Rabbits' feet and lucky pennies took commercial HVAC contractors only so far through the first days of the current economic downturn, some two years ago. Once the wishing and hoping had ended, it was the proven measures that took the best companies through to survival in the present day: customer contacts, new technology, more attentive service, referrals, and overall leaner practices.
The contractors interviewed for the 2011 Contracting Business.com Design/Build Contractor Survey (click here for CB.com Top 50 for 2011)are primed for a business resurgence. New installations have dropped off for most, but service activity has been steady. They say the ultimate remedy will be more shovels breaking ground, and looser purse strings from banks and customers.
Charles Richter, executive vice president, ACCO Engineered Systems, Glendale, CA, has seen many business cycles come and go during his 43 years in the HVAC industry. He says this present downturn is notable for its duration, and for a lack of help from usually eager bankers.
"We've tracked it over time, and we typically see a downturn in the construction market every eight to 10 years. But this one has been longer and more brutal," Richter explains. "The length of the downturn, to a great degree, is being caused by the lack of financing that's available to the private sector marketplace."
What does a mechanical HVAC superpower such as ACCO —with stated 2010 revenue of $470 million — do in times like these, to stave off the, "bigger they are, the harder they fall" syndrome? Richter says a hefty project backlog helps to halt a decline, as long as those projects last.
"As you consume your backlog, you have to find replacement projects. In the early stages of the recession, our burn rate was greater than our replenishment rate. In the last few months we've seen the replenishment rate start to exceed our burn rate. There are definitely some positive signs."
Those positive signs include an upswing in ACCO's activity in the health care, government, and education markets.
BIM & LEED Gain Ground
Building information modeling (BIM)—the computer aided design process that provides 3D computer graphic representations showing the integration of all aspects of a project, continues to gain in popularity. Today, 28% of contractors we surveyed have replaced their usual project planning methods with BIM’s richly-detailed CAD drawings (http://bit.ly/BIM_Revolution).
"Our BIM growth has been due to increased specification requirements for projects, an expansion of our piping and plumbing prefabrication, and the use of automated survey instruments for the layout of hangers and inserts,” says Guy Gast, president of the Iowa division of Waldinger Corp., Des Moines, IA. He adds that Waldinger, with a solid $150 million in revenue, has always been a leader in CAD/CAM, and BIM applications play to the firm’s strengths.
Joe Cvetas, chief business development officer, Southland Industries, Long Beach, CA — the 2001 ContractingBusiness.com Commercial HVAC Contractor of the Year— says Southland first used BIM more than two decades ago, to improve its fabrication and installation capability. As the program has been improved, Southland has expanded its use of it.
"Southland uses BIM to streamline the engineering, construction, and maintenance process, and provide accurate, valuable, and usable content to owners for operating, maintaining, and renovating the facility," Cvetas says.
Dennis Muravez, retrofit/service manager, for McClelland Air, Chico CA, says McClelland is the only company north of Sacramento with in-house BIM capabilities, which harmonize with McClelland’s commitment to be ready for anything.
"We try to meet our customers' needs, now and in the future. The trends are LEED® (Leadership in Energy and Environmental Design — http://bit.ly/LEED_Movement) and BIM, and we're getting started in that direction," says Muravez, a 25-year employee with supervisory responsibilities over 14 technicians. "We're seeing customers who are trying to be more environmentally-friendly and energy-efficient."
'Green' Counselor Selling
Our survey found that commercial HVAC contractors' pursuit of the United States Green Building Council's (USGBC's) LEED certification and/or "greener" HVAC delivery methods, continues at a steady pace; 71% say they're getting greener. However, as with all new methods and ideas, there's a right way and a wrong way to proceed. Regarding green mechanical improvements, Jeff Scherr, president, and Tony Scherr, vice president, Comfort Heating & Air Conditioning, Billings, MT, follow a well-defined plan of action and customer counseling.
"We offer green products, such as high efficiency heating and cooling equipment, ECM motors, digital thermostats, and more," Jeff Scherr says. "We also tout how maintenance plans are essentially green, as they will ensure that the equipment being serviced will run at designed efficiency; for example, how plugged coils will increase cooling costs. We also discuss proper equipment settings. All of this is green, and customers appreciate it," Scherr says, and adds that he views greener building comfort as the prize at the end of a sometimes complicated maze, that customers need help navigating through.
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"People are attuned to the concept of green, but not always sure how to get there," he reveals. "It's more than recycling. It's properly sized and maintained equipment, and properly designed lighting systems."
"When we talk with clients, we discuss many things, and energy efficiency and energy savings are usually the most highly discussed issues," Scherr explains. "Three years ago, I would almost never have dreamed of offering higher SEER rooftop units and/or dual fuel systems to commercial clients. Now, they're offered and explained on every proposal."
Southland Industries also includes green ideas from square one. They're now standard, and are "win-win" solutions for all.
"Southland has always been a champion for reducing energy and water consumption, and seeks to implement innovative solutions in all of its Design/Build/Maintain projects," Cvetas says. "In the past two years, more owners are recognizing the inherent benefits of green facilities, and requiring them by contract, which serves to highlight these on-going efforts."
"Everyone is interested in saving money on utilities, and more conscious of what's going on in the environment," says Ken Morrison, president, Morrison, Inc., Marietta, OH. "Everyone wants to do the right thing. For the most part, when higher energy costs hit the pocketbook, everybody gets on board," he says. He and company Vice President Dave Haas keep customers on track with understanding what kind of green methods makes sense.
