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Residential Fire Sprinklers: Plumbing Contractor Competitive Advantage #2

October 5th, 2009

Part four of a five part series focusing on the rapidly growing residential fire sprinkler market and why plumbing contractors are best positioned to capture this opportunity.

To view part three of the series visit “Residential Fire Sprinklers: Plumbing Contractor Competitive Advantage #1

When the 2009 International Residential Code (IRC) arrives, with it will be the highly publicized requirement for all single family homes to have fire sprinkler systems installed in them. Previously we discussed the market and individual growth potential for residential plumbing contractors this new code will create. If we have convinced you, a residential plumbing contractor, that in fact, this opportunity is viable; the question now is, what next? Certainly questions of capital, resources, training and tools all fill the list. But, if you are like me, you are asking, “How do I sell this?” How do I convince my existing homebuilding client that, not only am I capable of providing both services, but it will be less expensive than two separate contractors doing the work?

To start with, let’s admit that most everyone would agree that it should cost less to get everything you need from one source, rather than to get only one thing you need from one source at a time. A quick glance at the popularity and success of big retail such as Wal-Mart or Best Buy will validate that. And while it may seem obvious that bundling services is cheaper than buying them separately, it is harder to distinguish this when the amounts that are being compared are relatively low. For instance, you normally don’t drive to a specialty battery store to buy AA batteries that cost $6.50 when you can get the same brand at the grocery store for approximately the same price or usually within a $1 while you are buying your groceries. The batteries at the battery store may even be less expensive (not likely, but possible) however, when the retail price of batteries is not that much to begin with, who is going to drive all over town to save a dollar. And while costs are always a strong part of decision making, the residual savings that you get by not spending the time to make the extra trip to the battery store will most likely outweigh the cost difference between the two stores supplying the batteries. Not to mention the convenience and stress reduction of having one more item off your “to do” list.

Now equate this example with those contractors vying for the installation of a residential fire sprinkler system. You have the fire protection contractor acting as the specialty store and the plumbing contractor acting as the “all in one” store. If an average tract home is 2500 square feet and the higher end of installed costs for a fire sprinkler system are $1.50 square foot, the installed cost would be $3,750. If the average sales price for this size tract house falls into the mid $200 thousands the fire sprinkler system would represent approximately 2% of the cost. The question is “can a plumbing contractor provide this system for less than a fire protection contractor?” While geographic factors such as unions will skew the numbers somewhat, it would be safe to answer this question with a resounding “yes”. The first and most obvious reason is the combination or overlapping of insurance, tools and resources. It would be very difficult to compete with a workforce that is trained to install toilets and sinks as well as risers and fire sprinklers, especially when many of the tools and materials used are the same. A second factor that would make this option even more definite would be if the fire sprinkler system is a multipurpose or combined type system. Meaning a system of valves and piping that feeds both domestic and fire sprinkler demand all together. The reduction in coordination issues alone would make this a very attractive choice for any home builder.

The third and not so obvious reason would reflect the nature of tract housing itself. Tract housing is all about volume and typical construction. I have termed it RPTV which stands for “Residual Profit on Typical Volume”. This represents profit that is not readily measurable, but is made as the result of “production line” thinking. It could be characterized as savings made from repetitive activities that require very little effort on your part or that of your clients. It can apply to the services you currently provide for your tract home builder, but can also apply to his services as well. The typical nature of this type of construction produces less and less supervision with each home built. I can attest to this first hand. While growing up in the homebuilding industry I experienced the transformation of our family business from tract housing to full custom homes. Without diverting into a dissertation on the differences, suffice it to say, it can be summed up in one word… Volume.

Let’s say the average cost of the plumbing contract for our 2,500 square foot tract home is $15,000 and the fire sprinkler system is $3,750. The total cost for each service without profit is $18,750. If both the plumbing contractor and the fire sprinkler contractor apply a 10% markup, the total price to the client is $20,625. Now, if you are a plumbing contractor providing both services it would be reasonable to expect your price to be at least 2% lower than this as your fixed expenses are now spread over a larger amount of revenue. This would put your sell price at approximately $20,210 which is a savings of roughly $415 to the client per house. Now, consider that your 10% profit per house should actually increase as your crews become more and more proficient with the installation of both systems, along with savings on bulk materials. When you multiply that profit over a couple of hundred homes a year the decision to expand your services to include fire sprinkler systems becomes much easier.

