Are HVAC Contractors Using a Business Model That Leads to Ripoffs?

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Last month, the Today Show ran a little sting to see if HVAC contractors would do the right thing when brought to a home to diagnose an air conditioner problem that they'd set up. As it turned out, 6 out of 6 contractors presented bills that were too high, adding in charges for parts that didn't need replacing and in one case, even trying to charge to replace a part that that air conditioner didn't have.

Bobby Ring of the Air Conditioning Contractors of America (ACCA) helped the Today Show crew when they set up the house and made sure the air conditioner was in good shape before they disconnected a wire. He wrote a behind-the-scenes article about his experience afterwards, and one line stood out: "I’m not sure how the producers found the contractors, but the problem we have as an industry is that it’s too easy for the Today show – or any homeowner – to find the wrong contractor."

When I posted links to the story and ACCA's response on our Facebook page, Phil Mutz of Moncrief Heating and Air Conditioning here in Atlanta posted a long comment, claiming that a large part of the HVAC industry uses a business model that leads to problems like this. According to Phil, the problem is the "'Flat Rate' business model—promising owners incredible profit margins, reduced costs, simplified accounting, etc."

Here's the rest of what he said:

In the case of that NBC sting, I am willing to bet that every single one of those guys are possibly sub-contractors and certainly paid commission and little/no base wage. Essentially, they starve if they don't sell parts. Back at the shop there is a leader board with all techs ranked by average ticket sale, weekly/monthly/annual revenue. They have weekly tech meetings and discuss sales, sales, sales. Little to no technical training (unless it can help them sell). When fall/winter layoffs roll around, guess who's getting fired? I realize this doesn't change right/wrong, but understand these guys are put in a position where they are essentially justifying their actions. "This terminal looks a little rusty... better replace it before it breaks and I get a call-back charged against me." And nearly ever company is doing this. The honest guy can't support his family, essentially.

These aren't problems with individuals, it's an industry problem. Us good guys out here are being dragged down by it.

The hardest thing to track asAre HVAC contractors charging customers too much by using the flat-rate business model? an owner is time/labor for a bunch of technicians out in the field. Flat rate pricing removes this concern by attaching fixed time allotments to each repair/service. Tying technician pay to the repair instantly creates a conflict of interest. Of course the boss is saying "Don't rip anyone off now!" But how concerned do you think he is when money is flowing in hand over fist? As we all know, bosses tend to leave you alone when you're making them a lot of money. However... when they are not making money, you'll know. These techs are the same.

I think few people would argue that the HVAC industry is fine as it is. I've written numerous times here about my frustrations in working with HVAC contractors as a quality assurance provider in the ENERGY STAR new homes program (mainly on the issue of getting good HVAC design documentation from them). I've also written many articles about problems I've found in the field.

What do you think? Is a large part of the HVAC industry using a business model that results in unwary customers being ripped off? Should HVAC contractors pay their employees hourly so they don't have an incentive add in unnecessary charges?

 

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Comments

Charles Hendricks

I wish the Today Show would have scheduled a few more firms, perhaps gone to an architect or contractor and asked who does it right. I don't disagree that it is very hard to find an HVAC contractor(architect, contractor, plumber, electrician, carpenter) that does a good job, for a fair price, and cares about their reputation, however, it seems this project was set up to make ALL HVAC contractors look guilty. There are some good ones if you know where to look. 
 
As for the training and knowledge base - I find myself wondering everyday why there are not more HVAC contractors interested in building science. I get so frustrated when a design submitted that is clearly oversized, the duct work layout makes no sense, and the specifications have not been followed. How do we get the industry on board with building science is my question?

Lance

I don't think there is any doubt that when you create a "mis-aligned" incentive program there will be abuses. We only pay our service techs hourly and salary for service work and we do not incentivize them at all to sell based on average ticket. But, we also use our service work to identify other issues in the home- poor insulation, air-infiltration, ductwork repairs and other actual energy saving measures, so we have a natural opportunity to offer more which helps offset some of the loss we incur vs. others in our space. By no means is this perfect but by removing the "mis-aligned" incentive to rip people off we would hope that our tickets reflect the actual work that was required each and every time.

