Gas, Energy, Heating Costs: Are We Facing An Energy Crisis?
Building service contractors have seen high energy costs before, but nothing like the current increases. Oil and natural gas production in the Gulf region is still recovering from Hurricanes Katrina and Rita, causing energy prices to spike.
A look at the gas pump can prove how expensive oil is getting. Natural gas prices for February and March are predicted to increase by as much as 40 percent, says Donald Jones, Ph.D, vice president and senior economist, RCF Economic and Financial Consulting Inc., Chicago. These increases in fossil fuel prices are even affecting the cost of electricity. Wisconsin customers are facing an 11 percent rate increase, and in Connecticut a 22 percent rate increase is expected this year.
“This time it’s not elastic,” says James Harris Sr., CBSE, founder of Janitronics Inc. in Albany, N.Y. “It’s going to settle in at continued higher costs. It might even get worse.”
What does this mean for building service contractors? Potentially, it means smaller profits. Also, increased costs anywhere in the cleaning industry will trickle down the supply chain. If manufacturers see increased costs, so will distributors and eventually BSCs.
So, aside from paying more for their own utility bills, contractors should expect to pay more for their supplies. Also, some BSCs are worried that there will be less money coming into the company because their customers will reduce cleaning budgets to cover their own rising energy costs.
However, not all BSCs are pessimistic. Some are finding news ways to streamline services to prevent profits from shrinking. Others view this time as an opportunity to partner with vendors and customers to make business smoother not just now, but long-term. This may also be the time for some BSCs to increase their own prices — once again passing costs down the supply chain.
Reducing overhead costs
There are some energy costs BSCs can’t greatly reduce. Electricity and heating are two overhead bills that can’t be ignored, but the increased expenses mean less profit.
“Our office utility cost doubled in December; I’d hate to see what it will look like if we have a really cold month,” says B.J. Mandelstam, president, Integrated Cleaning Services, Centennial, Colo.
BSCs turn off lights in rooms not in use and turn down the thermostat in their offices and warehouses. While not much, it’s a start.
Gasoline prices are hitting BSCs the hardest. Fueling their fleet of vehicles is taking a large bite out of earnings. For Bob Merkt, owner of Kettle Moraine Professional Cleaners Inc. in West Bend, Wis., gas prices have hit his company twice as hard. Kettle Moraine Cleaners provides carpet-cleaning services that use machines run off of van engines.
However, there are ways to reduce costs. This is an opportunity to analyze driving routes and, if necessary, reschedule accounts to reduce the amount of time spent on the road.
“Our team has taken the time to intelligently design our routes so employees are driving as efficiently as possible during the course of their shifts,” says Mandelstam. “In a couple of cases, we asked clients if we could switch cleaning days, for example, changing from Friday to Sunday, so the days synced up with other accounts in the same geographic area.”
Another way to decrease driving time is to communicate with customers via phone or e-mail more often instead of face-to-face, says Merkt.
To reduce gasoline costs in the long run, consider buying more gas efficient vehicles. Some diesel engine vans have plenty of space to hold machinery and still get 25 miles to the gallon, says Dave Frank, president, American Institute for Cleaning Sciences, Highlands Ranch, Colo. Hybrid vehicles are another option.
The soaring gas prices are also affecting BSCs’ low-wage employees.
“Making $35 a night and spending 20 percent of that on gasoline may cause good employees to seek other employment,” says Frank.
More employees are seeking work closer to home, carpooling or taking public transportation. Accommodating these desires can be a bonus for existing staff or a hiring perk for new recruits.
“We’ve actually modified our hiring process,” says Mandelstam. “We have a map of Denver and the surrounding suburbs. We’ve segmented the maps and numbered each area. Applicants are asked to identify which segments they would like to work in. It’s helped us reduce turnover, since many employees didn’t consider the cost of their commute when they agreed to take a job.”
Daycleaning services can often accommodate workers who rely on transportation other than their own cars. More mass transit systems run during the day and employees may be able to carpool with people who work at nearby companies, says Steve Spencer, facilities specialist, State Farm Insurance, Bloomington, Ill.
Costs from the supply chain
Along with increases in overhead and fuel costs, BSCs can expect to pay more for their cleaning supplies. Distributors have been receiving price increases directly from product manufacturers and their own fuel costs have gone up, too. While they are doing what they can to keep prices affordable for their customers, some costs will get passed on. Though these increases are predicted to be lower than last year, no increase is good news for BSCs.
“There have been a number of increases over the years and they’ve been substantial enough to be reflective in the overall cost of doing business,” says Merkt.
