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Contracting in Inflationary Times

Last updated: 04-25-2021

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Contracting in Inflationary Times

Contracting in Inflationary Times
The Rant
Contracting in Inflationary Times
Commodity pricing increases are being reflected in equipment costs. Here are six things you should do to stay ahead of the game and prosper during inflationary times.
Matt Michel
Apr 23, 2021
Are we entering a time of inflation? It certainly seems so. Over the past six months, we’ve seen dramatic increases in commodity pricing that is being reflected in equipment costs. Here are six things you should do to stay ahead of the game and prosper during inflationary times. 
Price Up
When your costs increase, immediately raise prices. Do not sacrifice your margins. In fact, it is more prudent to raise prices in anticipation of an increase. If you wait, you are late.
Prepare your technicians and salespeople for push back from consumers over higher prices. Stand firm in the face of price resistance if encountered. It is better to lose the occasional job than to lose money by failing to pass along the cost increase.
Stock Up
As a rule, stocking more inventory than immediately needed is a mistake. It is like sticking a pile of money in your warehouse.  Moreover, there is a carrying cost. Some of your inventory will inevitably get damaged. Some will become obsolete. Some will grow legs and walk away. Factor the carrying cost of inventory into your pricing.
However, in times of inflation, inventory is an investment. If prices go up after you buy the inventory, but you're pricing on current costs, not the past costs you paid when you purchased.  
In times of shortages, which characterizes the present, carrying higher levels of inventory than normal becomes a business a requirement. You cannot sell what you do not have.
Do Not Over Promise
At present, there is a worldwide shortage of computer chips. It is bad enough that it has caused many automakers to temporarily halt production. These same chips are used on higher efficiency, communicating HVAC equipment. If the chip shortage is affecting automakers, who have more purchasing clout than air conditioning manufacturers, you can expect it to impact us. Do not be surprised if high-end HVAC equipment gets hard to source this summer.
When you quote jobs, make sure you quote using product on hand or product a distributor has on hand and will reserve for you. If you do not have a product in stock, do not assume you will be able to get your hands on it. Verify availability before you sell something. 
Have a Back Up Line
If you do not have a second line of equipment, now is the time to add one. Managing your equipment lines will be a juggling act.  Manufacturers are likely to award inventory to their most loyal dealers. Yet, you need a second line as back up in case your main supplier experiences shortages. To be able to count on the second line you will need to present them with enough business to keep their interest.
Switch to Performance Pay
The current technician shortage is likely to be exacerbated by pressure to increase pay. You can either pay more directly (further increasing your costs) or you can switch to performance-based pay so your technicians can award themselves a pay increase anytime they want.  At the very least, consider putting your installation crews on performance pay.
Sell Payments
It is likely that you will not encounter a lot of resistance on service pricing. Replacement pricing could be another story. The best way to handle it is to sell payments. Sell them on every change out.
Lower payments by offering installment financing over a 10-year term. Ten thousand dollars on a 2% revolving plan starts out at $200 per month. On a ten-year installment plan at 8% interest, it is only $121 per month. Do not rely solely on revolving financing.  Line up an installment source.
You should be selling payments and using installment financing anyway. Due to efficiency mandates and refrigerant changes, the installed cost of a home comfort system was already causing most homeowners to experience sticker shock. Selling payments is a way to reduce the surprise.
With a summer like this one, you need to stay on top of the changes occurring in the industry. There is no better source than the Service Roundtable. Join today for $50 per month and also benefit from the industry’s largest library of downloadable business content and the industry’s largest buying group.  Visit www.ServiceRoundtable.com or call 877.262.3341.
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The Rant
Nine Vital Practices For Running a Successful HVAC Contracting Business
At the risk of grave oversimplification, here are nine vital practices that will guide you as an HVAC contracting business owner toward generating a sustainable, successful contracting business.
Matt Michel
Aug 20, 2014
There is a lot involved with running an HVAC contracting company. At the risk of grave oversimplification, here are nine vital practices that will guide you as a business owner toward generating a sustainable, successful contracting business.
1. Plan
The first step in any business is to set goals for the company and define how you'll achieve them. Before you begin the number work, review and, if necessary, update your mission, your vision for the next five years, and your unique selling proposition.
What is your target for sales, gross profit, and net profit? Ideally, you are departmentalized and can break these down by department.
This is a seasonal business. Some months are better than others, so break it down by month. To achieve the revenue, how many service calls will be required? How many installations?
This leads to manpower requirements. How many technicians will you need? How many installers? How many salespeople? Remember to look at the calendar and make adjustments for holidays and weekends.
Of course, the calls won’t flow of their own accord. Well, some will. How many will you get based on repeat business from past customers? How many will you need to generate from marketing?
How many of the service calls will result in replacement leads? What percent of those will you close? How many additional installations will you need to generate from marketing efforts to reach your target? Given close rates for planned replacement sales, how many appointments are necessary?
Next, project your cash requirements by month. You know what you can expect to flow into the company from service and installation sales, what must flow out that is directly related to those sales, and what is required to cover overhead. Is the remainder positive or negative? If it’s negative for a month, where will you get the cash to stay open? Cash flow budgeting is important for all businesses, but especially companies with a strong commercial or new construction focus where payments come in lumps after the expenses are paid.
This planning process sounds overwhelming. It’s not. It’s a straightforward approach. It takes some homework and some tweaking to ensure the plan is internally consistent, but once you start an annual planning process, you will be surprised how often you hit your numbers.
It’s cliché, but failing to plan is a plan to fail.
2. Analyze
Every month you should review full financial statements (many believe this should be done weekly). This includes your balance sheet, income statement, and cash flow statement. Calculate your ratios, especially your liquidity ratios. Companies do not close because they are not profitable. They close because they run out of cash.