M. Johnson

Another question to ask is, why does the HVAC system require the maintenance it does? Homeowners think of this as an appliance, and an appliance does not normally require regular service calls, does not draw attention to itself until it finally breaks. With an appliance quality control is established at the factory, with today's HVAC every job is a custom thing. If you disagree, think about duct design, choosing the right air flow, static pressure, etc. Today's HVAC is really a mini- engineering job with every install. Homeowners do not feel like paying for consulting work, as a result they are always asking for the lowball quote. 
 
Mini-splits are a lot closer to an appliance than central HVAC. As a matter of fact, window AC's were and are good appliances. 
 
Just one line of reasoning you might think about. I have a lot better satisfaction when I think of the HVAC guy as a consultant, but few people do.

Pj

Alison, 
 
I would add this. 95% of Ac companies are small one man shops with little business savoy.  
 
A quick visit to any of them will confirm these guys are not getting rich but rather competing on price in a commodity business. Hundreds of companies, big box guys, Internet customers, DIY''s, slow economy, housing starts down, all work to compress prices.  
 
Acca is about 4-5% of contractors.  
 
Let's Bet.  
 
10 Acca contractors vs 10 small non Acca contractors visit same house.  
 
$100.00 says little guys are $150 less money on average.  
 
I do agree our biz model is broken.  
 
Great article  
 
Pj

Allison Bailes

Charles H.: I think you're probably right that the Today Show crew was looking to make it look bad. And I know there are good HVAC contractors our there. We work with some of them (like Moncrief and Vis Viva Energy here in Atlanta). Bobby Ring nailed it when he said that it's too easy to find the bad ones, though, and I think that's the lesson to take from the sting. 
 
Lance: You guys are one of the companies that does it right. 
 
M. Johnson: I think you answered your own question about appliances. Yes, HVAC systems are appliances, but much more complex and, as you point out, custom-engineered for each home. 
 
Pj: Yep, it's a race to the bottom, and nobody wins that one. I'm not going to bet against you because I know you're right on that one. 
 

Pj

Alison, 
 
One more fun fact: 
 
An Ac unit that is not serviced is less Likly to need a warranty part than one that is regularly serviced.  
 
What does that tell ya 
 
P

Jamie Clark

20 years ago I worked at a company that did duct cleaning. When we first got into it we paid the guys by the hour and an average minimum charge house would take 6-8 hours. The company switched the techs to commission only and that same house average time dropped to 2 hours. Now I'm sure they were milking it by the hour but I'm also sure that quality went to hell when they switched to commission. 
 
An even greater problem is letting service tech sell system. We have a company here in Lexington that the service techs are their sales people and I cant tell you the horror stories of heard, one guy needed a new system because his " voltage regulator" was shot ( that's a light switch to you and I). I've even heard that one of his techs brags that he does not even carry tools into the house any more! 
The HVAC industry needs to move to a licensing model that's based more on continuing Ed and less on apprentiship and sales people should have to have a license to design systems and not just change parts.

M.Johnson

More about the HVAC as appliance: It does not have to be this way. The equipment can be engineered to be simpler, less trouble-prone, and lasting longer between necessary service visits. 
 
How many HVAC technicians cannot even measure static pressure? I have met several. Instead they deal in generalities: "that duct system is adequate for another 400 CFM", "never use 3M filters", and "latent capacity is 30% of total". These often fail to work. 
 
You can make appliances better. In the 1960's English motorcycles needed very frequent service, tended to leak oil, etc. Japanese brands addressed these problems, innovated brake/clutch cables with low-friction liners, etc. and overwhelmed the old way of business even with some chronic shortcomings. 
 
I mentioned the window AC as an example of the past, the mini-split as an example of the future. I can think of several ways to make the central HVAC less fragile, very analogous to the way Japanese motorcycles innovated out the more conspicuous failings of the British model. 
 
At the very least, if you acknowledge the central HVAC is somewhat of an engineering design for every house, you need to troubleshoot it with a person who is relatively good with numbers. I think one big shortfall of the industry is it attracts technicians who are uncomfortable with the need to measure things, use lookup tables and do a certain amount of math. The people are not as well suited to the job as they might be.

chris in chicago

Great topic. Here in Chicago the service techs are mostly paid hourly but also get a commission on anything they sell. They love to sell homeowners new equipment wether they need it or not, because they make a ton of money.  
 
