Home Performance for the Large Contractor

April 16, 2006
Home Performance Special Issue 2006
This article originally appeared in the Home Performance Special Issue 2006 issue of Home Energy Magazine.
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        For most of our 39 years, our company,Tempo Mechanical, has been primarily an HVAC contractor specializing in single-family homes.We are a relatively large new-construction contractor; we will install air conditioning systems in about 4,500 new homes this year.Our service business handles the start-up and warranty from the construction business and also includes a relatively substantial revenue service business.This year we will answer about 25,000 service calls of all types.To do this much work in homes,we have to know a lot about how homes perform, and we also know a good business opportunity when we see one. In the spring of 2005, after two years of consideration,we finally got serious about offering home performance. It made a lot of strategic sense for us to pursue this type of business, and we are glad we did. In six months,we have generated revenue in excess of $180,000 from this division of our company.We believe that we are only scratching the surface of this business opportunity.
        In our opinion, home performance contracting is very similar to high-level HVAC service contracting. For all practical purposes, they focus on the same business and building envelope issues. Each one sees the home’s envelope as a key determinant of how to proceed, and—at least in Texas—much of the home performance and energy improvement opportunity ties right back to improvements in the HVAC system––both in the equipment and in the ductwork.
        Several years ago,we created a separate corporation,TexEnergy Solutions, to perform energy code inspections and Energy Star ratings, inspections, and field testing for new home builders. This business has given us an invaluable opportunity to train our staff and to incorporate the most applicable building science research and the best building practices into our business operations. In the last four years we have certified more than 17,000 new homes as meeting Energy Star new home standards.
        Like all other firms in the production home market,TexEnergy operates as a high-volume/low-margin business.The returns are similar to the returns we experience in high-volume HVAC contracting. The benefits that accrue from doing the energy-related work are the staff training, the culture change within our company, and the opportunity to offer more value to the home builder.We are better prepared to face the changing energy environment, and we are better able to advise our builder customers on how they can best navigate the constantly changing energy performance landscape.
         Our positive experience with our TexEnergy division led us to consider moving more fully into home performance contracting. While we have not yet resolved all the business development issues,we have made significant progress on a large set of business model questions.The answers are helping us to build a business model that provides real value for our homeowner customers while adding opportunity for employee development, off-peak business generation, competitive differentiation, and revenue growth.At the same time,we are making energy performance a cultural element of our entire company. Every action we take is being viewed through the lens of its energy and environmental impacts. This does not mean that we are changing everything we do. Rather, we are trying to change the way we think.We anticipate that this change in our thinking will affect what we do.The changes will be incremental. But as we grow in knowledge and confidence, the small, incremental changes will accumulate and cause a geometric level of change in our business operations.
        We struggled to decide what business unit and brand identity we would use in our home performance business.Would it be TexEnergy or Tempo? At one time, we thought it might be both, and that the two brands might even compete in the marketplace for business. Eventually,we decided to offer home performance services through TexEnergy, because Tex- Energy would be the best brand to target our potential home performance customers.These likely high-end home performance customers would live in a home that is more than 15 years old and is worth more than $125,000.They have a utility bill, comfort, or air quality problem large enough that they are willing to seek assistance, and they have the financial means to solve the problem. Unlikely home performance customers are those who live in newly constructed homes, since new homes in our market are very tight, highly energy efficient, and generally well designed.
        In Texas, the land of new construction, an ancient home is one that was built in the 1920s or 1930s, and there are few of them still standing. In this territory, the vast majority of all homes have been built since 1955, and really old homes begin at 40 years of age. Because of the housing stock’s age and the construction practices when built, the big opportunities for energy improvement come mostly from insulation, HVAC equipment and duct leakage, window replacement, and some infiltration.And we don’t do windows— which leaves us with fewer homes that offer big opportunities. But window replacement is not a field where we have particular expertise to share with homeowners, and we don’t believe that learning about this field would be the best use of our time. Instead, our strategy is to find and develop partners that can help us with what we don’t do well, and our goal is to help them in the areas where our superior knowledge and expertise might support their business efforts.At present, we have developed solid relationships with five other contractors who specialize in the areas where we lack expertise or purchasing leverage, or that require big capital investments. We also stay away from business sectors where the local specialist is a recognized expert. In general, we try to share leads and sell each other’s work.Our goal is to buy wholesale-priced services from our installation partners and sell these services at retail prices to our customers.We provide our installation partners with a sold customer, a clear job scope of work, job scheduling and coordination, and no collection problem. In return for this value and the reduction in sales and overhead costs, they discount their price to TexEnergy, and we quote and sell the work at a small markup to cover the cost of selling, managing, and collecting for their work.
        Our potential customers are bombarded with many offers of energy savings— especially now, with energy costs rising as steeply as they are.Without careful positioning it is easy to get caught up in a race to promise more savings than the contractor can deliver. Most of these energy-saving claims have some documentary support, but homeowners can be, and often are, easily misled about the true savings potential of any one measure on any one home.As a result,we decided to develop a core offering that was based on a diagnostic analysis of the home—a home energy audit
         Our comprehensive energy audit costs the customer $500.Amazingly, $500 does not cover all of our costs, since the audit we perform is indeed comprehensive. Usually we will have two energy technicians in the home for three to four hours each. Our complete audit process includes Duct Blaster and blower door tests, checks for leaks with smoke pencils, and often we monitor the home for humidity, carbon dioxide,carbon monoxide, and airborne particles using an AirAdvice IAQ monitor. In addition,we will send an analyst who captures the air conditioning load,the HVAC layout, and the window schedule and floor plan.The analyst identifies comfort problems, probes for healthy home and indoor air quality issues, and then answers questions and summarizes data. Later we will create a load calculation for the HVAC system and provide a REM:Rate analysis to evaluate the baseline energy usage and develop cost/benefit scenarios for each improvement recommendation.It usually takes from three to five days from the first appointment to complete this analysis and prepare recommendations for the homeowner. We deliver a very sophisticated proposal with lots of general and specific information.The summary data are simple and clear—easily read and understood by any consumer. But the accompanying tables and graphs are sophisticated enough for the most knowledgeable engineer to ponder. Generally, we have a senior project manager make the recommendations to the homeowner, often in conjunction with the analyst or one of the technicians who performed the original audit. Finally, our base audit cost includes a performance test-out upon completion of the selected work to confirm that we delivered what we promised.
        We invest substantial time and expertise in each audit to know how best to help a particular home.There is very little about our audits that suggests a cookie cutter operation; it is all custom analysis. Because our audits are real, because they are extensive, and because a huge part of the process is credibility, the acceptance rate from our recommendation list—so far—is very high. The entire process is designed to help us understand the needs and issues in the home. People who pay $500 for an audit believe they have a problem.Their struggle is to find a company that has a solution to their particular problems—rather than a company that will try to fit a prepackaged solution to their problems.
        We have made significant strides in becoming a company that delivers tailored solutions and in developing home performance as a viable business. One strategic and very noticeable change is the training that has percolated throughout almost all levels of our company. For example, our controller, who is a CPA, is also certified as a home energy rater and an energy code inspector. Our warehouse manager holds both energy certifications as well.Throughout all our business units,we have 20 home energy raters and 13 certified code inspectors, and we are just getting started on education and training.
        It is an ongoing challenge to make this business valuable to homeowners, as well as to the employees of our company. But with the recent dramatic price increases in electricity and natural gas,we think the home performance market will continue to grow rapidly.
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