August 22nd, 2009 by Steven Scandaliato, SET
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.