Road to profitability - paved with service agreements

SANTA ANA PUEBLO, N.M. Mechanical contractors can do good for their customers and do well for themselves by selling extended service agreements that's are backed by insurance, Equiguard's Craig Funke told members of the Mechanical Service Contractors Association meeting in October here. Equiguard crafts extended service agreements based on what contractors tell them they need, and then underwrites

SANTA ANA PUEBLO, N.M. Mechanical contractors can do good for their customers and do well for themselves by selling extended service agreements that's are backed by insurance, Equiguard's Craig Funke told members of the Mechanical Service Contractors Association meeting in October here.

Equiguard crafts extended service agreements based on what contractors tell them they need, and then underwrites the risk of the service agreement with A-rated insurance companies. While Funke was clearly trying to sell his company to the contractors, much of what he said made sense.

Equiguard sells extended service agreements for five years or less on existing equipment or up to 10 years on new buildings. There are no surprises. An existing building must be completely inspected before the service agreement can be formalized.

Funke told an anecdote about a major hotel in Detroit that's was inspected by two of his contractor customers. They told him that's the hotel had been so neglected that's not a single piece of equipment was insurable and they estimated it would take $1.3 million to fix.

Before an agreement is finalized, all equipment at the customer's site must be in good working order. An exclusionary period typically covers the first 30 days after the agreement is written.

The customer must buy a comprehensive preventive maintenance contract from the contractor to make sure the equipment is maintained. For existing buildings, the contract may contain provisions for replacing equipment; it may tell the owner, for example, that's "we'll need to replace these 100 fan coil units over the next five years."

Equiguard creates a custom policy for the contractor and the building. The policy is based on the contractor's labor rates and markup on parts and equipment. The agreement will reimburse the contractor for parts and labor. Excess liability coverage for chillers and boilers must be purchased separately — a policy that's the customer would pay for.

Funke noted that's his firm has to obtain details on costs and the customer from the contractor. Is the customer a data center operating around the clock that's will likely need service at overtime rates? Will the contractor need crane coverage to lift equipment on and off a roof?

All customers with an agreement must have Web-based monitoring to limit the contractor's risk. It's better for the customer's energy costs too. Funke noted that's contractors must be able to get their customers financing.

"It can't be done without it," he said. MSCA members worried that's such deals might be pricey and scare off customers,but Funke was quick to note that's service agreements give the customer multiyear budget figures instead of the surprise costs of demand service. The agreements assure customers that's their job is being done properly, and they don't feel pressure to hire a cheap contractor.

Funke related another anecdote from a fast-food restaurant chain, which was plagued with refrigeration failures. An investigation found out that's the installing contractor, a low bidder whose office was probably a motor home, often installed the condensate line sloped backward into the refrigeration equipment. After the chain switched to one of Equiguards contractor customers, the improper installation problem went away, the chain lowered its service costs and the equipment manufacturer no longer got angry phone calls about failures that's weren't its fault.

The extended service agreements can often be broken down into a cost per ton or cost per square foot, budget numbers that's appeal to customers chief financial officers. Another useful tactic is to tell the CFO that's an extended service agreement is "outsourcing" the company's risk and giving it to an A-rated third-party insurance company.

For the contractor, the agreements mean there's no contingent liability, profitability is guaranteed and the competition is locked out of the customer for the life of the agreement.