Contractors Get Hung Up on Rising Gas Prices
March 28, 2011
Gas prices across the nation have been on a steep upward trend, and the end of price hikes is not yet in sight. From mid-February to the first week in March, national average gas prices rose $0.33. By the middle of March, AAA reported that the national average price for a gallon of regular gas was approximately $3.553 and diesel was $3.93. At the beginning of February, the national average price for a gallon of regular gas was $3.122 and diesel was $3.516. Last year’s national average prices in March were $2.747 for regular gas and $3.48 for diesel.
Arguments are being made as to what is causing the increases, but many of the reports point to the unrest in the Middle East and North Africa that began in Tunisia and spread through Egypt and Libya, among other countries. According to the U.S. Energy Information Administration (EIA), oil and gas production in Libya has dropped 60 to 90 percent. Although Libya only provides 2 percent of the global supply, the EIA reports that, “the market impact of such a supply disruption can go beyond volumetric loss.”
Despite the political and economic reasons for the price increases, HVACR contractors find themselves dealing with a familiar problem a bit earlier than normal. Fuel prices often increase during summer, but earlier gas hikes have left contractors and the nation questioning where the price ceiling is, and what effects these increases will have on daily business and the economic recovery.
CALCULATING COSTThe cost of gas is more than just the number on the pump. Each gallon has the ability to dictate the business practices and behaviors of those filling up. For many HVACR contractors, the biggest concern about gas prices is their bottom line. Simple business math dictates that increased overhead equals a decreased net profit. To compensate, a price increase to the consumer can be considered and, according to some contractors, it should be considered.
The decision to implement a price increase, however, isn’t as simple as tacking on a few extra dollars to each call. The way a price increase is implemented can have a profound effect on the customer’s perception of a contractor. Some contractors add a fuel surcharge to the bottom of the bill, but many tack it into their diagnostic fee, labor, or truck charge cost.
What concerns Karl Roth, CEO of AN Roth Co., about these fuel surcharges is how they will affect his market share and competitive edge.
“I would like to say that we will raise prices,” he said. “But at present, given the business climate and the extreme competitiveness, I am not sure.”
He’s not the only one.
“We had a lot of push back when we tried fuel surcharges,” said John Sedine, president of Engineered Heating and Cooling. “We eat the short-term increases and if it looks like they are here to stay, we adjust our service pricing.”
In most cases, choosing if and when to increase prices is a contractor’s prerogative. Where some HVACR contractors run into trouble is larger, long-term projects that have already been estimated and contracted for a specific price. According to Eric Knaak, vice president of service, Isaac Heating and Air Conditioning, the inability to react to how the increase affects parts or materials for these larger projects could possibly be detrimental to that project’s bottom line.
The cost of gas affects consumers’ bottom lines as well, and this can affect the way they approach replacements, repairs, and overall spending.
“We will adapt to the costs as we need to,” said Paul Wadsworth, owner of P.K. Wadsworth Heating and Cooling Inc. “I am afraid, however, of the impact on the psyche of the buying public and the economic recovery.”
FUEL-SAVING STRATEGIESIncreasing prices to the consumer is not the only strategy that HVACR contractors are employing to mitigate rising fuel prices. Another prime strategy being implemented is saving fuel. There are many ways to accomplish this.
Wadsworth has converted much of his fleet from traditional pick-up trucks to, “better gas mileage Ford Escapes.”
Corey Hickman, president of Comfort Matters Heating and Cooling Inc., has begun using more couriers to transport materials instead of having his trucks deliver.
Mark Meacham, president of Mark E. Meacham Inc., is replacing his high-mileage fleet with smaller, more economical vehicles for the sales and maintenance/service vehicles.
Many contractors are keeping a close eye on dispatching procedures and improving dispatch efficiency. Some have purchased routing software and GPS, and they are enforcing personal usage of the vehicle restrictions.
“The first thing we did was remind the technicians that idling a van is costly and second, that wasted trips equals wasted gas. We use GPS to track the trucks, allowing us to gently reinforce our concerns with our technicians,” said Ken Bodwell, business development, Innovative Service Solutions. “We’ve also shared with our dispatcher our concerns about running a guy all over our geographic area just to be responsive to our clients. If an emergency is not deemed critical and can wait an extra hour: do it. Ask the client up front.”
George “Butch” Welsch, president of Welsch Heating and Cooling Co., has had to limit the benefit of taking home his trucks that are provided for his technicians. “For the first time in our history, we are charging guys that take their trucks home a weekly fee if they live more than 35 miles from our shop,” he explained. “In the next month, that will probably be dropped to 25 miles.”
GAS PRICE FUTURESThe NEWS asked contractors where they thought the price increases would end and multiple respondents told us it is crazy to try and predict where this will stop. Despite initial reservations, they ventured a guess and the consensus was somewhere between $4.50 and $5. Multiple news agencies are predicting $4 but they are also leaving a lot of room for increase if the Middle East and North Africa continue to further destabilize.
Ratib Baker, CMS, summed it up well when he said, “If it gets to $5 there will likely be a large drop in usage which will help drive the prices back down. The problem will be if the economy further retracts as people quit having the money or gas to spend on leisure activities. The good news is that they will likely spend more time at home and need AC repairs.”