Basically the homeowner has to trust the service guy because they know nothing about there furnace or ac, just like the auto repair shop.  
 
I live telling people a good service guy should be able to keep your equipment running indefinately.

Adam Gloss

There are a lot of HVAC contractors who do things right: Who provide technical training to their staff, pay for testing and certification, provide the right tools and maintain them, hire people with integrity, good communication skills, clean background checks, drug screens, etc. Companies that have all required licenses, insurance and bonding, who permit their work, etc. But all of this costs money, and consumers vote about whether they care about this with their wallets. Right or wrong, some do and some just don't.  
 
As a result, there will always be bottom-feeders in every industry (including HVAC) who bait-and-switch, offering cut-rate prices up-front, and then cheat the customer out of money they didn't deserve, making unnecessary repairs, or using sub-standard parts/techniques. They exist in the auto repair industry, the contracting trades, retail stores, and even in that most trusted profession - Medicine!  
 
In every consumer decision, but especially with something as complex as a mechanical SYSTEM, "buyer beware" should be the watchword. ACCA did some follow-up research and found that every contractor they could identify from the NBC report had an "F" rating with the BBB. Do you think NBC didn't know this going in? And how hard is it really for consumers to check with the BBB, their State licensing offices, and sites like Angie's List before they choose a contractor? Would they walk into a doctor's office based on an ad in the Yellow Pages?  
 
M. Johnson hit the nail on the head when he stated that many consumers think of their HVAC SYSTEM as an APPLIANCE. As long as they have this misconception, and see their HVAC service provider as a commodity, rather than as an adviser or consultant, this problem will persist.  
 
We work hard to educate consumers about what to look for in a contractor. We provide hand-outs, we blog about it (in fact - I just published this one yesterday http://www.belred.com/blog/entry/2012/08/07/illegal-contractors-tips-to-...), we put a lot of information on our website and Facebook page, etc.  
 
There are a lot of other excellent HVAC companies working to correct this problem. Many, like us, belong to ACCA and more and more of them are becoming leaders in building performance. As an advisory board member for ACCA's Building Performance Council I have the honor and pleasure of working with many of them, companies like TAG Mechanical, CroppMetcalfe, Environmental Systems Associates, Minnick's, Tempo Mechanical. Estes Heating & Air Conditioning, Frederick Air, Halco Plumbing & Heating, AirRite, and Entek. ACCA is providing more leadership in this area, and companies like Comfort Institute and Green Homes America are helping many HVAC contractors enter this industry with the skills and tools they need to really help consumers.  
 
Finally, to address the issue raised about flat-rate pricing - we use it and our techs and customers generally prefer it. They appreciate knowing the cost of a repair up-front, regardless of how much time it takes us to complete. Our techs are compensated well for this work, sharing the revenue, but we are very careful to hire people with integrity, and to "trust but verify". We review EVERY invoice, we survey customers, we spot-check work in the field, and on rare occasions when we catch someone cheating, we fire them and make it right for the customer. The problem is not the system (cheating happens with time and materials pricing too), it is abuse of the system.  
 
A bad contractor is a bad contractor, no matter how they structure their business. And a good contractor will make every effort to do right by their customer - not matter how much, or how little, they are making on the job. The trick is to know the difference and to not let a few rotten apples (or a sensationalistic news story) spoil the bunch.

Allison Bailes

Jamie: Good points! 
 
Chris in Chicago: Well, maybe a good tech can keep a system running for a long time, but that doesn't mean that older systems shouldn't be replaced. Changing out a 20 year-old AC that was originally rated at 7 SEER with a new 13 SEER system has a pretty good payback. 
 
Adam G.: I don't think Phil was saying that no company can make the flat-rate model work but that it leads to enough problems that it's hard to trust any company that uses it. Even with totally honest, above-board people, techs will be more likely to use the better-safe-than-sorry approach, especially if they know that the ones who don't bring in as much money are more likely to be laid off when work slows down. 
 
