Sure, we’ve got the technical standards that keep you covered with the very latest in building science. But this newsletter’s not about that. As every contractor in the home performance industry knows, you need more than technical skills and hard work to succeed – you also need business planning savvy and marketing tools that work to successfully reach a reluctant and often uninformed homeowner market. Our goal with this newsletter is to help your business succeed with true added value tips and tools, - such as in estimating job costs, setting hourly rates, using your website effectively, and more. We’ve got an all-star line up of experts who have spent their careers in the trenches of this industry. They offer their knowledge, their contracting business acumen, their communications expertise. You know their names , such as Mike Gorman of TechKnowledge, Peter Troast of Energy Circle Pro, and Mike Rogers of GreenHomes America - all folks you’ll be seeing soon behind the podium at the ACI National Home Performance Conference in San Francisco.

We’ll also be featuring industry news with a regular column by Leah Thayer of the weekday newsfeed daily5Remodel. An occasional column, Your Stories Beyond the Headlines – will tell your personal stories on the varied and sometimes unexpected paths that lead to success in this field.

Check out the column, So You Think You Know Home Performance which features ‘Stump the Chump’ puzzlers, quizzes, and brain teasers about building science to keep you on your toes. We’ll feature the winner of each month’s contest in the following issue of Performance Matters. And of course, you’ll find updates on webinars, conferences, opportunities to earn CEU credits and other event news in the right-hand column.

Let us know what you think! Email us with your suggestions for improvements, Stump the Chump ideas, possible Your Stories Beyond the Headlines, your joke of the month, and ideas for future articles at lmcdowell@bpi.org.

Home-performance contractors got a new lease on Long Island last week with the launch of Remodel Your House with Energy Star (RYHwES), an EPA-backed program that aims to expand the success and guidelines of the agency's popular Home Performance with Energy Star (HPwES) program into the realm of certain full-service remodels.

Unlike HPwES, which targets cost-effective improvements such as sealing ductwork, adding insulation and upgrading lighting and appliances in existing structures, RYHwES encourages larger projects involving home additions or remodels of existing unconditioned spaces, such as attics, garages and basements.

The RYHwES pilot is a joint effort of EPA, Long Island Power Authority (LIPA) which serves 1.1 million customers, and the towns of Babylon and Southampton. The towns were selected by LIPA because of their existing green home programs and willingness to reduce permitting fees and times. LIPA hopes to enroll up to 100 homes in the program by year-end. Yesterday's kick-off event was held in front of a home that has already been improved through the HPwES program (the homeowner is third from right).

Net Zero or Bust

In the Long Island pilot, qualifying projects must achieve a goal of "net zero" energy or beyond, based on pre- and post-project energy audits and thermal bypass checklists. Depending on the test-out results, homeowners will receive remodeling rebates of up to $5,000 from LIPA and additional incentives for efficiency upgrades such as more efficient lighting, appliances and insulation.

Remodelers, who must either be participating contractors in LIPA's existing HPwES program, or must work with one, will receive $500 for each qualifying project.

The towns also promise fewer administrative headaches associated with RYHwES work. Babylon, for instance, will rebate 100 percent of permit fees associated with the program. "We are also creating a green desk in our building department to expedite permits for those who are voluntarily taking on green projects in their home," said Steve Bellone, supervisor for the town of Babylon (second from left in photo).

For remodelers, RYHwES has been a long time coming. “The EPA and the Department of Energy recognize the enormous opportunity and challenge of making our nation's housing more energy efficient, and to make a sizable impact we must engage the $250 billion a year remodeling industry,” said Chandler Von Schrader, national program manager for HPwES (far right in photo).

LIPA's Michael Deering, in an interview Monday, affirmed that it is the remodeling industry's turn to benefit from the same incentives that have powered the growth of EPA's Energy Star program for new homes. "We have a lot of mature suburban homes from the '50s, '60s and '70s, and with the buying and selling of homes a little bit flat, more people are looking to invest in the homes they have. The timing of this program couldn't be better."

Depending on the success of the pilot, EPA will stage a rollout to the other 40 or so HPwES programs around the country, Von Schrader told us. How do remodelers get involved?

"First step, check if you are in a market with a HPwES program," he said (click here for a full list). "If so, make contact with the sponsor and get on the building science train!"