Do not forget, just like everyone else in the construction industry, home builders are looking for ways to do more or get more with the same amount. And if they do agree to pay more money it has to be towards something that they know will help them stand out from their competition. Tract home pricing is very competitive with margins averaging 8% to 10% at best. So other marketing tools are used. Usually these types of things come in the form of “buyer options”. This is where the buyer of the home may want to add certain options to the basic home he is buying such as a refrigerator, washer/dryer or upgraded carpet. The big difference is that these options are not “required” by codes or standards. The fire sprinkler system, on the other hand, is required by code and therefore is a hard cost that the home builder must account for. While he is looking for “bang for the buck” he is equally looking for companies that are going to make his life easier. Meaning, fewer coordination issues, no more sub-contractors than what he is already working with and someone who is managing their work without his supervision. By using an “all in one” plumbing contractor for both services he eliminates one more company he has to go into contract with, he needs only one phone number to deal with issues for either system, and there are fewer invoices to process, which keeps his overhead from increasing.

Trust me when I tell you, home builders put a high price on their time and how it is spent. They don’t want to deal with coordination problems or issues regarding permits or scheduling conflicts. They just want it done, on time, on budget and with attention to the same quality expected in custom home building. Home builders today are looking for every advantage they can find to either lower costs or provide more value for the same price. If domestic plumbing and fire sprinkler services are packaged up by a single source contractor, they will take a long hard look at the single source price. With a competitive price and the reduction of administrative expenses, there is real value to the home builder in getting there plumbing and fire sprinkler systems from the same “store”. Show the home builder how this works for them with the pricing in your own neighborhood and I am confident you will be successful as a single source provider.

In Part 5 of this series, “Residential Fire Sprinklers: Plumbing Contractor Competitive Advantage #3”, Jayson Drake, will discuss why multipurpose systems are the future of residential fire sprinklers, why plumbing contractors are uniquely qualified to install these systems and how this creates a clear competitive advantage.

Steven Scandaliato is a Fire Smarts Faculty member and Principal at SDG, LLC, a fire protection design and consulting company. With over 23 years of fire protection engineering, design and project management experience he holds a Level IV certification from NICET in Fire Sprinkler Layout and serves as a member of the NFPA 13, 101 and 5000 committees.

Residential Fire Sprinklers: Plumbing Contractor Competitive Advantage #1

August 24th, 2009

Part three of a five part series focusing on the rapidly growing residential fire sprinkler market and why plumbing contractors are best positioned to capture this opportunity.

To view part two of the series visit “Plumbing Contractors Needed for Residential Fire Sprinkler Work

Growing up in the home building business provides a very unique opportunity to learn about micro and macro economics without ever having to pay a single tuition bill. In fact, when taking these courses in college, I found myself arguing with the establishment most of the time, because not one of my instructors had ever experienced grossing $1 million one year and then struggling to stay in business with it for the next five. Mowing lawns to buy basketball shoes and cancelling family vacations, because interest rates changed as fast as the weather does. None of them had experienced living in a thriving community with great growth potential for several years to come and then see it completely stopped by a select group of community activists using a gas moratorium as a way to stop future growth. Now, several years later, ironically, a similar event has taken place, which is going to have one of the most significant impacts on the home building industry since 1.5 gallon toilets were mandated. Of course, I am speaking of the new IRC requirement for all new single and two family dwellings to have fire sprinkler systems installed.

The impact is estimated to be as high as $3 billion a year in potential revenue. Of course, there are those that are for this and those who are not. Nevertheless, it is here and the potential market that is now open to those who install fire sprinklers is also open to the plumbing industry as well. I say this because, contrary to many of the reports and articles written about this subject, the fire sprinkler industry is not large enough to absorb this type of demand. And, even with the pressure our capitalistic economy is currently feeling, demand for designers and installers of these systems is going to be very deliberate. So the question is, do you want to be a part of this market?