I'd be interested in seeing a similar sting set up where they choose equal numbers of companies using flat-rate and hourly models AND choose companies that have better ratings. 

Adam Gloss

Allison - I don't want to belabor the point, but the issue is not the billing model, it is about integrity. A tech working for hourly wages and billing on time and materials can milk the job to work more hours (costing the company AND the customer) or can recommend unnecessary repairs to extend time on the job just as easily as a tech on flat rate can cheat the customer. A cheater will always find a way to game the system in their favor. The bottom line is to do your research BEFORE you need a contractor, and to choose one you can trust - there are plenty of us out there.

Dave Eakin

I was under the impression that businesses joined the BBB via subscription? If so, where is the unbiased recommendation? Angie's List is a little more democratic, but individuals still need to subscribe to it in order to post comments. Professional certifications ensure integrity? Nope. Professional organization membership? Nope - at least not until there is a singular body that also has disciplinary powers (similar to AMA). Talk to an architect or builder? Probably more apt to get the names of firms that they have awarded contracts to (i.e., low bidder) since the architect/builder are usually not involved in post-build issues. 
 
 
 
Allison - maybe Energy Vanguard (or Green Building Advisor) establish an independent recommended HVAC list (maybe searchable by proximity to ZIP code) so anyone can view?

moedad71

My experience w/HVAC biz is justa 'bout like all areas where the consumer is , at best little informed, and at worst, totally ignorant. Kinda like great whites sense'n weakness/vulnerability...they swiftly, home in. But I might add though, ALL sharks are ultimate predators whereas all biz are not, and what I mean is that I do know of one (1) HVAC biz here in Newburgh, In, who is up-front w/me. The fault really is the BIG manufacturers, i,e, the obsolescence paradigm equates w/their bottom $$$ line.

David Butler

Great article Allison. Nothing to add.

John Barba

Can o' worms opened up here. I don't have a problem with flat-rate pricing, or time-and-materials pricing, for that matter. It's like any kind of tool. A hammer in the right hands is an instrument of construction. In the wrong hands it's an instrument of destruction...all depends on who's holding the hammer.  
 
It's a shame stories like this tend to paint with a Wagner Power Sprayer as opposed to simply a "broad brush," but it's good that an ACCA representative was part of the story. One hopes that the outcome of the story is that people pay a little more attention to whom they hire. 
 
I tell my contractor-students all the time that the average homeowner assumes competence when they hire someone. After all, if you have a shingle over your door that says HVAC Service Contractor, it's reasonable to assume that contractor would have a minimum level of competence and integrity (we are a trusting people!). You don't find out otherwise until it's too late.  
 
Bottom line - buyer beware is a good mantra. It's important for customers to do their homework, don't assume all service providers are the same and don't treat your home comfort system as a commodity. Ductwork, pipe, furnaces, A/C's and boilers MAY (MAY!!!) be commodities, but the people that put them in and service them most certainly aren't.

geoff hartman

I agree that the billing model is not the problem, and I see/hear a lot of "buyer beware," do your research, etc. but no real answers. My last several moves included personal research soon after moving to a new city to try locating a few good resources. Generally car repair, and basic oil change is not too hard. Pool service? A little harder. A/C service? Almost impossible. First there is service/response. 6-8 out of 10 never even respond. Once I get 6-8 appts, I see at least 50% no show. THen thoise that do seldom can diagnose a system or determine what is wrong (if anything) but they can get the sales guy out (for free) to quote a replacement. Oh, and the higher efficiency/quality system is always "too expensive," "not needed," and "will never pay for itself." 
 
So what do I recommend? 1) Referrals! but my neighbor may not be a good technical resource, so 2)request up front that only the top technician be sent, and wait for them to be available, 3) personal interview where you describe symptoms, ask specific questions about what they intend to investigate - and why, and 4) require the technician be able to perform air flow &/or static pressure measurement, capacity check on equipment, air leakage test. Expect to pay for this service. Maybe $150 ?, but not $700 or $800!, 5) never accept the lowest price, and Finally - Tell everyone when you find a good resource, and offer yourself as a strong reference. Here is the last quirk. The A/C companies have NEVER accepted a positive reference or used the offer to request additional leads. Wonder why they waste so much time soliciting new customers when their existing and lead referrals could be keeping trucks running to pre-sold referral work? 
 
