How HVAC Contractors Can Increase Gross Margins on Maintenance ContractsAuthor: Brett Knox
November 10, 2022 - 3 MIN. READ
Prices for HVAC parts and supplies continue to be volatile and remain stubbornly high. To achieve gross profit targets, HVAC contractors need to be proactive to maintain gross margins on their preventive maintenance contracts.
This article will walk you through how to increase gross margin as well as explore a great technology tool that can help you do so quickly and easily.
The Squeeze on Maintenance Contract Margins
During inflationary times like we have experienced over the last 18 months, maintenance contract profitability has declined for many contractors. Not only has material costs gone up but so has fuel. Many maintenance contracts were signed before inflation hit and now your cost of goods sold (COGS) are far higher than they were when you sold the contract. Some of your customers are willing to concede to price adjustments and others will not. Aside from adding fuel surcharges or environment surcharges to your invoices, you are left with few options if your customer will not accept a price increase from your company.
What options do you have?
Purchasing Strategies for Maintenance Supplies
Paying less for your maintenance supplies can help improve profits and there are several ways to accomplish this.
- Consider joining a Group Purchasing Organization (GPO), which leverage the buying power of all their members to negotiate deep discounts from distributors and manufacturers. One great example is Raiven, which specializes in the HVAC and electrical industries. They have pre-negotiated pricing on equipment, parts, air filters, refrigerant, and more with industry-leading suppliers like Carrier, Ferguson, Graybar, Koch Filters, Grainger, and Sunbelt Rentals. Their members experience savings of 7% - 25% and they do not have to hassle with time-consuming negotiations.
- Buy directly from the manufacturer. Going direct cuts out the distributor and associated markups. However, be aware that if you are not part of a GPO, your purchasing volume alone may not be large enough to move the pricing needle down with large manufacturers. With this approach, you also may need to consider warehouse space, which will be discussed later in this article.
- Outsource air filter and belt changeouts to a third party. Some HVAC contractors have been successful outsourcing basic maintenance activities to save money on labor costs and material costs so they can use their technicians for more profitable service and repair work. If you are philosophically comfortable with outsourcing and can find a reliable, quality conscious partner, it may be worth exploring.
Whichever strategy you choose, analyze your spending carefully and determine where your highest cost categories lie. Do an 80/20 analysis to determine which 20% of supply categories compose 80% of your costs. Provide this information to your GPO or request competitive bids for these items from multiple suppliers. By focusing on that 80%, you will get the best bang for your buck.
Finally, but most importantly, you will need accurate, timely data on your purchasing. The days of sifting through paper records and Excel spreadsheets are over. Technology is an essential part of an efficient purchasing model.
Plan for longer lead times during maintenance season
Preventative maintenance (PM) season is here for HVAC so lead times on air filters (particularly MERV 13), belts, etc. are increasing because of increased demand and a chaotic supply chain.
Unfortunately, Supply chain disruption continue to bedevil the HVAC industry and it likely won’t improve dramatically over the next 12 months, but knowing how to plan ahead can help ensure these changes do not hurt your business in the long run. Begin by examining your project book for the past year and estimate your supplies and parts usage for the next 12 months; allow for growth in business year over year with an added percentage for contingency.
These are things to keep in mind since Spring filter change out season will be here before you know it.
Determine your warehousing needs
If you decide to bulk buy air filters to save money and not use your distributor as your virtual warehouse, storage space becomes essential. A space to store parts and materials for easy access is essential in optimizing your inventory. What’s more, you need to organize and manage it while assigning someone responsible for “bagging and tagging” the air filters so your techs have quick access to their materials.
Inventory management can be expensive and requires a delicate balancing act. On one hand, you can bulk buy and warehouse all your filters, belts and materials saving you significant upfront dollars, but warehouse space is expensive if you do not own it. On the other hand, you can minimize inventory costs by relying on suppliers’ stocks (obtain a maximum lead time) on your maintenance materials. For larger inventory needs, negotiate with the supplier to warehouse your items on a dedicated basis. Be sure to get timely reports on inventory levels.
It all comes down to evaluating the costs associated with each option since every contractor’s situation is unique. The common denominator with all these options is finding the simplest way to reduce your purchasing costs.
Group Purchasing Programs Make Saving Money Easy
Joining a Purchasing Program is the fastest and easiest way to reduce your costs on maintenance, service, and project work. The benefits if joining a purchasing program like Raiven include:
- Save 7% - 25% on all your typical purchases without having to negotiate with suppliers
- No upfront fees or ongoing costs
- Employees save time by buying from a digital Marketplace that houses all your suppliers in one place
- Software tools that find the lowest prices so employees do not waste time bouncing around websites comparing prices
- Supply chain alerts for price and product availability changes on the supplies that matter to you most
There is no quicker, easier way to cut your cost of goods sold and increase your margin.
Seize the moment
Do not be late to the game for Fall and Spring preventative maintenance seasons. Protect or even increase your margins by cutting your cost of goods sold on all your service and maintenance work.
If you want to save time and money, contact Raiven to learn more!