The economy has been tough for many HVAC contractors over the last few years, and the signals are mixed as to whether things will get better in 2012. On the positive side, construction employment rose in 28 states and the District of Columbia between December 2010 and December 2011, the largest number of states with year-over-year employment gains since November 2007, according to an analysis by the Associated General Contractors of America (AGC). Looking at 2012, AGC expects modest gains in construction employment, as demand for some private-sector construction projects improves.
On the other hand, the U.S. Census Bureau announced that only 302,000 new homes were sold in 2011, which is 6.2 percent below the 2010 figure. Existing home prices continue to decline in many parts of the country as well. And the Congressional Budget Office (CBO) recently projected that economic growth will only be 2 percent this year and 1.1 percent in 2013, while unemployment may creep higher to 9.2 percent by next year.
In its 2012 Construction Hiring and Business Outlook report, AGC noted that construction firms will remain caught between increasing health care and materials costs and stagnant amounts for what they can charge. The association concluded that while conditions will improve, the industry should not expect a broad-based recovery until 2013 at the earliest.
Slow Recovery
The economy will continue to be a concern until there is more stability in general, said Air Conditioning Contractors of America (ACCA) CEO and president Paul Stalknecht.
“We are seeing some, but there hasn’t been a full recovery yet. Commercial contractors have been hit particularly hard the last couple of years but certainly anyone who focuses on construction, be it residential or commercial, is still probably down from a few years ago.”
Laura DiFilippo, owner and vice president, DiFilippo’s Service Co., Paoli, Pa., and chairman of ACCA, noted that her company, which specializes in residential service and retrofit work, ended 2011 with a 3 percent drop in total sales from 2010. “I think the economy will rebound but the process will be slow, taking several years. Consumers will hold on to their money until they feel safe in spending again. Because equipment purchases in our industry are a high expense, the residential market may become reactive versus proactive, with consumers only buying when they have to.”
The loss of the $1,500 tax credit is also still affecting the residential market, noted Josh Bigelow, president, Great Dane Heating and Air Conditioning Inc., Clinton Township, Mich., a residential add-on/replacement company. “Even though there was a $500 tax credit last year, we really felt a decline in higher end and package sales. Bringing back a tax credit would definitely benefit all of us. With the loss of these rebates, I don’t see a major rebound in 2012.”
DiFilippo agreed that the loss of the $1,500 tax credit is still affecting equipment sales, as consumers have no incentives to purchase higher SEER equipment. “When the tax credit was lowered to a maximum $500, we saw no consumer interest. Having large enough incentives in the residential market will drive business and higher-efficiency equipment purchases. This is beneficial to not only the end users but to our local utility companies, many of whom have been mandated to lower total energy consumption.”
The good news is that pent-up demand may drive homeowners to replace rather than repair, as many have been putting off the replacement of existing older equipment for several years, said David Allen, area manager, Service Experts, Rockies (Utah, Idaho, and Colorado). “I believe there will be more consumers who choose to replace in 2012; however, the market has shifted, and they will opt for models that are mid-to-lower tier. Incentives from the government in 2010 and 2011 drove the upper end products, and without this type of stimulus in 2012 the market will shift lower.”
Allen is optimistic that overall sales for 2012 will increase 5 to 6 percent as a result of focusing on the budget-minded consumer. “We also expect to see an increase in ancillary sales-upgrades of IAQ and control products, as well as a continued uptick in customers willing to embrace solar and geothermal options for their homes.”
On the commercial side, Woody Woodall, director of business development, Gary Co., Washington D.C., and chairman of Mechanical Service Contractors of America (MSCA), notes that things seem to be getting better. “There is still stiff competition on work that was not as tough in the past but we believe there are some great opportunities in mission critical, energy services, and education applications. I think with the economy getting slightly better there will be more focus on saving energy and building in a sustainable manner, but there will be more competition from power providers and ESCOs.”
With 2012 being an election year, Richard Starr, president and CEO, Enterprise HVAC Service and Control, Cleveland, noted that many businesses will focus on doing only what is absolutely necessary, as opposed to making discretionary purchases. “We’re projecting a 5 percent growth in revenue from last year by staying focused on what we do best, which is specializing in building control systems integration, HVAC service, and air/water balancing in existing commercial, industrial, and institutional buildings.”
