Certified Contractor Programs: A Reliable Yardstick When Investing in Roofing

The basics (and benefits) of certification explained

Contractor loyalty programs are a key component of building products installation and home improvement. A recent survey of exterior contractors found that 63% of those with over $2M annual revenue were in a contractor loyalty program while 44% of exterior contractors were extremely satisfied with it (84% were satisfied or extremely satisfied).¹ In the roofing industry, a typical rewards loyalty program is supplemented with benefits and components. 

The roofing industry’s certified contractor program has five major players, who interact through a series of reciprocal relationships that can be broken down into “gives” and “gets.” The most straightforward reciprocal relationship is between the homeowner (or commercial property owner), who pays to have a roof installed, replaced or repaired, and the contractor, which performs the work in exchange for this payment.

Relationships among the other players can be more complex and nuanced, but CCPs are a common thread that influences these relationships to varying degrees (see Figure 1).

Viewed from the top down, all CCPs start with the manufacturers, which leverage their market presence to establish reputable manufacturer positioning and provide credibility in designating a contractor as reliable. Homeowners hire installers they can trust, and roofing contractors that are certified by established manufacturers benefit from this trust by proxy. In exchange, contractors agree to use the certifying manufacturer’s products for a set percentage (as much as 90%) of their roofing contracts.

As a practical matter, the roofing distributors are a critical intermediary between the manufacturers and the contractors. They also have relationships with manufacturers and the manufacturers’ CCP contractors and benefit from the “pull-through” business that manufacturers bring, given that certified contractors can be more loyal to the brand than the channel. In return, the distributor may steer a certain percentage of its non-certified contractor business to the manufacturer.

Distributors can also leverage their own relationships with contractors and CCP vendor programs, including rewards, points, etc., as an additional incentive for contractors in return for purchases. Moreover, distributors may offer online customer portals or web apps that streamline contractor access to tools and functions that help them grow their businesses.

SRS Distribution, for example, has partnerships with EagleView, GAF Quickmeasure and Hover for their roof measurement tools — these are also CCP vendor partners with various roofing manufacturers — as well as its Roof Hub tool that provides online ordering, real-time delivery tracking and other business-building tools. ABC also has online and business-building tools and hosts multiple training resources from its manufacturers. As another example, Beacon has digital and online tools and business-building solutions such as homeowner financing. Sometimes these programs can be alternatives or complementary to programs offered by manufacturers.

While valuable, the arrangements that CCP vendors and service providers bring to the CCP ecosystem tend to be less obvious than the other types. Let’s say a manufacturer has a contract with a graphic design business to provide some of the manufacturer’s marketing materials. That manufacturer could leverage this relationship by providing the graphic design firm access to all of its certified contractors. In exchange, the graphic design firm agrees to give those contractors a specified discount, acting as a “buying group” for its customers. The manufacturer not only derives a “soft” reward (reinforced loyalty from its certified contractors) but could also receive a more tangible benefit: increased sales through the uptick in business that the contractors enjoy by using more professional-looking marketing materials.

Even the distributor, which plays no direct role in this arrangement, would benefit from the increased business. There is a range of these programs, and some manufacturers have developed dozens of vendor relationships across a wide spectrum of needs (see Figure 2). 

That example illustrates the systemwide advantages of participating in CCPs.

CCPs have a tiered benefit structure

Just as each manufacturer’s certification program differs from the others’, each program also has different tiers of “gives” and “gets.” This is similar to the different levels of certification for various trades, from apprentice to master, but there are no universal standards or labels in the roofing industry (see Figure 3). Each manufacturer trademarks its own certification programs, such as Master Elite (GAF), Platinum Preferred Contractor (Owens Corning), Select ShingleMaster (CertainTeed), Mastercraft Pro Certified Contractor (TAMKO), Pro+ (Atlas), RoofPro Craftsman Premier (IKO) and Emerald Premium Certified Contractor (Malarkey Roofing Products). Even an entry-level certification gives a contractor a valuable credential and a badge that can be displayed on its website, in the home and through other marketing materials.

In addition, many manufacturers include “locator” functions on their websites, which direct prospective customers to the manufacturer’s certified contractors in their local area and can also give higher placement to the top-level and best-performing contractors. If a product has a manufacturing defect and needs to be replaced or repaired, manufacturers often turn to CCP contractors to perform this service, providing an opportunity for the contractor to build a relationship with the property owner.

In general, as contractors progress through tiered CCPs from entry level to elite, they need greater credentials (such as guaranteeing that every employee has received a specified amount of training) in exchange for more benefits. The top tiers of leading CCPs often feature rewards programs, discounts, access to business tools and networking events, and enhanced warranty protection.