Before you answer, allow me to impart some observations that only someone in my position can share. First, I doubt anyone would argue with me about the significant differences there are between commercial and residential construction. Certainly this discussion alone would warrant several pages. However, when narrowed to the introduction of fire sprinklers to the home building process there are specific issues to consider. First, consider the fact that the plumbing industry can be characterized into three major groups. There are the large major mechanical contractors consisting usually of both HVAC and plumbing capabilities. These companies are found predominately on commercial types of projects, which require more than 2-3 man crews with construction schedules that can stretch out for months and many times years. Then there are those companies that concentrate on the residential markets. These would include multifamily as well as single family projects. These companies are usually much smaller than those involved in the commercial markets and tend to have smaller crews. The final group is those companies that have chosen to focus on the service side of the plumbing market. They are typically small to medium sized companies, less than 25 employees, and are structured to accommodate the general public’s plumbing service needs. They are not involved with new construction much, if any at all.

Of these three groups, it is the residential companies that are most prevalent and have the most opportunity to gain from the emerging residential fire sprinkler market. There are several simple reasons for this. First and foremost, they have the most to gain with the least amount of investment required. Let me explain. In residential construction, there are usually only five or six sub-contractors involved. They include the foundation, framing, mechanical, electrical, finish and painting contractors. Of course this will vary for several reasons, but for the purpose of this discussion these would be considered the core group for a home builder to contract with on a regular basis. Since the residential plumbing market is already very competitive the potential profit margins are very tight, especially when you consider the fact that average tract housing plumbing contracts only total $8 to $10k to begin with. So most residential contractors are looking for volume as well as the occasional custom home that comes along. Any chance one has to increase the base cost of their services means that while the actual margins may not increase, the amount of that margin allows opportunities for more rapid growth or internal capital improvements such as tools, trucks or even employee benefits.

Second, as long as I can remember, and my father before me and his father before him, every house that our family built had running water in it. What I mean by this is that plumbers have been on site for decades. Not so for fire sprinklers contractors. Plumbing contractors already have relationships built with current clients. They are familiar with home building trends, contracts and market conditions. The overwhelming majority of all fire sprinkler contractors in this country are commercial contractors. They do not have the years of experience with residential markets. Over the years, some have diversified into the residential markets but one thing is for sure, very few are capable, or for that matter, even want to participate in both markets. The reasons for this are the same reasons there are three groups of plumbing contractors. The bottom line costs are not as high as commercial construction and they have found that trying to accommodate both markets usually involves higher overhead which makes it harder to compete.

The third reason is the nature of the trade itself. It is pipe and water. Who better to adapt to this market than skilled labor that already knows how to work with the majority of the components involved with fire sprinkler systems. I have read several articles and reports from those on both sides of the residential fire sprinkler argument. And in response I say this: As a guy who started on his dad’s framing crew at age 14, going on to become the Vice President of the company and getting my Class A contractor’s license at age 21, only to end up as NICET IV fire sprinkler designer as well as a member of the NFPA committees that put the codes and standards for fire sprinklers into place, this is NOT hard. It will not take years of training and expense to merge the design and installation of fire sprinkler systems into an already successful residential plumbing contracting company.

While residential fire sprinkler systems have been required in select markets and geographic locations since the mid 1980’s, it has really only made its presence known in multi-family projects and even then it is fairly marginal. Today’s residential plumbing contractors have a very clear and distinct advantage coming into the residential fire sprinkler market. It would be prudent for them to consider this advantage as well as the education and training tools that are being made available by Fire Smarts and the Plumbing-Heating-Cooling Contractors Association (PHCC). 2011 when the IRC requirement comes into effect is not far off. And given the current economic conditions in the residential market, demand can only grow. Like my father always said, “people will always need a place to live”. For me, these are words to build a company by.

In Part 4 of this series, “Residential Fire Sprinklers: Plumbing Contractor Competitive Advantage #2”, Steven Scandaliato, SET, will discuss how plumbing contractors that provide both domestic water and fire sprinkler services have a competitive advantage by reducing the general contractor’s administrative burden, while increasing their own profit margin.

Steven Scandaliato is a Fire Smarts Faculty member and Vice President of Business Development of Telgian Corporation. With over 23 years of fire protection engineering, design and project management experience he holds a Level IV certification from NICET in Fire Sprinkler Layout and serves as a member of the NFPA 13, 101 and 5000 committees.