The Price is Right: Pricing Commercial HVAC Services

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March 10, 2014

Although he has guys working on cranes in inherently dangerous situations, Rick Tullis insists that the riskiest time in his commercial contracting business is bidding the job. That’s why he keeps a detailed analysis of the company’s direct, indirect, and overhead costs.

“We look at costs historically to see what gross profits we have to hit to break even and to reach our targeted net profit,” says the president of Capstone Mechanical in Waco, TX. “It’s a pretty analytical process to come up with what those numbers need to be, and it changes year to year. It depends a lot on the market and market drivers and things we put into play to be more efficient. For example, we’re implementing lean technology in our processes, which is reducing some of our direct and overhead costs.”

He explains that the HVAC market in his area of Texas has shifted several times in the last few years. Before the recession, a number of local bond issues had passed, which generated public school and municipality work and drove the market for a year or two. When that waned, federal spending ramped up.

“We’re close to Fort Hood and we have several VA hospitals in the area, so federal spending jobs carried the market for a while,” he says. “Then that started to drop off . Thankfully, now we’re starting to see the private market come back. Developers, private owners, and industrial clients are spending money. In a short period of time, we’ve seen the market shift in three distinct ways. We’ve had to adjust to each of those markets.”

He admits that company margins have taken a hit in the last few years. “Volume in the market is a factor,” he says. “If there are fewer jobs out there to bid, it drives up competition and drives down price. We’ve definitely felt that. We’re getting margins that are considerably less than five or six years ago. In our commercial contracting side of the business, 5 to 7 percent net profit is our goal. I can’t say we’re always getting that.”

The company, which Tullis started with a partner in 2005, has grown to about 150 employees and $22 million in annual sales, the majority of which is commercial and industrial contracting. A key factor in the company’s success, he says, is the creation of a collaborative culture.

“The guys in the office estimating the work communicate closely with the guys in the field,” he says. “No one is afraid to ask questions. When the guys get in the field, they all know how many hours are in the scope of work to get their jobs done. We openly share that with them because we want them to hit those targets. We require our guys in the field to do two-week look-ahead plans, so the materials can be ordered at a pace that will keep the work going strong. If they see places where we underestimated or overestimated certain parts of the work, they communicate that back our estimators. We all rely on each other. It’s a team atmosphere.”

He reports that his most reliable estimators generally start out in the field because “not only do they know the work, but they also have the relationships,” he says. “They have credibility with their peers.”

When Is Low Too Low?
Kenneth Morrison, president, Morrison, Inc. in Marietta, OH, draws a distinction between the design/build market and the plan and spec market. He tends to steer clear of the latter.

“Generally, when we bid projects, we go up against two or three people,” he says. “Those projects that are on the street where anybody and their dog get a shot at it, we leave those alone. Those are the ones where the best—or worst—mistake gets the job. Sometimes lowest is not the right price.”
He figures most bidders come within 5 to 10 percent of each other. “If one guy is 30 percent higher—or lower—he probably made a mistake,” he says. “Getting the right information helps you get the right price.”

To bid on a job, he needs to know a variety of factors, including the building’s use and occupancy. “If the building is being used for offices, it has certain parameters we look at for square foot per person. That’s a code scenario,” he explains. “We look at outside air requirements, because that makes a difference if we have to heat or cool outside air based on occupancy of that building. If it’s a manufacturing facility, we need to know electrical requirements for equipment, because there will be latent heat distributed by the equipment as it’s running. The variables go on and on, depending on whether it’s manufacturing, office, hospital, clinic, or restaurants.”

Once he has developed a bid, he typically compares it to estimating books to ensure it’s on the mark. For example, he might compare the cost per ton on AC units, the cost per square foot, and on the metal side, the cost per pound. He also examines numerous variables, such as standard versus programmable controls, which can influence cost.

“I’ve been doing this for 41 years,” he says. “You get a feel for looking at a project and saying, ‘we’re ok—or we’re not ok.’”
Another contractor that prefers design/build jobs is Larry Michelsen, president of Viking Heating, Inc. in Damascus, OR. “We’ve been in business 50 years,” he says. “In the last 10 to 15, we’ve tried to stick to design/build as much as possible. We do some plan and spec too because the pipeline isn’t always full. The customers we work with on design/build are the ones who stay with us and last longest.”

Although the company prides itself on repeat customers, they don’t necessarily receive a volume discount. “On every job, we’re putting our reputation on the line,” he says. “We want our repeat customers to come back, because we have performed well in the past. A come on or a discount or end-of-the-year sale doesn’t really work for us in our business.”

In addition to building utilization factors, he considers location and time of year when calculating prices. “If the job is a close distance to our office, it enters into the labor portion,” Michelsen, says. “We are dealing with a known quantity, and we don’t have to pull labor from another union hall. Staying in our bailiwick certainly does help us.”

With 44 employees, his company generates about $7 million in sales per year, while staying within 50 miles of the office. “We handle residential, commercial, industrial, and institutional,” he says. “Because of the area we’re in, we have to be a jack-of-all-trades.” He estimates that business volume is 25 percent residential and 75 percent non-residential.

Service Has Its Price
When pricing service contracts, Morrison considers factors such as distance from office, access to equipment, and the time of day that the equipment can be serviced. “For instance, if it’s in an O.R. and we can only get in there during the night, that would have an effect on how we would price the service contract,” he says.
Michelsen, who tries to schedule preventative maintenance in lag times, usually gives a discount on parts to customers with maintenance contracts. “We have a relationship with our customers, and we want to make sure they are happy,” he says. “We want to give them a price that is fair to them and fair to us.”

Because he sees their revenue-generating potential, Tullis prices service contracts very competitively, almost at break-even, in fact. “We see about a one-to-three ratio on the amount of the service contract versus the volume of revenue we see generated by that customer. So, if we sell a $10,000 service contract, historically we get from that customer about three times that in service work for changing out equipment, emergency repairs, and things that aren’t covered in the contract.

“We try not to lose money on service contracts,” he points out. “It’s a strategic risk, but we’re willing to take it.”