Heat Pump Pricing
By James Buchanan
On the surface, heat pumps have a lot in common with refrigerators. Both are big-ticket home appliances sold by familiar brand names, and if you're willing to charge $1,000 against your credit card, someone will deliver one to your door within a couple of days. But the similarities end there.
In fact, it makes more sense to compare heat pumps to artificial hearts rather than refrigerators. If you're in the market for a new heat pump (or a new heart, for that matter), you better make sure that the person doing the installation knows what they're doing and chooses the right model -- and you better understand how the pricing works.
How Heat Pump Pricing Works -- in a Nutshell
Heating contractors prepare a bid that includes the underlying cost of the equipment and associated parts. They add a markup. Then they estimate the labor involved in installing the equipment. They add the labor costs to the equipment costs and add an additional percentage to ensure they will make a profit. Then the homeowner negotiates with the contractor -- either to reduce the price, or to add additional services. A contract is signed, and the contractor gets to work.
If that seems simplistic -- it is. Here's the real story.
How Contractors Develop their Quotes
There are two basic approaches to developing a quote.
- Some contractors use a flat-rate "Price Book", that tries to account for standard labor and materials costs, and provides a built-in profit margin;
- Some constractors keep their own records on labor and materials costs, and roll-up those costs themselves along with a profit margin;
We interviewed contractors that use both of those methods for this article.
Stratton Lobdell is the Manager of All American Heating and Air, a Raleigh, NC-based HVAC company that specializes in heat pump and central AC system installations. His company begins with a load calculation to properly design the system and determine the appropriate size of equipment.
Once the sizing has been determined, Lobdell says, "our system design people have a price book -- and based on the homeowner's need they will say you need this model of heat pump at this size, and this model of air handler to match that, and line sets and thermostat, permits, electrical work, and they will total those line items and provide them with a proposal."
In terms of figuring the cost of labor as well as other elements that affect the overall price, Lobdell says, "The way our company is set up, when we look at our flat rate book we build in expected labor hours and material costs based on standard installation of these particular pieces of equipment. There are options that can be added if needed such as if you have to convert from an 80 to 90 percent efficient furnace you have to do a specific conversion or if you have to upsize the electrical service to the house or the equipment, we have a standard up-charge for that. We build all of that in though the price book."
Additional elements of a heat pump installation that could increase the overall cost are issues such as:
- the cost to contractors in your state for worker's compensation
- your local tax structure
- additional employment laws
- scope of work (just replacing the outdoor unit as compared to the entire system, for example)
- if modifications need to be made to the interior of the house (drywall and framing, additional wiring, etc.)
- external issues such as if the lawn gets torn up
The next piece of the bid is the contractor's profit margin. "Most companies work in a gross margin of between 35 and 45 percent, though some companies are higher," says Lobdell. "It depends on what the market is in your area and the type of products you are selling. If you are selling low-end, baseline product and dealing with a homeowner that only cares about price, you can't sell that at the same price as a high-end product with a higher expectation of service."
Bob Jackson is a heating contractor from Chesapeake, VA, and he and his workers keep extensive records about how long each step during an HVAC installation takes. If you'd like to read more about how Jackson develops his bids, see our article on central air conditioner pricing.
In contrast to Lobdell, Jackson says that he generally shoots for about a 20 percent profit margin for a job.
Is there an Equipment Markup? If so, how large is it?
Other than labor, the cost of equipment is the biggest cost and determiner of how much your system will ultimately cost. Therefore, it is important to understand how contractors approach these markups. This will also help you determine if it is worth sticking with a contractor for the equipment or if you want to try working with a direct to consumer outlet.
Asked about how much his company marks up the equipment Jackson says, "Every company does it a little differently, but at the end of the day you're working on that gross margin, which is on top of all your direct costs."
According to Taylor, there is considerable variation between contractors and that the type of equipment will in large part dictate the higher end of what a markup could be. "The markup varies on the cost of the item and the moral value of what the contractor feels something is worth," he says. "A contractor is not going to markup a coil assembly or condenser 100 percent where it costs $3,000. They might mark that up by about 20 percent.
"However, a valve or some small component, they may mark that up 100 percent so that rather than $30 it's $70, but that is a drop in the bucket compared to the four hours they are going to spend installing it correctly and then fine tuning it. And that $30 of profit goes out the door for the half hour he spends trying to gain access to a tricky part of the house or for some other unexpected issue."
Should You Buy the Equipment Yourself?
Given that equipment gets marked-up by the contractor -- and then a profit margin is added on top of the mark-up -- are you better off just going to a direct-to-consumer website to buy your heating or cooling equipment?
This is probably the area of greatest contention and debate within the HVAC world. Essentially, contractors and their relative associations are pitted against a growing number of online retailers that sell directly to consumers. Contractors and their supporters argue that there is too much risk associated with these direct-to-consumer vendors and that people are best served by sticking with tradition.
For example, Taylor says that he recommends people not try to purchase their own equipment arguing that they risk losing the warranty on the equipment. He goes on to add, "I don't recommend it because the homeowner also has no leverage with the manufacturer. If you are the manufacturer you don't have any potential for repeat sales and a manufacturer can't be sure the product was properly secured during transit or that the product will be properly handled and installed, so they will not feel good about supporting the warranty.
"Most homeowners probably would not even be able to go directly to a manufacturer, though there are some distributors that sell directly to homeowners and I've seen their billboards along the side of the highway advertising it."
Lastly, he argues a homeowner is more than likely to spend as much on the equipment as they would through a contractor because contractors get such good discounts. "In addition," he says, "the warranty will remain in effect and the install will be done right if you have a good contractor that has the tools and will do the design properly."