[PHOTO CAPTION]
Photographed at last week's kick off for the LIPA pilot program are, left to right: Michael Hervey, chief operating officer for LIPA; Steve Bellone, supervisor, Town of Babylon; Anna-Throne Holst, supervisor, Town of Southampton; Mark Donnelly, homeowner; Phil Weiden, Long Island Board of Realtors, Chandler Von Schrader, national program manager for HPwES, EPA.

Each month columnists for the QMS Toolbox will provide Quality Management Systems (QMS) guidance and tools as it relates to home performance contracting. QMS is a tried and tested framework for sustainably managing an organization's processes so that they consistently turn out products and results that satisfy customers' expectations.

To understand the phenomena of sales being up and profits being down, you first have to understand how 90-95 percent of current company owners in our industry got started. This may not be your story, but it is the story of many of today’s owners. Most company owners used to be technicians working for someone else. One day, a little light bulb goes off that says something like this, “You know what? The company is paying me $X.00 per hour, and they are charging the customer this unbelievably high hourly rate, and you know what? If I went into business for myself I could charge that high rate and I’d be rich!” So you think about it for a few days, weeks, or perhaps even years until one day you make the break - you start your own business.

Normally you start out of your house or garage. What’s your first major challenge? “How much do I charge?” Well that isn’t really a problem. Most new owners simply find out what everyone else is charging, and then they charge the same thing or probably a little bit less. The first few years go pretty well. You have very little overhead and you’re making money. No, you aren’t making what you thought you would but you still have the vision of turning your company into a real money machine one day! So everything goes pretty well for the first three or four years and then a strange thing begins to be happen. You find yourself doing more and more work but making less and less money. You look at last year’s figures and find that sales were up 30 percent but profits were down! What’s going on?

How long does it takes the average company to even realize it has a foundational problem? Normally one to four years -- not to solve the problem -- but to realize there is one! Going out of business is normally a three step process. If you understand the signs, it might just save your company.

Step One, profits are down and cash flow is tight. The solution? Most contractors simply do more work. Instead of working five days a week now they work six or perhaps seven days a week. Eight hour days for the techs become a thing of the past. Now they’re working ten or twelve hours a day. What’s the net result? More cash flow comes into the company. You can now pay your bills. The problem seems solved, for the next six or twelve months. Then the company finds itself right back in the same position again. Sales are up and profits down. It’s time for Step Two to kick in!

Step Two begins the process of “hanging on” until things turn around. Remember those first few years you were in business, you made some money. Smart owners pigeon-holed some of it and now it’s time to “invest in the company”. Step two finds the company owner putting his or her savings back into the business to buy a little more time until everything works itself out. The additional funds help cash flow and the extra cash buys a little more time. All is well for another year or so, and then it’s back to lower profits and tight cash flow. Now it’s time for Step Three.

Step Three is often the “straw that broke the camel’s back.” Sales are increasing, you’re hiring more techs, buying more equipment and your customer base is growing by leaps and bounds. The final step - mortgage it all! The line of credit is maxed out and you’re not paying your distributor because you need the cash to keep going. You get that second or third mortgage on your house, which buys you a little more time but eventually you are right back to square one - out of cash, but now you have nothing left to draw from!

If the above scenario sounds familiar to you, you are not alone. Many of today’s companies have followed a similar path. There are two major problems in the trades industry today that put companies out of business. The first is improper labor pricing and the second is cash flow. If you are fortunate, you will face the above two problems BEFORE you complete the three step process of going out of business.

To understand the solution to improper labor pricing you have to understand what has happened to your company over the past years. When the new company began, it had very little overhead cost. It charged what everyone else charged and the profit margin was pretty good. As the years passed however, overhead increased. Since the company became a “real” business the paperwork monster raised its ugly head. That required office supplies, printing, computers, part time or full time office help and lots of other unforeseen costs. All of a sudden the home office is too small. The company needs more office, storage and warehouse space not to mention added utilities, insurance and maintenance costs. In the midst of all those changes the company is growing! You need more techs, more trucks (and truck payments), gasoline, employee benefits, and still more insurance. To maintain growth, the company owner has to start marketing, which costs money, and before long it’s too much for the owner to handle. He or she can no longer work in the field and run the company. The owner then moves from the field into the office and guess what, the owner’s salary just became another huge increase in overhead costs.

What happened? The company’s cost of doing business has dramatically (but gradually) increased. What has happened to the hourly rate over the same period of time? Has it gone up enough to cover the additional costs while maintaining the desired profit margin? The answer is most cases is a resounding NO! Worst of all, the average owner doesn’t know how much they need to charge to cover their “real” costs of doing business while still generating a reasonable profit.