That being said, there will be challenges ahead, noted Starr, including increasing health care costs and more regulations from the Environmental Protection Agency (EPA) and other government entities. “Despite this, there are always opportunities for those who know their local marketplace.”
Opportunities and Challenges
Knowing his local marketplace has benefited Bigelow, who recently expanded his company by 30 percent and ended up experiencing growth rates between 7 and 20 percent over the past five years. “The economy and the weather are always driving factors for residential contractors. While the weather pattern for Michigan is terrible, and the economic climate is not much better, that does not mean that this will be a bad year. We continue to market to our existing customers and work harder on our maintenance agreements. Without a solid maintenance agreement base, we would be much more vulnerable to weather and economy. In addition, we are investing in the green sector with energy auditing — I see a big opportunity for growth in this area.”
Maintenance agreements are also extremely important to DiFilippo, and she noted that her company saw a substantial increase in their sales in 2011, due to the implementation of a monthly payment plan program. Her goal for 2012 is to increase overall sales 9 percent over last year, and in order to achieve that her company plans to add several new products and services, expand their territory, update Internet marketing, and make changes to the employee incentive program. “In this type of economy, you can’t continue to do what you’ve always done and expect business just to roll in. Keeping these goals in front of us at all times drives us to succeed. That and a little luck.”
Implementing this new strategy, combined with the general costs of doing business, will result in increased overhead costs for DiFilippo, which is why the company will raise prices after the first quarter. “We are lucky that we have extremely clean books that allow us to know exactly what cash flow is every day. If I could offer one piece of advice for small contractors it would be that your financial records are the most important piece of information in running your business.”
Starr noted that his company would also be forced to raise prices, due to increasing costs associated with health care benefits, union wages, and government regulation. Another issue that he believes will not only affect his company but the entire industry is the fact that a good portion of the current workforce — the Baby Boomers — will soon be retiring, taking their strong work ethic and wealth of knowledge with them. “The incoming generation is very well educated but also distracted by inherited money, social media, and a suspect work ethic. Too many Generation Yers are unable to communicate in organized sentences, and verbalization of thoughts often comes across like a text message. Lastly, if I were king for a day, I’d pass legislation that puts learning a vocational trade in the same quality venue as getting a college education.”
Woodall does not believe overhead costs for his company will increase significantly, although he noted additional expenses may be incurred in order to keep up with customer demands. “We are transitioning from a planned maintenance focus to an energy service focus, so we face educational challenges, not only with our clients but with our team as well. But these are the fun challenges that can be very rewarding for everyone.”
Another issue of concern to DiFilippo is licensing — or lack thereof — in many states. “New contractors appear daily during the high demand summer months, and these lower-end contractors will drive the installations of R-22 dry charge units, as they only worry about putting money in their pockets, as opposed to doing what’s best in the long run. If I could change one thing in the HVAC industry, it would be to have a universal measurement system for contractors. This would allow those of us who do all the right things to be properly identified; those who are lacking could either work towards meeting the standards or choose not to. Consumers could then ultimately make their decisions based on factual data.”
Allen believes there will be some progress made in states recognizing that HVAC should be a licensed trade, which should help people think the industry is an excellent career choice equal to the plumbing or electrical trades. “Another trend I see is the significant advancement in new product development, and technicians must continue to update their skills and technical knowledge frequently if they want to advance in their career. I would like to see HVAC technicians continue to grow in their appreciation of their role of providing meaningful expertise that solves customers’ needs for home comfort, healthy environments, and necessary improvements that reduce their energy costs and preserve national resources.”
In addition to the opportunities and challenges noted above, contractors will face other uncertainties going forward, such as how expensive will R-22 become? How many price increases will manufacturers pass along this year? What are a contractor’s responsibilities in regard to the new regional standards mandated by the Department of Energy? While all of these issues can be challenges, noted Bigelow, “They can also be opportunities if they are handled correctly.”