New residential construction contractors are undoubtedly already experiencing the severe downturn in the residential housing market. Here in St. Louis, new residential housing permits are down over 30 percent compared to 2005. The bad news is that we are finally seeing a decline in the new residential market. The good news is that for most of the country we have had an unprecedented run of 15 years without a severe downturn.

I know I’ve said it before, and for those of you who have already taken the advice, I know this is preaching to the choir. However, I also know there are a number of contractors out there who have specialized in the new residential market and are very apprehensive about 2007. Forecasts are that new home sales may not rebound until the third or fourth quarter. That won’t help HVAC contractors until 2008.

Remember the hundreds or maybe thousands of new installations you have made in the last several years? Many of these customers are waiting for you to contact them to sell them a maintenance agreement. The year 2007 should be the one when you convert your mostly new residential construction firm to a mix of new residential and service/replacement. You can do it! Prior to the last downturn in 1991, our company was 98 percent new residential construction and 2 percent service/replacement. In 2006, we will end up right around 50-50.

We did it by selling maintenance agreements. I’ll be happy to e-mail our agreement and sales brochure to you if you contact me at the e-mail address below my picture. You can begin by contacting some of your new construction installation customers and tell them you are now offering maintenance agreements. In choosing those to contact, I would recommend installations that are 3–5 years old and concentrate on those installations where the homeowners are likely to want to purchase your services.

For example, in our experience, homeowners in “starter” homes and lower-priced tract homes are probably not likely to purchase maintenance agreements. On the other hand, the mid- to upscale homeowner today is so busy that they are anxious to have you maintain their equipment for them.

Since you were the original installation contractor, they should at least be familiar with your name. A simple contact asking if their system is operating properly and advising them that you are now offering maintenance agreements should prove effective and get you started. Once performing the routine maintenance, you become “their contractor” and when a breakdown occurs, you will be the one they contact first. Prompt, efficient correction of their problem will make you the odds-on contractor to replace their equipment when it fails down the road. However, be patient as the process takes about five years to really reap rewards.

2007 is the perfect year to begin the process because you know you will have extra capability due to the downturn in the new residential market. After a few years wouldn’t it be nice to not always have to be worrying about when the next downturn was coming? If you have worked hard to develop your service/replacement business, the next downturn will be hardly a blip in the success of your company.

Have you noticed that the contractors who report net profits of 10 percent and above are typically service/replacement contractors? They determined long ago that their investment in that market is more rewarding financially than the new residential construction market. While the new residential market may produce large volume numbers and push a lot of units for your equipment suppliers, it’s unlikely the return on investment is at a level you deserve. So with the new residential market bleak for 2007, this is the year to change your organization.

Publication date: 12/25/2006