A residential HVAC system's total cost of ownership includes:
- Cost of new equipment or the cost of renovation
- Ongoing operating (gas/electric costs)
- Equipment reliability and longevity
- Good lungs (non-leaky duct systems)
These things can be combined into a sales package that will differentiate the performance-based contracting firm from all others.
For many years my organization has focused on teaching contractors how to sell safety, health, comfort, and energy efficiency. Here’s a brief breakdown as to why:
SAFETY — Not all contractors are the same when it comes to safety. Typically, a performance-based contractor’s field people are carbon monoxide safety and combustion certified. If a competitor’s field people aren’t so certified, it’s unlikely they sell the safest possible system.
HEALTH — A good system can improve the healthiness of a home by reducing dust, biological growth, and allergens. A performance-based contractor can solve the root causes of these issues through proper testing and diagnostics.
COMFORT — It’s the reason our industry exists. Besides equipment performance, a total home comfort approach focuses on balanced air flows and temperatures. A performance-based contractor identifies the causes of comfort issues, provides real solutions, and “tests-out” to prove he or she fixed them.
ENERGY EFFICIENCY — In most cases, when the first three elements of performance are properly addressed, energy efficiency is achieved. There are other factors, including equipment efficiency and how a home gains or loses BTUs.
The problem with energy efficiency as a primary sales approach is this term is so misrepresented and over-used. Sellers of HVAC, windows, doors, insulation, siding, roofing, house sealing, appliances, and so on, all promise to reduce customers’ bills by 20% to 40% or more.
When it comes to home and HVAC system performance, maybe it’s time we stop using energy efficiency as our main sales pitch. Efficiency is just one component of operating costs. What if we began talking in terms of “total cost of ownership,” where efficiency is a key component, but nowhere near the whole story?
What is Total Cost of Ownership (TCO)?
TCO includes the initial cost of the equipment and/or system renovation — plus ongoing operating costs. It drops greatly when you correct the performance problems equipment replacement alone cannot address. One important aspect of TCO is the reliability and the longevity of the equipment itself. If system issues aren’t addressed, the results often are equipment components that wear out prematurely, which leads to unplanned service and maintenance.
If a unit is replaced without addressing an undersized and/or leaky duct system, performance suffers. Restricted airflow causes premature compressor and heat exchanger failures, and excessive mechanical component wear. The leaks can also introduce unwanted dust and other particles, as well as moisture and loss of BTUs.
TCO is simple: Show the difference between replacing equipment and providing a total solution.
Let’s say your price for an 18-SEER condensing unit/90% furnace package is $11,000. Because we measure system efficiency, we know only 52% of the BTUs make it into the home. Since the old 80% furnace and 9 SEER air conditioner were working at 52% of capacity, the new equipment would do the same (sometimes worse because newer equipment can be even more adversely affected by duct system deficiencies). We calculate that by only replacing equipment we’ll get a 10% reduction in utility costs. If annual utility costs are $4,500, when you take away lighting, plug load, and water heating costs of $100 per month, HVAC system energy costs are $3,300. So the $3,300 bill will drop by $330/yr. The 10-year total cost of ownership for this job is $7,700 ($11,000 - $3,300) or $770 per year — plus maintenance costs
Let’s compare this to a total system solution with a price of $15,000 for an 80% furnace, 14 SEER AC unit, resizing, sealing, and insulating ducts, plus fixing some envelope leaks, replacing missing insulation, and testing out. In this example, we increase system efficiency from 52% to 88% for a 36% point improvement. In this scenario, utility costs would drop by $1,100/yr.
The 10-year TCO for the total system is $4,000 ($15,000 - $11,000) or just $400/year — about half. Plus the customer will get a safer, healthier, and more comfortable home for 10 years or more — and you’ll make a higher margin!
If the equipment is replaced without fixing the system, the homeowner will likely experience more breakdowns. If added service costs average $200/year, the TCO on the first system is now $970 — more than twice as much as system #2!
Think about how the TCO approach can differentiate your company, especially if you are a performance-based contractor who has the training, tools, and systems to deliver total home performance — because it’s a known fact HVAC system performance is the heart of a home’s performance!
Dominick Guarino is CEO of National Comfort Institute (NCI), the nation’s premier Performance-BasedTM training, certification, and membership organization, focused on helping contractors grow and become more profitable. His email is firstname.lastname@example.org. For more info on performance-based contracting, go to WhyPBC.com or call NCI at 800/633-7058.
EDITOR'S NOTE: An earlier version of this article incorrectly listed total cost of the example, 18-SEER system as $13,000. The corrected, subsequent calculations are now based on $11,000 as the system cost.