Contractors also benefit from the branding designation that the manufacturer provides, as many homeowners place a good deal of trust in a manufacturer-certified contractor. In addition, contractors can leverage the manufacturer’s local sales rep to resolve any issues that might arise, such as supply chain bottlenecks. Reps can also provide certified contractors with additional education and troubleshooting support with the manufacturer. And at the highest level, manufacturers even offer warranties that guarantee the certified contractor’s workmanship in the event of any dispute with the homeowner (see Figure 4).

Manufacturers, of course, don’t treat top-tier certification lightly. Due diligence on prospective top-tier contractors includes reviewing Better Business Bureau reports, scouring customer reviews on Google and other sources, and additional background checks. In addition, local reps assess each contractor’s reputation in the marketplace. The reward for manufacturers is a guaranteed percentage of market share as well as further enhancement of the manufacturer’s reputation through word of mouth. This, in turn, can influence other contractors in the region to join that manufacturer’s CCP with the goal of mutually building each party’s business.

In summary, certified contractors receive designation/certification; preferred warranties; rebates/rewards; leads/lead generation support; favored terms on business building tools; and enhanced manufacturer rep support/training. Rebates/rewards are a critical element of this, reflecting a recent HIRI survey of a broad range of installers which found that 57% cited ‘everyday discounts’ as the number one reason to stay loyal to a contractor loyalty program. Consequently, design of these rewards is key. For instance, when it comes to reward program design, 56% of exterior contractors prefer ‘average rewards’ (offered once a threshold is reached) vs. tiered rewards (starts with a few benefits and grows with spend).

Homeowners benefit from these tiered, reciprocal relationships as well. Just as the manufacturer’s “locator” feature benefits its certified contractors, it also streamlines the process for a homeowner who is looking for a reputable contractor. The homeowner can proceed with the assurance that the contractor they’ve chosen has been designated reliable and of good quality by the manufacturer, which the homeowner often views as objective. As a bonus, the manufacturer can share additional tools with the homeowner through its certified contractors, such as free roof measurement services or visualizer tools that enable the homeowner to compare products with a 3D mockup.

What all this means for prospective private equity investors

Any review of a prospective investment in the roofing industry begins with an assessment of this underlying ecosystem of relationships, in particular the relationship between manufacturers and contractors. In essence, an evaluation of the CCP ecosystem serves as a proxy evaluation of investment opportunities. That’s because the certification process — especially at the highest level — requires the same sort of due diligence by a manufacturer that an investor would perform. And a name-brand manufacturer avoids risk to its reputation and its credibility by certifying only roofing contractors that have sufficient training, technical competence and customer service skills.

Moreover, manufacturers that grant the highest level of certification assume significant risk via enhanced consumer protections, including commercial NDL (no dollar limit) warranties that guarantee the homeowner coverage not only of the manufacturer’s roofing materials but also the contractor’s workmanship. On the commercial side of the business, the highest level of extended warranties also requires an inspection.

The manufacturer’s inspectors can often vouch for the contractor’s quality. Sometimes the warranty stipulates that the manufacturer must carry out work to address material or installation issues (e.g., on a commercial roof). In these instances, the manufacturer can choose the contractors to perform this work, and is more likely to select high-quality CCP contractors that are also good customers and can do the work in a timely manner.

This is another example of certification serving as a proxy, in this case as a means to determine the quality of a contractor.

In addition, a contractor’s level of certification can be a reflection of how committed it is to building its business — an important consideration for any prospective investor. One key metric to consider as part of the contractor evaluation process is the percentage of warrantied, digitally acquired or financed sales that the contractor has upsold. Another is the degree to which the contractor is taking advantage of CCP vendor programs in digital marketing, financing, etc. Higher performance on these measures indicates that the company is aggressively trying to obtain higher sales and/or margins. That can be a good indicator of the contractor’s willingness to expand, to adapt and to grow its leads — important considerations if growth and expansion into new markets is part of the investment thesis.

Prospective investors could also capitalize on opportunities to scale. By investing in multiple contractors, an investor could potentially “bundle” those contractors so they could negotiate better terms with manufacturers for the group than each contractor might have done on its own. Other opportunities for support at scale include customized digital solutions using a distributor’s or manufacturer’s platform. 

The bottom line

As a very broad generalization, any top-level certified contractor is likely to have already demonstrated not only a high level of competence but also a facility for the type of networking and relationship-building that is vital to success in any business. While there are also other factors to consider in any investment evaluation, CCPs are a good reference point as part of any diligence effort.

The authors would like to thank Lucy Beimfohr for her contributions to this piece. 

For more information, please contact industrials@lekinsights.com. 

L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of their respective owners. © 2023 L.E.K. Consulting LLC

Endnotes
¹HIRI Brand and Supplier Loyalty Nov 2023