It feels like yesterday that I was watching live content from the AHR Expo show floor. Time flies. I hope the first half of 2024 was good for your business and the second half is even better.

I don’t see any major changes coming over the next six months. Rather, I think we’ll see a continuation of what we’ve experienced in Q1 and Q2. 

Customers have been pulling back their budgets. This applies to both the commercial and residential sectors, though I think the impact is bigger on the commercial side. Many preventative replacements are being deferred and, painting with a broad brush, they’ll be a hard sell for the foreseeable future. 

I suggest picking up more service work, getting good at it and prioritizing it. Lead with service. If you can extend the life of a customer’s existing equipment, you should be first in line to replace it in a few years. 

We’ve been doing a lot of replacement projects over the past decade. That’s changed now that interest rates have gone up, and the economic landscape isn’t as lush as it was two years ago. We’ve recently had quite a few customers who wanted replacements, but when shown the cost, the conversation switches to, “How can we put a good Band-Aid on the system?”

For example, a customer called me a year ago about adding a large heat exchanger to a commercial boiler system to accommodate a new load. I quoted the job, but the customer put it off at the time because other ongoing work in the facility had to be wrapped up first. He called us again this year for a new quote, and the same project had all but doubled in price. This increase was due to material and labor costs, so the project has been deferred. 

Passing the Buck

I have friends in other sectors of the construction industry. From what they tell me, commercial and industrial customers are finding new ways to shift costs and liabilities to the service provider, regardless of which skilled trade they’re in. At times, this cost transfer comes in the form of tedious, detailed contracts and more strenuous requirements. Let me explain.

Until recently, the requirements demanded by our commercial customers have typically been tiered depending on the scope of the task. If the project was a $2,000 repair job, the insurance requirement was much lower than a $100,000 system replacement. 

Not anymore. A recent contract I sent out for a tiny repair job came back to me heavily redlined by the customer’s lawyer. Instead of a $2 million insurance policy, the customer required that we carry a $10 million policy. The difference has a massive impact on my bottom line.

Further, the customer required infinite indemnification. Yeah, I didn’t know what it meant either, so I asked my lawyer to put it in layman’s terms. It used to be that my insurance policy only had to cover the portion of the system we worked on. 

With infinite indemnification, on the other hand, my insurance policy must cover the entire massive system. Imagine replacing a single pump in a system with 100 pumps, and then a boiler heat exchanger fails shortly thereafter. Infinite indemnification would mean that my company could be held responsible for the boiler failure and, per the contract’s wording, the customer could suspend payment for our work. 

Nickle-and-diming the service contractor isn’t anything new, but some people writing commercial contracts have gotten more creative, dare I say, sneaky. They’re doing so because they’re under corporate pressure to curb expenses.

Here’s another example. We were hired to replace a heat exchanger in a pool heating system. All this work took place inside the mechanical room. None of the work had any impact on the pool deck. Regardless, the contract we received from the customer required that all pool furniture be removed and stored by us until the project was complete, at which point we had to set it back up again. 

I can’t pay my technicians to play with lawn furniture, let alone store it under lock and key. Heaven forbid that it gets scratched in the process.

So, I went through the contract with my lawyer and made changes to it. They redline my contracts, so now I do the same to theirs. With the changes they required, our price went up by 50 percent. 

I was hungry for work 10 years ago, so I’d have eaten the expense back then. Now, I push back. The contract must be a fair and equitable agreement for both parties. 

Read agreements before you sign them. Even better, request a copy of the customer’s basic contract and insurance requirements before you provide a quote.

Harder for the Little Guy

These changes have made doing business harder for the little guy. I feel bad for companies starting out and trying to break into commercial work. Some of the contracts I’ve seen recently require five years of experience in commercial work, and the customer wants to see copious examples of a contractor’s work.

Dealing with homeowner associations specifically, many small property management companies have been bought out by big firms, so they have more resources and contacts to vet you. This isn’t necessarily a bad thing because it does weed out the less-than-professional outfits. It is, however, a barrier to entry for young companies that do good work. 

Another thing I’ve noticed early this year is that quotes from competitive service providers are drawing much closer together. In years past, my quote was typically the highest collected by a customer (and they’re quick to inform me of that fact). It’s not always the case anymore. If I am the highest, it’s not by much. I think that’s good. It’s good for me, good for my competitors and good for the trade. 

One other thing worth mentioning at this halfway point between 2023 and 2025: pay attention to information the trade media publishes on the Inflation Reduction Act. 

There are more than a few ways companies in this trade can ethically leverage the various efficiency incentives set forth by the IRA. Customers might be willing to open those tightly drawn purse strings if they’re properly educated on the opportunity to save money. Be the contractor encouraging customers to invest in energy-efficient solutions that qualify for tax credits and rebates under the IRA; it’ll likely help your bottom line later this year.

Ultimately, I think the theme of 2024 is, “Stand on your price.” We’re in this to make an honest living. It’s not a charity. To borrow another line from Jon Bon Jovi, “We’ve gotta hold on to what we’ve got!”