’s the time for leaders to shine.”

“If one person wakes up and says ‘I’m in control of my destiny,’ then the economy will begin to change. The government alone can’t turn this economy around,” Rauseo says. “It’s far bigger than the government. Main St. America is what will turn this economy around.”