These increases reflect the rise in energy costs. Crude oil is used in the manufacturing of plastics. Everything from bottles and caps to can liners have been affected. In the case of the latter, energy increases have caused liner prices to rise as much as 20 percent, says Barbara Casse-Bender, president of BCB Janitorial Supply, Hackensack, N.J.
Paper is another product that requires a lot of energy to manufacture and prices are up about six percent. In February, chemical prices are scheduled to increase, says Andrew Brahms, president, Armchem International, Fort Lauderdale, Fla. In many instances, these price increases are also a result of the manufacturer passing on their fuel surcharges to the distributor.
“For some prices, there may not have been an increase on the product, but there will be a fuel surcharge added,” says Casse-Bender. “Manufacturers will say they didn’t increase the price of the product, but I don’t care where you add the increase, it still increases the price of the product.”
BSCs may think the best way to save money is to shop around for the cheapest price. Distributors, however, disagree. This is an opportunity to establish, or reestablish, a solid partnership with a distributor to receive value-added services such as on-time delivery and training, along with products. BSCs can also get a better price on products through distributors by buying bigger lot quantities and paying bills quicker, says Brahms.
“Most BSCs don’t want a partner, just a lower price,” continues Brahms. “But if you can really partner with a company, the little bit extra you pay will come back ten fold.”
To see significant savings, remove consumable products such as can liners and paper products from account proposals, says Harris. The customer should pay for these products because they control how much is consumed, not the BSC.
With the help of distributors, BSCs can then educate their customers on ways to reduce usage. For example, hands-free devices control paper consumption better than fold towels or crank dispensers; jumbo toilet paper rolls work better than single rolls.
“With single-roll toilet paper, if you leave extra rolls out on back of toilet, they’ll grow legs and start walking away,” says Brahms.
Can liner costs can also be reduced. Use different liners for different types of trash. For example, in office facilities where trash is mostly paper, use a high-density bag, says Brahms.
“The bag has more recycled material and less plastic, but you’ll get more bags for less money,” he says.
When stronger bags are needed, pay attention to the bag’s thickness, known as its mil count. The higher the mil count, the thicker the bag.
“If you’re using a 1.5 mil bags, go down to 1.3. It’s a minimal difference in bag quality and you will save three to five dollars a case,” says Brahms.
BSCs’ own customers are facing the same increased utility bills, but often on a grander scale. Unfortunately, their budgets often remain static and other expenses, such as cleaning, may have to be scaled down to cover the increased energy expenses.
“They are in the business of facility maintenance. Facility managers are attempting to contain cost. If the utility bill keeps rising the manager may look to cut cost in other areas to meet budget,” says Frank.
Losing customer profits in addition to spending more on energy is not a scenario many BSCs can afford to face. When costs increase, it creates the perfect time to engage dialogue with the customer and build a strong partnership, says Harris.
“If you do nothing and just wrench your hands, you are absolutely guaranteed doom and gloom,” he says. “But anytime you sit with the client and are open minded about things that affect the quality of service, it’s a great opportunity to improve customer relations.”
A valuable service BSCs can bring to the table is explaining how cleaning can make a facility more energy efficient. For example, electricity accounts for 90 percent of a facility’s utility bills. Any way to reduce electricity will result in a substantial savings, says Spencer.
“We map the work flow and work with facility managers to make sure lights…are only turned on for the time we’re working in the area,” says Mandelstam. “In buildings that don’t have computerized systems, we will have a site supervisor turn off lights at the beginning of the shift.”
If switching to daycleaning is feasible for a contractor, this solution can also significantly reduce a customer’s energy bills. For example, in a 300,000 square-foot building lit with two-lamp fixtures for five days each week, customers can save $55,000 a year by using day cleaning services and turning lights off after the workday ends. For three-lamp fixtures, savings are as high as $120,000 a year, says Spencer.
In return, BSCs get a satisfied customer who will be more understanding to issues affecting their vendors, which may include increasing prices to cover these new energy costs.
“If you don’t address a price increase, sooner or later, other costs beside energy, such as labor, will chip away at your profit,” says Harris.
Even if the contract is months away from expiration, now is the time to begin discussions with clients because they are facing the same increases in energy and know the added pressure these costs put on profits. An open dialogue with customers about factors that affect pricing begun well before renewing the contract will be more effective than simply sending a letter with firm price increases, says Harris.
Whether BSCs view these current energy prices as a “crisis” or just as a routine annoyance, it will take efficient planning and strategic partnerships with suppliers and clients to ensure business remains profitable. These energy costs may eventually decrease, but chances are they will only increase again, or other expenses will take their place. If BSCs handle this difficult time successfully, the changes they put in place should help them keep profits afloat through the next predicament.
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