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Home Construction On Hold2 635c11637b2a3

The Five R’s of 2023

Oct. 28, 2022
The new year will bring dark clouds, but some have silver linings.

There are lots of dark clouds on the horizon for the economy and the HVAC industry. Fortunately, there are silver linings for residential replacement contractors.

Record Profits

Something funny happened in the face of the shipment cliff for the replacement market. The shipment cliff was a reflection of the 40% contraction of the industry from 2005 to 2009, with 2010 essentially flat from 2009. The pandemic resulted in a large number of deferred replacements from 2020 into 2021, delaying the advent of the shipment cliff. However, it was expected to show up in 2022. Yet, revenue was up.

The increase in revenue was wholly the result of input price increases to contractors that were passed along by most contractors.  Price increases hid the reduction in unit replacements.

Combine the greater revenue across fewer changeouts with less overall installation labor and record profits result.  Enter SEER2 and the accompanying 18% to 25% price increases projected by manufacturers the same formula will apply in 2023 that made 2022 such a great year for contractor P&Ls in the residential replacement market.

 Record Plunge

The residential new construction (RNC) market outlook is in stark contrast to the replacement market. It is not pretty. As mortgage interest rates rise, home
affordability plunges, taking housing starts with it. The National Association of Home Builders’ Housing Market Index has dropped to 2012 levels. 

Bad news on the RNC front affects the replacement market.

Bad news on the RNC front affects the replacement market as new construction contractors step up their changeout activity.  The additional competition is less of a problem than the new construction contractors’ pricing practices.

 Recordkeeping

 Starting in 2023, the SEER2 minimum efficiencies will kick in.  If contractors have old inventory that fails to meet the new efficiency levels in the south and southwest regions, it will be illegal to install it.  Furthermore you must prove your installations comply with recordkeeping.  Contractors will be required to maintain model numbers, serial numbers, and AHRI matches for four years.  While this is not overly onerous, it is also easy to fall behind where it may be impossible to catch up. 

Expected surge of IRS agents will create additional tax related recordkeeping burdens on contractors. 

In addition, the expected surge of IRS agents will create additional tax related recordkeeping burdens on contractors.  The “wealthy” who will be targeted are likely pass through corporations (S-corps, and LLCs) that characterize most contractors.  Now is the time to work with your CPA and review your reporting and ensure all business expenses are clean, legitimate, and defensible. 

 Rebate Confusion

There is a lot of anticipation in the contracting community about the High-Efficiency Electric Home Rebate Program (HEEHRP).  There is also a lot of confusion.  The 100% qualification applies to consumers earning less than 80% of the area median income. The 50% qualification applies to consumers earning between 80% and 150%. It seems impossible for contractors to make these assessments, putting the qualifying burden on the customers. To add further confusion, each state energy office will administer the program, raising the prospect of 50 different approaches.

Even with the rebates, it seems unlikely that low-income homeowners will be able to afford qualifying equipment without long-term financing.

Even with the rebates, it seems unlikely that low-income homeowners will be able to afford qualifying equipment without long-term financing, which they are also unlikely to qualify for.  Thus, the most likely recipients of the rebates are high worth retirees with little or no ordinary income, if their state energy office does not count passive income towards the median income.

Refrigerant Confusion

 No sooner will the industry absorb SEER2 than the new refrigerants will sweep in.  It appears that manufacturers will settle on two different refrigerants, R-32 and R-454B.  This means carrying four jugs of refrigerant when R-22 and R-410A are included.  What can possibly go wrong?

 To minimize confusion and maximize opportunity in 2023 for your contracting business, join the Service Roundtable, contracting’s largest business alliance.  Learn more at www.ServiceRoundtable.com or call 877.262.3341.

About the Author

Matt Michel | Chief Executive Officer

Matt Michel was a co-founder and CEO of the Service Roundtable (ServiceRoundtable.com). The Service Roundtable is an organization founded to help contractors improve their sales, marketing, operations, and profitability. The Service Nation Alliance is a part of this overall organization. Matt was inducted into the Contracting Business HVAC Hall of Fame in 2015. He is now an author and rancher.