Proper hourly rates are the basic building block for profitable growth. If your hourly rate is wrong….nothing else really matters!

Calculating Your Hourly Rate

The process of calculating your hourly rate is really not all that complicated. Keep in mind, however, hourly rates need to be set based on cash flow (dollars in and dollars out) not accounting numbers. There are two big differences in cash flow and accounting. The first is deprecation vs. equipment replacement costs. Deprecation is an accounting term that deals with what you paid for the equipment years ago. Equipment Replacement Cost deals with what it is going to cost you to replace the equipment years in the future…..and then builds that cost into today’s pricing. The net result is that you will be able to pay cash for equipment when it is time to replace it. You might say this is the first “system” the company is putting into place for future profitability.

The second difference is how loan payments are handled. Let’s assume the company has a $500 a month loan payment. One hundred of the payment is interest and four hundred is principle. Guess what shows up in the accounting P/L statement? Only the $100 in interest shows up, the other $400 goes off to never-never land. However, from a cash flow perspective, the company wrote a check for $500 ALL of which needs to be built into the company's hourly rate.

The simplified five steps of setting proper hourly rates are as follows:

Step One: Determine your real costs of doing business, from a cash flow perspective
Step Two: Determine how much gross profit you make by selling materials, equipment and spare parts
Step Three: Calculate your billable hours. Billable hours are the hours you can actually bill the customer.
Step Four: Calculate your breakeven rate. Subtract the gross profit you made by selling materials, equipment and supplies from the total overhead cost. Next take the remaining overhead and divide it by your billable hours. The end result is your breakeven rate.
Step Five: Build profit into your breakeven rate by dividing the breakeven rate by .85 if you want a 15 percent profit or .9 if you want a 10 percent profit.

Now that was quick and dirty but it covers the basics. For an example of a Sample Company with ten worksheets, click Sample Worksheet. The worksheets walk you through the process of setting proper hourly rates. Keep in mind you need to fill in the worksheets, by department, in order to come up with proper hourly rates for each area of your own company.

Congratulations, you have just created the first system within your company. You now have a simple system to set proper hourly rates that will lead your company on a path of continued profitable growth. If you are serious about setting proper hourly rates you might want to contact Grandy & Associates and/or HVACRedu.net.

Without sales a terrible thing happens; nothing. In our corner of the shelter industry the role of ‘salesperson’ is played by craftsmen, technicians, diagnosticians or others calling themselves designers, estimators or consultants. Very few want to be called salesperson and fewer willingly expose themselves to sales training. The result may be that the public is able to buy our products and services at bargain basement prices, often below cost. This purchase is made from a pool of contractors that appears to be constantly drained by those closing up shop and constantly refilled by those just starting up.

The aversion to the label salesperson is not unique to contractors, but in reality everyone practices sales techniques in some way. The employee who marches into the boss’s office bent on a raise must sell the boss on his or her capabilities. Couples deliberate about where to spend those precious ten days vacation until one persuades the other that the Adirondacks would be better than Orlando in June. The child following mom through the cashier’s lane in the market clutching a candy bar knows enough to ask for the order several times before overcoming objections and closing the deal. The point is that all of us are salespeople, but not many people want to be known as salespeople. For that reason I prefer to call myself a decision engineer.

My role as a decision engineer is to create a project that can be delivered in a satisfactory manner for all parties, while creating a customer for life who will refer other clients my way. Promising more than is delivered is sure to create the unsatisfied customer, while the opposite can earn the right to a customer’s business for life. How the homeowner views the outcome of a remodeling job or new home construction often depends on the selling process. The decision engineer who does the best job of educating the prospect about everything they need to know to make the right choice of contractors has the best chance of converting the prospect to a client, on his or her price and terms. Now these better educated clients have a benchmark by which they can measure their experiences during the process. This allows them to feel good about their purchasing decisions. While people don’t like to be sold anything, they do enjoy making wise buying decisions aided by a problem-solving consultant. They want to enjoy a friendly relationship with the contractor they choose to buy from.

The seams of the shelter industry are bursting with talented poor people who are truly gifted at what they do. One skill often separates these artists from fortune. Selling is as much a skill as singing, writing, or painting. We can learn to sell by observing, listening, reading and practicing. As with most skills, attention to detail allows people to advance. You could argue with reason that understanding how to sell insulation or HVAC upgrades is as important as knowing how to install them.

