Pricing transparency: peeking behind the curtain of Heat Pump quotes

A common customer question in HVAC is how costs break down between parts and labor. It’s no surprise — now that the internet has made pricing information widely available, consumers can buy HVAC equipment direct-to-consumer, bypassing the traditional model where customers had no idea how much the equipment actually cost.

Naturally, they start asking, “Why are you charging me $16,000 for a system that I can buy online for $4,000?”

Deceit, Trickery, Incompetence, or Something Else?

When customers see a large discrepancy in pricing between equipment cost and installed cost, it’s natural to assume that their contractor is ripping them off. Customers often assume that anything beyond the cost of the equipment is labor, so if you do simple math, it becomes apparent that HVAC contractors are charging hourly rates similar to doctors or lawyers.

Is it that simple? Let’s break it down.

The Reality of HVAC Pricing

Most HVAC contractors aim for a 50% gross margin, meaning for every dollar they spend on labor or parts, they charge their customer two.

Take a $4,000 piece of equipment. Mark it up by 2x, and you’re at $8,000. Add in labor—let’s say two technicians making a combined $75/hr for 20 hours, which is $2,500 including overtime and associated insurance costs. Double that, and you’re at $5,000. Then add $1,500 for refrigerant lines, ductwork parts and other consumables, double that to $3,000 and suddenly, you’re at $16,000. That’s why your contractor charges what they do.

Sounds profitable, right?

Well, not so fast. After accounting for the cost of overhead, most firms are targeting only a 10-20% net margin across the business.

Where does the money go?

• Office staff: Coordinating permits, handling city inspections, processing rebates, managing documentation—it’s more than just installing a system.

• Sales and Marketing: Acquiring customers isn’t free - this topic deserves its own post soon.

• Transportation: Contractors often have large service radii to source enough projects to sustain their business. This means that they’re often traveling hours to job sites, and often paying the salary of the technician during the drive time as well as the cost of fuel and depreciation on the vehicles.

• Inventory and Warehousing: Storing equipment costs money - both the warehousing space, and the opportunity cost of that capital. There’s always a risk of damage or theft during storage, adding another layer of cost.

• Insurance: Workers’ comp isn’t cheap, especially in a field where falling off a ladder or getting electrocuted are not uncommon. Insurance premiums in the construction industry are substantially higher than others.

• Benefits: Beyond health insurance, there are other benefits in this industry that aren’t typical in others, including tool allowances and take-home vans for senior technicians.

The 10-20% figure is just a target, too. A few projects that don’t go according to plan can decimate all of the profits in a business for a year. This risk of projects going south is often priced into project costs.

The Bigger Picture

Here’s the thing: Contractors are running a business. They’re trying to achieve a 10-20% net margin, and each transaction affects that bottom line.

While it can be frustrating that quotes don’t break out individual pricing line items, it’s not that straightforward. There’s a lot of uncertainty in each project, so although behind the scenes there is some level of bottoms up pricing that accounts for labor and equipment costs separately, there are a lot of hidden factors that feed into it.

Ultimately, how quotes are itemized doesn’t matter much to customers. One contractor might choose to hold a large markup on equipment costs and bookkeep a lower labor rate, while another might apply a low equipment markup with a higher labor rate - but the only number that really matters is the total out-the-door price.

Contractors know there’s psychology involved here too. If they show equipment itemized with a high markup and customers find it cheaper elsewhere, they’ll push to supply their own equipment or ask for a price match. If they show a high labor rate, customers may feel overcharged. Itemizing quotes leads to questions, and rarely are those questions in favor of the contractor, which results in opaque quotes.

So, what’s the solution?

Finding a Balance

Ultimately, the desire for transparency in pricing is often motivated by sticker shock around the cost for a heat pump installation. To increase heat pump adoption, we need to find ways to balance the bottom line of contractors with the wallets of consumers. Here are a few ideas:

1. Reduce Direct Costs: Cheaper equipment and reduced labor costs can drive down costs. For example, Gradient’s units are expensive, but they can be installed quickly by someone with minimal experience.

2. Operational Efficiency: Decreasing the gap between gross and net margins by reducing the overhead in the business. Private equity rollups of HVAC contractors aim to do this, as do some venture backed plays like Pipedreams who aim to reduce administrative cost with streamlined back-office software.

3. New Revenue Streams: Unlocking new revenue streams so contractors aren’t solely reliant on installation revenue. Could contractors take a cut of Virtual Power Plant (VPP) revenue for the equipment they install? Is there a world where the equipment installation could be a loss leader that’s covered by other services?

4. Subsidies: Government incentives play a real role in transforming the HVAC market. If contractors can make the money they need, and customers can pay less, everyone wins. Initiatives like the 25C Federal Tax Credit at the national level, TECH Clean California at the state level, and Peninsula Clean Energy at the local level are brilliant, and are already demonstrating that they drive adoption just like incentives for Electric Vehicles and Residential Solar previously did.

5. Lower Profit Margins: Could contractors operate on lower profit margins and make up for it in volume, like Costco? Many small contractors do the largest volume of their work on less profitable service visits. If they did more installation projects, could the cost per installation come down?

6. Not-for-profit Installation: Organizations like SunWork use armies of volunteers to install residential solar and heat pump water heaters for homeowners at discounted prices. Could this same model work for heat pump HVAC?

7. Premium Pricing: Some customers are willing to pay more for premium service and equipment. What does the Ferrari of heat pumps look like, and is it something customers want? Quilt has built a beautiful ductless heat pump with an elegant user interface, and I’m confident they can build a meaningful niche with their product-led strategy. If customers are spending more, but feel like they’re getting a good value, this could be a win-win.

Conclusion

There’s no simple answer, and as HVAC costs continue to rise year-on-year, customers will only grow more frustrated by the lack of pricing transparency. Fortunately, there’s a lot of innovation happening in the space and I’m hopeful that there is opportunity for prices to eventually plateau and begin trending downward. In either case, hopefully you’re now better informed on how these systems are priced and where the costs come from.

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