Commercial Contractor Backlogs: Examine Leading Indicators for HVAC Demand

Contractor backlog is an important leading indicator for distributors that allows them to anticipate future demand, plan inventory, and gain market insights. As contractors commit to projects, Backlog represents the estimated revenue from contractors that the contractor has committed to but not yet completed.

Comfort Systems USA is a contractor that provides installation, maintenance, repair, and replacement services for HVAC systems in various commercial, industrial, and institutional facilities. The numbers from Comfort Systems USA indicate a significant upward trend in backlog over the years, with fluctuations in annual changes. While there have been occasional decreases, the overall trend shows substantial growth, reflecting increasing demand for construction services. The growing backlog will translate to higher orders for distributors.

Projects for Comfort Systems USA generally last less than one year, and their backlog represents revenue that is likely to be reflected in the next 6 to 12 months. Comfort Systems USA states that they source their product through domestic and foreign distributors at competitive prices. Lead times for raw materials and standard components are generally short, but orders for manufactured commercial HVAC equipment have experienced the longest lead times, sometimes greater than 6 months. As of December 31, 2023, 10,481 projects were in progress, with an average duration of six to nine months and an average contract price of $1.1 million.

Limbach Holdings, Inc. is a company that provides mechanical, electrical, and plumbing (MEP) services to commercial, institutional, and governmental clients. Their services include HVAC installation, maintenance, repair, and retrofitting, along with electrical and plumbing services. They operate primarily in the United States and cater to various sectors such as healthcare, education, commercial buildings, and government facilities.

The company operates in two segments: General Contractor Relationships (GCR), in which the company generally manages new construction or renovation projects by general contractors or construction managers, and Owner Direct Relationships (ODR), in which the company performs owner-direct construction or provides services to building owners and property managers.

Limbach Holdings has expressed a growing focus on its’ ODR segment, which typically yields higher margins. Based on historical trends, Limbach Holdings estimates that 95% of its ODR backlog as of December 31, 2023 will be recognized as revenue during 2024, along with 83% of its GCR backlog. The Company believes the reduction in GCR backlog (as well as backlog overall) has been intentional as the Company looks to focus on higher-margin projects than historically, as well as its focus on smaller, higher-margin owner direct projects. In addition, ODR backlog included approximately $1.2 million and $26.6 million of backlog associated with the operations of their recently acquired businesses, ACME and Industrial Air, respectively.

The Construction Backlog Indicator is a report created by Associated Builders and Contractors (ABC) converting survey responses from dollars into months of contracted work. ABC reported that its Construction Backlog Indicator declined to 8.1 months in February, 1.1 months down from February 2023. “Backlog is declining and confidence began to fade modestly in February,” said ABC Chief Economist Anirban Basu. “While it is far too early to predict an industrywide downturn given that confidence readings continue to signal growth along sales, employment and profit margin dimensions, it appears that a rising tide of project cancellations and postponements has begun to make its mark.”

Outlooks for 2024

2024 outlooks from Limbach Holdings’ and Comfort Systems USA’s annual reports remain positive and focus on resilience and potential for growth in the industry. Limbach aim’s to continually focus on building long-lasting relationships with building owners to grow their ODR sector, and their key objectives for the year are to improve profitability, foster sustainable building environments, and invest in their workforce. The company also believes it can further increase its cash flow and operating income by acquiring strategically synergistic companies that will expand the company’s geographic reach, supplement the current business model, address performance gaps and enhance its service offerings to better serve its clients.

Comfort Systems USA believes they have a good pipeline of opportunities and potential backlog. They stated that in 2023 they were successful in maintaining productivity and in procuring needed materials despite increased labor costs, supply constraints, and delays in delivery of various materials and equipment.

“Although we are preparing for a wide range of challenges and economic circumstances, including an eventual recession, we currently expect that supportive conditions for our industry, especially for our industrial and technology customers, are likely to continue in 2024.”

HARDI forecasts that the Construction Backlog Indicator growth has peaked through 2023 and will level off over the course of 2024 as backlogs slow and new construction continues to underperform. As a result, we expect nonresidential distribution sales growth to diminish over the course of the year but to still remain strong with low double-digit growth in alignment with contractor trends.

Overall, by closely monitoring contractor backlog and industry outlooks provided by key players like Limbach Holdings, Inc. and Comfort Systems USA, distributors can stay ahead of market trends, anticipate customer requirements, and position themselves for sustained growth and profitability in the construction sector.

Interested in Getting Involved?

If you would like to get more involved with other HARDI members in the commercial space, consider joining HARDI's Commercial Council.

Please contact Tim Fisher or Tyler Drown if you are interested in joining the Commercial Council.