Capital Ideas

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Hickory Sheet Metal Co., Inc., located in Hickory, NC, recently replaced six rooftop units for one of its customers, a major supplier to the furniture industry. That’s just the start, however; over the next few years, the customer plans to replace the remainder of its 40 rooftop units, all of which are about 17 years old.

“We came up with a phased-in replacement plan for the next three years, starting with units that we knew, from our service work, were just limping along,” says Lanny Huffman, Hickory Sheet Metal’s vice president. “By phasing replacements, the customer doesn’t have as big a capital outlay at one time and has a good idea of what new equipment costs will be for the next few budgets.” Plus, replacing units intermittently rather than all at once won’t interfere with the customer’s manufacturing processes.

Proper Planning

“Property managers and owners would much rather anticipate replacement costs than be blindsided by expenses that throw their budgets out of whack,” notes Sam DeAngelis, CEO of Colorado Climate Maintenance, Inc., in Englewood. That’s why his firm provides a detailed HVAC budget every time it renews a maintenance contract or knows that a customer has begun the annual budgeting process.

Typically, an HVAC budget prepared by Colorado Climate Maintenance includes escalation costs for maintenance; anticipated costs for service calls and repairs, based on the customer’s history; and suggested capital expenditures.

“Usually, the customer is just looking for a single number to plug into a budget, but we also present options for upgrades,” explains DeAngelis. “Capital planning doesn’t always make it into the customer’s one-year budget cycle, but we explain the potential exposure. We mention that equipment replacement may not be needed this year or next year—but it definitely will happen.”

To provide the context for its suggested capital expenditures, Colorado Climate Maintenance likes to meet with customers in person. “We want to demonstrate that we’re not just servicing their equipment and keeping it running, but also helping them with long-term financial planning,” DeAngelis says.

The goal of such presentations, he continues, is to educate the customer that equipment replacement is not a question of if, but when. The customer learns which pieces of equipment are most likely to fail within the next three to five years, along with the estimated repair costs and downtime associated with a nonfunctioning unit. DeAngelis then makes the financial case for proactively replacing aging equipment—especially in groups, to reduce the pe runit cost—rather than waiting for it to fail.

“In the commercial marketplace, 65 to 70 percent of tenant complaints—and the reasons they move out of buildings—are related to tenant discomfort,” DeAngelis observes. “Tenants are much more tolerant when they are given a lot of notice for a scheduled replacement, compared to having air conditioning that suddenly doesn’t work.”

Making the Case

Seaman’s Mechanical in Grand Rapids, MI., begins the relationship with every new account by conducting an audit that determines the age and condition of each piece of equipment. Seaman’s also talks with the end user to determine how each unit serves the customer—for comfort, for ventilation, or for process. That information helps Seaman’s prioritize replacement recommendations in a summary report that covers the next three to five years.

“We position the report as a planning tool for all of us,” says Randy Seaman, president. “If, for example, a major repair is needed in a critical area and the plan calls for replacement in two or three years anyway, the customer may go ahead with the new equipment.” On the other hand, if the equipment still has a remaining life expectancy of 10 years and wasn’t due for replacement according to the plan, the customer might choose the major repair.

Crafting a long-term capital plan takes time—and a lot of input. For example, your service technicians must provide reliable assessments of equipment condition. From suppliers, you’ll need accurate estimates of the savings that might apply to units purchased in bulk. And you must assess the customer’s position as well: Does the customer have capital to spend now, or is it just making ends meet?

“It all comes down to data,” DeAngelis believes. “You can talk a good story, but unless you have the actual data—mostly financials— to support it, your plan won’t make any sense to the customer or to the person writing the check.” His firm, for example, maintains an extensive database with repair and maintenance costs, equipment condition reports, and replacement schedules for each customer.

Here are additional ways to help sell a customer on capital planning:

Show as well as tell.

A few photos may grab a customer’s attention more than your words. “Digital cameras and phones can produce powerful images,” says Huffman. “Customers don’t go up on the roof, so they don’t know what an air conditioning unit looks like. But show them a picture of a unit that’s banged up and rusty and they’ll say, ‘Really? That’s on my roof?’” Huffman credits an aerial view of aging rooftop units with helping one customer decide on a phased-in replacement plan.

Talk Up Energy Efficiency.

Some customers will naturally want to do their part to conserve energy and protect the environment. Others may need persuading.

DeAngelis believes the growing popularity of the EPA’s ENERGY STAR program for commercial buildings will help. The ENERGY STAR website enables owners and managers to enter data on a building’s energy consumption and characteristics, then benchmark its performance against similar buildings. A rating of 75 or higher on a 100-point scale earns a building the ENERGY STAR label for superior energy performance.

“Customers that lower the operating costs for their tenants will add value to the building— and HVAC systems in commercial buildings can represent up to 50 percent of the energy consumption,” notes DeAngelis.

Investigate the incentives.

Installing new, energy efficient equipment may qualify commercial customers for tax credits or rebates from the federal government, the state, or even the municipality. One of Huffman’s customers, for instance, recently received a $1,200 rebate from the utility company for replacing three rooftop units.

Because the eligibility criteria, required forms, and calculations can become complicated, Seaman sometimes seeks advice from a CPA who specializes in energy tax incentives. For substantial projects, he says, “We may even hire the CPA for the presentation to the customer, to help us explain the potential benefits of an energy efficiency package.”

Capitalize on facility improvements.

Other capital projects undertaken by a customer may present a perfect opportunity to upgrade equipment pushing the limits of its life expectancy. When Hickory Sheet Metal learned a customer would be constructing a new building, it proposed replacing several aging units at the same time.

“We’ll be using a helicopter to set 15 units on the new building, so we’ll also do the six units on the existing building that are the hardest to reach,” says Huffman. At $150 per lift, the helicopter is more cost effective for the customer.

Above all, adds Huffman, he wants customers to consider Hickory Sheet Metal as an equipment or energy consultant, not simply a contractor. “The only way to do that,” he says, “is to be proactive, provide them with information on the condition of their equipment, and keep them on task with reminders if they have a replacement program.”

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Posted In: ACCA Now