Wendy Welton, RA, President of Art Form Architecture in Portsmouth, New Hampshire, echoes Taylor's argument and adds, "If something does go wrong with the equipment it may not be right away and you will have the contractor in your corner because he is the person who is responsible for ensuring the homeowner is protected."
Harvey Sachs, PhD., a Fellow in the Buildings Program of the American Council for an Energy Efficient Economy takes the argument one step further, saying that the cost of the equipment and whatever markup a contractor may add to it is minimal when considering the totality of the job. "In my opinion, we need to shift the perspective about these purchases," he says. "It's not really a product purchase like buying a car. Instead, you're buying a service, which is heating and cooling for your home. So consumers really only need look at the bottom line total price and what it covers because by far the most important consumer decision is choosing the right contractor.
"Having a good contractor makes more difference -- because there are so many ways to mess up sizing and installation. The basis for this is that typical installations -- those not done by contractors that perform all of the services necessary to ensure the equipment is matched to the home and can do a proper installation effectively lose 25 to 30 percent of the efficiency they could deliver and the lifetime implications of that are huge."
However, direct to consumer retailers, overwhelmingly online, believe they offer consumers a valid option for purchasing equipment. "This is a competitive industry so these other people can say what they like," says Sam Wyant, Assistant sales Manager for Alpine Home Air. "However, people appreciate what we offer them and we do very well. I also think that what we do is something the industry will probably get onboard with, though it feels like they treat the online industry as a fad, but I think gradually they are realizing it is here to stay."
Wyant goes on to add that his business and segment of the industry are also something of a boon to contractors rather than a drag on their ability to sell equipment. For example, they rely on contractors for installations, which requires having a list of thousands of contractors nationwide that they partner with and provide leads to for installations. "We're not trying to put contractors out of business because we rely on them too," he says. "We like working with them, especially the smaller contractors that don't get as good pricing from the large manufacturers."
In terms of the advantage his company offers homeowners, Wyant says the biggest issue is on price. "It is hard to be specific because markups vary wildly across the country and it also depends on how much of the labor a customer is going to do on their own," he says, "but if a customer is not going to do any of the labor and hire out the full installation to a contractor they will save several hundreds of dollars if not more. If they do part of the installation, they often save thousands."
Other advantages he says include the willingness of the company to spend time with the customer to understand their unique needs for the system as well as the various features that are available to them in different equipment. "We really want them to understand the differences between the equipment and features so they can decide what is best for them rather than have the cookie cutter approach that is so prevalent in the rest of the industry," says Wyant. "Anecdotally, it seems that a lot of individual contractors install pretty much the same system or two in the vast majority of the jobs they do, but there are so many unique features on the equipment that the vast majority of contractors aren't even telling people exist."
The company also offers lifetime trouble shooting support as well as educational resources on the products, which he says, "Makes the process much more consultative than I think people are aware."
In terms of performing a load calculation, Wyant says that contractors very rarely perform a Manual J load calculation and generally just use the previous system as a guide. Other online retailers, he adds, also tend to take a light approach to this part of the job by relying on generalized regional map of weather and temperature patterns. By contrast, his company uses their own proprietary sizing tool that takes into account weather data for the area the home is located in, average insulation levels of homes and calibrations done with the customer to create a load calculation.
"We tell folks that the most precise thing to do is get a Manual J load calculation or buy software to do one yourself," says Wyant, "but if you don't want to go to the expense or trouble you still want to be sure to do an accurate sizing estimate."
Warranties are another area the company handles. They offer full manufacturer warranties on the equipment, but do not warranty the labor. "There is a lot of misinformation out there about warranties," he says. "We process the warranty just like anybody else and you get replacement parts just like anybody else. There is not a warranty on the product for labor unless the installer supplies that, which we are very upfront about, but usually the savings is going to more than make up for that for folks."
To fulfill the warranty a contractor will have to diagnose the problem and the homeowner will have to show proof that a qualified HVAC contractor conducted a final inspection of the system after installation and did the startup.
Will a Contractor Increase the Bid Based on the Value of My Home?
Both Jackson and Lobdell say that they will not alter the cost of an installation due to the homeowner's financial circumstances, such as owning a valuable home or having a wealthy lifestyle. Not only is competition within the current economy fierce enough to make such a strategy risky at best, but they both seek to maintain their company's reputation for being honest.
"Personally, I don't think it is right of me to walk in and say, okay this person lives in a $750,000 home so they can pay more than a person that lives across town in a $100,000 home," says Jackson. "For me, my costs are the same. I don't care how much money they have."
As an interesting side note, Jackson adds that wealthier people in his area tend not to buy the more high efficiency equipment. Instead, middle income homeowners do because they are looking for the best way to rein in their utility bills.
How Common Is It to "Revise" a Bid?
One common technique a less than reputable contractor may try to pull is to offer a lowball bid and then come back to ask for more money saying the job has additional unanticipated complications. However, it is relatively rare for a contractor to need to adjust the bid price. Again, they often rely on word-of-mouth from happy customers as much as any other form of advertising.
"It is fairly rare for me to come to a homeowner to ask for more money," says Jackson. "If it is something that I overlooked while creating the bid or I made a mistake, that is not the homeowner's fault so I will live up to the agreed price and it is my responsibility to cover the expense. However, if there is something the homeowner intentionally left out or they come to me and want additional work, then that is something we have to have further discussion on, but that is generally not the case."
Heat pumps can be an efficient tool to keep your home both warm and cool. However, they can also be expensive to install. As a homeowner, they require an extra level of due diligence to ensure you hire the right contractor to put in the right system in the right way. This requires understanding how these systems are sized, designed and priced as well as how contractors capable of doing a good job go about preparing bids and estimating costs.