Integrating Performance-based Services Into Your Residential HVAC Contracting Company

This month marks 20 years since National Comfort Institute began teaching how to test and correct the air side of HVAC systems. Over the past two decades as we learned more about the properties of the air delivered by the system, we began to understand the process of measuring delivered BTUs in real time. We started to hone better methods of testing duct systems with pressure, air flow, and temperature instruments.

With the help of thousands of HVAC contracting companies, we began to systematize the processes to make testing, diagnosing, and correcting performance issues faster and more accurate. We found that most contractors we worked with were able to assimilate the technical knowledge and develop their skills in performing this work.

While working with all these contractors, we began to notice some patterns. Only roughly 10% of the companies we trained were able to fully integrate delivered performance into their offerings. These companies have been regularly delivering profitable system renovations to their customers, and have become known in their markets as true solutions providers.

Of the remaining 90%, some are somewhat able to sell and deliver system renovations, mostly when a customer “really wants” their systems fixed. Most of the others only perform testing and some fixes when in a pinch.

When we asked these folks why they weren’t able to fully integrate delivered performance into their businesses, the top six reasons given were:

1. We just can’t find the time to make it work
2. Customers don’t care — they just want the lowest price
3. Can’t get my guys to test on a regular basis
4. My sales people just want to sell equipment — they tell me this stuff is just too hard to do
5. We can’t figure out how to make this part of what we do
6. It’s too labor intensive. We don’t think we can make money at it.

Let’s review and address each of these issues.

We can't find the time to make It work

One reason owners can’t “find” time is that they look at the process as one giant elephant they need to swallow all at once. The key is to eat the elephant one bite at a time. Start with baby steps. Train your service techs to begin testing static pressure and temperatures at different points in the systems they service, beginning with before and after the equipment. Get them into the habit of recording specific values on every service call and routine maintenance.

At the same time have your installers test-out their installations. Slowly introduce basic testing to your salespeople. This process gradually builds the foundation and confidence your team will need to take the next steps.

Customers just want the lowest price

The biggest secret to selling performance is customer education. You do this by involving the customer, starting with the initial conversation, then quickly engage them to “help” you with the testing. There is a very specific process to this, but the key is to take the customer with you as you test and evaluate their home and HVAC system.

My favorite phrase to engage the customer and get them excited about the process is to simply say, “You spend more time in your home than anyone else. No one knows more about how it feels and performs better than you. With your help I can much better pinpoint how your home and comfort system are performing from the standpoint of safety, health, comfort and energy efficiency. The process is educational and kind of fun, would you be willing to join me?”

In 20 years I’ve never had a customer say no to this invitation. When presented properly, most will gladly join you as you test and evaluate their home.

I can’t get my guys to test on a regular basis

As mentioned above — the key is baby steps. Have your techs test your office, their own homes, and their relatives’ homes. The key is getting them comfortable with testing so they feel confident with using it in your customers’ homes.

When you’re ready to have them test “real” customers’ systems, add in some spiffs to reward turning in their test data. Create some weekly contests, maybe focused on who finds the highest static pressures.

My sales people just want to sell equipment

It’s human nature to want to stay in our comfort zones. Most people are either motivated to change by fear of loss, or opportunity for gain. There are ways to work both of these motivators into bringing your sales team around.

For example, if you have more than one salesperson, identify the one who is most interested in selling system renovations and delivered performance. Designate him or her as your “Performance Champion.” Make sure you provide top training and the right tools to help ensure success.

Keep him motivated with added incentives to sell more than equipment change-outs. Pair him up with your best performance-based lead generating technician, and with a trained crew that knows how to renovate properly and test out their work.

In other words create a small “Special Forces” performance-based team within your organization so you don’t have to engage your entire team in the process all at once. Once they start achieving successes, celebrate victories, and begin the transition to “mainstream” delivered performance through the rest of your company.

We can’t figure out how to make this part of what we do

One of the toughest challenges to becoming performance-based is integrating it into your existing business model. Unfortunately most business models sort of evolve, they aren’t well-documented, and are communicated mostly by osmosis.

The first step to integration is to get a better understanding of your existing model. Create a document that describes how your company operates in as much detail as possible. Break it out by department and by profit center.

While there is overlap, these aren’t necessarily the same. Many departments, for example impact multiple profit centers and vice-versa. The next step is to identify the key impacts of the new approach on each of these areas and start planning the integration.

Starting with marketing, you’ll need to look at your message. Look for ways to include delivered performance in it without overwhelming or confusing potential and existing customers.

Generally it’s best to start with your tune-up and service marketing. Start with showing your differentiation by spelling out the additional testing steps you take during your tune-ups and routine maintenance.

Next, focus on your service department. Do you have the right education/training, tools, and incentives in place? After your initial pilot, it’s important to ramp up and engage the entire service team, especially your service manager. He or she needs to become a champion of performance testing.

Now it’s time to spread the approach to other teams in your organization. If you spend some time identifying existing processes for doing the work you currently do, you will recognize integration points.

Look at it from the perspectives of dispatching, accounting, general office, installation department, and so forth, to allow a smooth flow from generating leads, booking appointments, selling, and delivering and testing out your work to show your customers you did what you said you would do.

We don't think we can make money at it

There’s a misconception that you can’t leverage your labor enough when selling system renovations, ductwork repairs, home sealing, etc. At face value it seems equipment change-outs require a much lower labor-to-revenue ratio, so you make more money than labor intensive system renovations and home performance repairs.

This would be true if all you did was mark up your materials and labor using the same formula as swap-outs. This is where many contractors go down the wrong path.

System renovations should be priced based on the same gross revenues per man-day as replacement work. You have a lot more tools, training, and behind-the-scenes work involved in system renovations. A good rule of thumb is your renovation work should yield 60-70% or higher gross profit margins.

When you combine this work with the tighter gross profits of your chang-outs, your overall net profit will jump to much higher levels.

For example, if you’re operating at 35% overhead, and your average gross profit is 42%, your net would be 7%. If you added renovation work at 70% gross profit to make up 20% of sales, your overall gross profit jumps to 48% with a net profit of 13% - almost double!

The key to this paradigm shift is understanding that your performance-based work produces greater value for your customers. It requires a significant investment on your part, and you should make the profits your company and your employees deserve.

This approach can truly set you apart from your competition in the eyes of your customers, your community and your employees, establishing you as a true leader in your marketplace. Go to whypbc.com for more information on Performance-Based contracting.