Screen Your Leads

A salesperson should spend their most time working on sales with the easiest-to-close, most promising leads. When the prospect calls your office, ask screening questions which will help you determine:

• the need which drives the prospect
• the ability to pay for the purchase in mind
• and if they come to you with some level trust

When there is need, ability, and trust, the more likely a signature will seemingly drop from the ceiling onto your contract. Screening leads for these qualities is the first part of a sales system—a process that will guide you most efficiently to your objective: the sale. Only after you have screened the leads do you proceed to setting the appointment, enhancing trust, educating the prospect, defining and refining the way to meet the prospect’s needs, and finally presenting the proposal in exchange for a signature and a check.

The following are sample questions to help you determine need, ability and trust:

• How long have you been considering this project?
• How long do you see yourself living in this house?
• How soon would you like to start work?
• What research have you done?(other vendors/ media/ manufacturers/ internet)
• Have you done any remodeling in the past?
• Review a list of common home performance problems the house may have (i.e. high energy bills in summer or winter, hot or cold rooms, drafts, frequent dust, mold or mildew, respiratory problems, high humidity).
• Do you plan to pay up front, or would you like to learn about financing options?
• How did you hear about us?/You were referred by?

This is a great starting point for starting down the road to understanding who will buy from you. Create a lead capture form to ask the same questions of everyone who calls your office. You likely will begin to see a distinct pattern that will help you distinguish real prospective buyers from ‘tire kickers’ who will suck all of your time and energy away.

The industry offers more opportunity than can be imagined, but likely only those who realize that sales is the engine that pulls the train will get their share. The good news is that this may be the best-kept secret around.

Have you got what it takes to figure this stumper out? Below is a puzzler, a test of your home performance wits and know how. Figure out what is going wrong with this house, write it up along with your prescribed solution, and send it to us at lmcdowell@bpi.org. If you’re the first person to get the right answer, we’ll feature you, your company and your answer in the next issue of Performance Matters!

The Problem:

The customer from Westchester County, NY called to complain that his house would not maintain temperature in the winter. This despite the fact that he had had a heating contractor look at the furnace multiple times over the past few years and had a second furnace installed in his 1968 3,000 SF Brady Bunch-style home to take the chill off. The main furnace was big - a 1978 monster with 155,000 BTU output. The second one was induced draft and a 70,000 BTU output.

When we arrived, we saw a peculiar home-made sign hung on the upper front panel of the big furnace– the panel intended to cover the burner area, that was detached and leaning forlorn against the furnace. It said, “Do not install on furnace.” The homeowner –we’ll call him Chuck– explained that every time the contractor came to look at the furnace, afterward Chuck would find the front panel left off and so would put it back on again. He said the last time the contractor came he told Chuck to leave the panel off permanently. We put it on anyway. When we did our CAZ test, the big furnace fired up nicely. Soon after the blower kicked on (within five seconds) the flames went out. After a minute or so the flames would come back on, the blower would start and the flames would extinguish again. So we removed the upper furnace panel and the furnace cycled without any issue. But when we reinstalled the front panel while the furnace was operating and blower running, sure enough, the flames snuffed out. The furnace continued to cycle like this repeatedly while the upper panel was on.

Additional facts: During the CAZ test, neither the smaller furnace nor hot water heater were affected by the blower operation of the larger furnace. Also, all the return duct work was properly connected, and the air filters were in good shape.

Think you know the answer to the problem? Send it to us at lmcdowell@bpi.org.

You know those jobs – the house that isn’t so much a house as a wind tunnel, with 19,000 CFM 50; or that house with the stream running through the basement floor and mushrooms growing in the crawl space; or maybe it’s the one with the water heater completely disconnected to any vent; or the one with a mama raccoon nesting in warm, gaping open duct work.

Tell us the scary before and the happy after, i.e, what home performance challenges your company faced, and what you did to fix the problem(s), helping your customer breathe easier, live more comfortably, and save money on their utility bills -- perhaps even save their lives!

The company with the most intriguing, complex or just plain awful stories --combined with their heroic solutions—will be featured in the following month’s column. We love pictures – if you have ‘em (and have permission to use them) we’ll take ‘em. We look forward to your horror stories! Send stories to lmcdowell@bpi.org.