In addition, you want to track other key metrics like gross profit, your average service call ticket, average installation sale, sales per co-worker, sales versus budget and last year, labor as a percent of service, labor as a percent of installations, service agreements customers as a percent of total active customers, and so on. Track these weekly or monthly.
Track incoming service calls, leads, service revenue, installation sales, new service agreements, non-renewal service agreements, total service agreements, and cash balance daily. Assign responsibility for the preparation of a daily dashboard to your bookkeeper. Look these over at the start of each day.
Most contractors hate going over the numbers. Still, it’s necessary. Pick one day a week, or one half of a day a week and devote it to analysis.
3. Communicate
As business owner you are the chief communicator and evangelist for your company. A significant part of your job is external and internal communication.
Externally, you should represent your company in your community. Get involved in community organizations and events. Yes, this pulls you away from your company, but it also pulls the community to your company.
Internally, you should set the tone for the organization. If you are positive, your team will be positive. If you are gloomy, people will fear the worst. Your organization reflects you.
You owe it to your co-workers to let them know how they are performing individually and as a team. Take some time to talk with each person who reports to you to know how he or she is performing.
At least once a quarter, share company performance whether good or bad. Show them the balance sheet, income statement, and cash flow statement, explaining each. Show your team how they can impact the bottom line by boosting sales a few percentage points, cutting costs a few percentage points, or both.
4. Recruit
Maybe the most important role of a business owner is recruiting co-workers. Always be on the lookout for talent. Keep a list of people you think could work in key positions in your organization. If you aren’t ready to hire someone today, keep in touch with the individual so you can pick up the phone tomorrow when you are ready.
Interview anyone, anytime. Recruiting should account for 25% to 30% of your time. Look for people with great attitudes and mechanical aptitude for your field service and installation positions. Send them to the various schools available in the industry that will get them up to speed quickly on basic service work.
5. Appreciate
As we hire more Gen Y and Millennials, our approach to management must change. These are individuals who received participation trophies as kids. Like the kids of Lake Woebegone , every single one of them is above average. They have grown up being told how special and wonderful they are and expect that to continue.
You may think a paycheck is thanks enough, but this generation thinks not. If you want to keep them engaged on your behalf, show them appreciation. In fact, treat them like a volunteer workforce.
Show them appreciation as a group by doing fun things like holding a chili cook-off in the off season. Take them all fishing or bowling or shooting sporting clays.
6. Measure
I attended a Matt Smith training class for the Service Nation Alliance where he reported example after example where people’s performance improved when they became aware that it was being measured and reported. He said people often know what to do and how to do it. So it’s not a question of aptitude. It’s just that no one is keeping score.
Pick your sport, bowling, golf, you name it. If you are not keeping score, you will play sloppy. Once you keep score, especially if others see it, your performance will improve. The same thing happens with your technicians, salespeople, and customer service representaives (CSRs). Once they know their performance is being monitored, it improves.
Require your people to report their results. Display the numbers on a monitor or white board and watch the results improve. It’s like magic.
Want to see greater improvements? Join one of the groups where technicians are compared with other technicians from across the country. Suddenly, the company hotshot is not so hot. This will drive top performers insane and they will move mountains to move up the rankings.
7. Incent
Business writer Michael LeBoeuf said the greatest management principle is “what gets rewarded, gets done.” Incentivize your people’s performance and you will get more of it. Yes, pay for performance.
Pay wages for time on the job and you will get time on the job. Pay incentives for productivity and that’s what you will get.
Of course the challenge is to examine your incentives for unintended consequences. Make sure  you're not incentivizing undesirable behavior. For example, when a contractor split the diagnostic, or response charge, with his technicians, he discovered that the technician were incented to run as many calls, as fast as possible, instead of slowing down, being thorough, and providing great service.
Some contractors fear that incentives corrupt people, especially technicians. Performance pay for technicians encourages an ownership mentality. They make more money when you make more money. If performance pay corrupts, then every contractor is corrupted the moment he hangs out his shingle and starts his business. If a technician carries larceny in his heart, it will be revealed regardless of the pay system.
Of course, not all incentives are monetary. Some people respond better to time off than additional income. Others simply crave recognition. It’s amazing what some people will do for a $10 plaque.
Your organization also imposes its own incentive structure. If a technician’s peers exert pressure counter to your incentive structure, the peer pressure will likely prevail. Keep alert to the culture within the company or departments. If it starts to slip, act immediately to correct the problem. If coaching is insufficient, a key termination or two may be required.
8. Delegate
The most difficult lesson for many contractors is learning to let go. Even if you are the best at everything, you cannot accomplish everything on your own. You must learn to delegate. Control freaks take note: delegation does not require micromanagement. Accept that people may not perform a task as well as you, as fast as you, or exactly the same way.
Unless you learn how to delegate, you'll never grow beyond your personal capacity. You'll never have a company. You will only own a job. You cannot sell a job. You can only sell a company.
Your job as owner is to build a team and processes so that your presence is not necessary. Only then will you have a sustainable business.
9. Learn
Society is not static. Business is not static. You cannot be static either. You must embark on a lifelong quest to seek more knowledge and new and better ways of growing your business. Your personal growth will be reflected in your company’s growth.
Read the trade magazines. Read business books. Attend conferences, seminars, and dealer meetings. Join contractor groups. Never before has our industry had such a wealth of information available. Moreover, the information available tomorrow will far exceed the information available today. If you do not keep up with the state-of-the-art, you will get left behind.
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