"They'll have a superficial understanding, or get bits and pieces of information from the utilities," Morrison says. "We try to take new innovations into account, while considering older innovations. We're not LEED®-certified, so we're trying to find the most efficient methods customers can afford — geothermal when they can, energy recovery ventilators, and so forth."
"Most of our clients want greener solutions, and it's still a clear differentiator. It can move you from being the 'low cost' provider to the 'value' provider," says David Gannon, president, Tempo Mechanical Services, Irving, TX.
Service Agreement Emphasis
Sixty percent of our survey respondents say they've increased their emphasis on selling service agreements. One of those is Mike Kotubey, president, MMC Contractors, Kansas City, MO. MMC has recently made service agreement sales a full-time position, after trying to make it work as a part-time effort. The company has offices in the East, West, and Midwest.
"A couple of people in our service group were selling service agreements as a part-time job, in addition to selling retrofit/renovation work. They got caught up trying to sell the $250,000 renovation project, and were forgetting about the $20,000 service agreement," Kotubey explains. As a remedy, he hired a full time SA salesperson.
"We brought someone on board with a lot of industry experience in selling service agreements, and have made that his primary responsibility. He's been bringing in the $20,000-to- $50,000/per year maintenance agreements. It doesn't take long for those to add up to a sizeable amount," Kotubey says. And, customers who eliminated maintenance entirely over the past few years, soon came to see the value of regular service.
"They often have a hard time making the connection between a lack of mechanical problems and the existence of a good maintenance program. Obviously, you try to help them understand that connection. But if you can't, you need to let them make that decision and go outside their normal program for a year or two," he advises. "Then, when problems arise, hopefully they realize that they prefer the previous arrangement, and reach out to the contractor again, to talk about a maintenance program. Those customers who have made those decisions, and are still in business, come to realize that eliminating service wasn’t the most cost-effective decision they could have made."
Southland Industries' comprehensive system maintenance services are provided with the confidence that comes from having well-trained technicians on its 1,500-person payroll.
"Our service employees have extensive training in the specific systems and equipment that Southland designs and installs. As a result of our flexible plans and comprehensive knowledge base, Southland has seen a 50% increase in maintenance contract sales, and a 95% retention rate for contract renewals," says Joe Cvetas.
Monthly payment options can help increase service agreement sales. "We've moved many 'Energy Saving Agreements' to monthly plans, which has been of help in a slow economy," adds Tempo's David Gannon.
Differentiation, Focus, Attitude
In slow times, successful commercial HVAC contractors have stayed focused on the basics, which are described perfectly by Jeff Scherr: "Set your self apart. Keep in touch with your current clients, and ask for referrals. Keep your pricing stable and fair. Work with your employees to help bring in more business. Each and every member of your business is a salesperson, and new clients are job security for them," he says. "Keep a positive attitude, and treat each and every customer you have, want to have, and are working to get, with respect. And, understand that they also may be working hard to keep afloat."
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Cvetas agrees, that, in tough times, well-trained, committed employees are priceless. "While several factors have contributed to Southland's success, our biggest asset has always been our employees," Southland’s Cvetas says. "By having the right people in the right places, Southland has witnessed tremendous growth over the past 62 years, and we're well poised to continue that trend."
"The industry needs more tax incentives for building owners, for energy efficiency upgrades and retrofits, and better financing options for the same," claims Gerry Vance, vice president, business development, Lee Company, Franklin, TN, our 1984 Commercial HVAC Contractor of the Year.
"We also need fewer low-ballers," Vance adds. "Owners and general contractors are seeing serious problems associated with taking bids from companies desperate for revenue."
Mike Kotubey wants to see a major shift in attitude related to the U.S. economy, and more positive leadership.
"We need consumer confidence, and a change in the American psyche," he says. "I liken it to what happened in the 1970s and 1980s, when we had rampant inflation. Everybody came to believe 12% to 18% inflation was normal. The cycle of negativity fed upon itself, until President Reagan broke that cycle. We need somebody to create that positive feeling in the American economy, to make people believe in it again."
In spite of a national malaise, the HVAC industry's best commercial contractors are positive that they'll continue to be successful. They know what they can control within their organizations, and what works. Their strategies and tactics will help them greet the eventual turnaround stronger, having weathered the storm — bent, but not broken.
Design/Build is the preferred delivery method of 68% of respondents to the CB.com 2011 Commercial Contractor Survey. Here are some stated reasons why they prefer to go the D/B route:
"Design/Build has multiple advantages. Design/Build provides our projects with the best performance and delivery schedule, at the lowest cost." — Charles Richter, ACCO Engineered Systems.
"Direct contact with the end-user of the project helps us understand their actual needs, so that the project is neither under- or over-designed." —David Gannon, president, Tempo Mechanical.
"We've always believed that Design/Build is the best method. We understand what the customer wants, and design around that. We're not in the business of cutting corners. We give them a fair price for things we don't believe we can keep out of the project." —Ken Morrison, Morrison Co.
"Analyzed next to Construction-Management-At-Risk or Design/Bid/Build project delivery systems, our Design/Build/Maintain methodology consistently provides numerous benefits, including single source accountability, early document coordination, reduced or eliminated change orders, and accelerated time schedules. Southland's efficient and sustainable Design/Build/Maintain solutions allow our clients to receive superior quality work at reduced costs." — Joe Cvetas, chief business develpment officer, Southland Industries.
"Owners want system performance. We provide that with single-source accountability. HVAC systems are among the most complex systems in a building. If the owner has a problem with an HVAC system that we designed and built, there's only one company to call. We stand behind our work on every project." — Gerry Vance, vice president, business development, Lee Company.