Lastly - ACCA's new credentialing program may go a long way to help identify quality contractors. It certainly will identify better qualified, and hopfuly that leads to better service.

Jonathan Merrill

It also doesn't help that firms like American Home Shield perpetuate A/C "maintenance". They won't cover a claim if the A/C isn't serviced every 6 months! Which definitely opens the door to abuse. 
 
Please keep blogging about this and other energy topics! This is one of my favorite blogs to read. 
 
JMM

Christopher Cadwell

Interesting comments. 
 
Nothing new. Since I got started in HVAC I have observed these issues.  
 
I have top ratings on Angies list because I am honest, and I will turn down a compressor replacement, if all it takes is tightening a wire lug to keep the breaker from tripping. 
 
The latest economy is spurring a new trend in consumers to look up and follow the latest reviews. This newbuying habit will likely usher in quality and honesty as something to be heavily rewarded for.

Ed Voytovich

The same scenario can and often does exist in any economic transaction: there is a natural tension between the service or commodity provider and the recipient of the service or commodity.  
 
The tension arises from the imperative to make a profit on the one hand and the need for a product or service on the other.  
 
Unfortunately, it is the rare contractor whose constant objective is to deliver at a fair price what the customer/client/patient really needs as opposed to what will yield the most profit for the payee.  
 
There is no good reason to single out the HVAC industry over any other as being particularly likely to rip customers off.  
 

David Butler

Ed wrote: 
> There is no good reason to single out the HVAC industry over any other as being particularly likely to rip customers off.  
 
How true. But shows like the Rossen Reports seem to be "equal opportunity" when it comes to choosing who to go after.

James Morgan

Interesting thread. Just wanted to comment on Dave Eakins remark about BBB: a business will have a rating whether it's a subscriber or not and that rating is based entirely on consumer complaints to the Bureau, or the lack of them. A few years ago there was a complaint against the Bureau that the highest rating - AAA - was reserved for subscribers, and this issue has been resolved, any business, subscriber or not, is eligible for a top rating if their record justifies it. But a BBB subscription has never protected you from an F rating. That said, I wouldn't go to BBB ratings to gauge technical competence but rather to see how long a company has been in business and if there are any black marks on their customer dealings. And of course, just as with Angie's List, customers don't always know if they've been ripped off.

Carlos

I have a question as well as a statement to make. I myself am a contractor. I have to be honest. I realize that it is, perhaps, something that I should really work on improving, but the one problem that I seem to have run into working for other companies is my pace. First of all, I don't have the 15+ years of experience that my most recent and former boss had, therefore it's logical that I'm not going to move at the same pace as he does. But I can definitely do the job. Furthermore, as a Christian, it goes against my principles and against my conscience to charge someone for something that isn't broken. I have fixed my own fridge and boiler, as well as having done side jobs. Up until now, I have not had any complaints. It doesn't make things easier on me when there are people who, like my former boss, at times put me in a compromising position because of what has been described up top. At times, it seemed he was more concerned about getting paid than it was for me to do an honest days work, even if it meant not earning as much as he'd have liked to. I've been told that with time comes experience, and with experience (repetition) comes an increase in speed. I'm currently thinking, actually working to start my own business because of this problem. Does anyone have any comments, any advice, tips, hints, for me? I would greatly appreciate the feedback. 
 
Thank you, 
 
Carlos

Carlos

Oh, and I forgot to mention. I personally don't agree that the problem is a broken business plan (flat rate pricing). After all, the pricing method is not at fault for the dishonesty of people. It's a choice that each contractor makes. You're either true to your principles (if you even have any), to God, to yourself, and to others, or you're not. It's that simple. It's not the business plan that is broken, it's the people. To talk about the industry as whole, just because you're angry at certain people within the industry is definitely not the right way to go about it. Now you're including all the honest contractors out there, even if they are few in number, and giving them a bad name on the account of the dishonest ones.