$1 in Maintenance Contract Should Yield $3 in Repairs

BY ROBERT P. MADER of CONTRACTORs staff SCOTTSDALE, ARIZ. The existing building market never gets smaller and equipment is constantly marching toward replacement, said Steve Smith, vice president/mechanical services at ACCO Engineered Systems in Glendale, Calif. Smith directed his talk, March 2 at the Mechanical Contractors Association of America convention here, to contractors who have small service

BY ROBERT P. MADER of CONTRACTOR’s staff

SCOTTSDALE, ARIZ. — The existing building market never gets smaller and equipment is constantly marching toward replacement, said Steve Smith, vice president/mechanical services at ACCO Engineered Systems in Glendale, Calif.

Smith directed his talk, March 2 at the Mechanical Contractors Association of America convention here, to contractors who have small service operations or who are new to service. Smith, with more than 15 years’ experience in contracting, focused on the numbers as befits a CPA and an accounting graduate of the University of Wisconsin.

Every dollar in a maintenance contract should yield $3 in repairs, except for full maintenance contracts, which should have fewer repairs if the contractor is doing his job. Repairs typically have a 50% markup, so $1 out of that $3 is gross profit, he noted.

But beyond the numbers, service is built on relationships, Smith said. It’s a sales-driven process as opposed to construction, which is engineering and technology driven. Establishing a relationship gets customers to trust you so when you say a piece of equipment needs to be replaced, they believe you. Even if competition is introduced, the contractor with the relationship gets the “last look.”

ACCO sends all customers a budget letter every year so they know what equipment and repairs they should need.

If a customer is going to want complex work, fast-track work performed during a shutdown or labor-intensive work, such as a lot of ductwork, the contractor has to write a good scope letter, Smith said, to protect both its markup and the relationship.

“You’re not trying to trap these people,” Smith noted, just explain thoroughly what needs to be done and protect what should be a high margin.

Service has a higher overhead than new construction, 18% to 20% of revenue, ideally 18% or less, because service is more labor intensive. On the other hand, administrative costs are lower because service doesn’t have lien waivers or retention. Administrative people will need much more customer service training.

Someone in administration should handle purchasing, both to take it out of the techs’ hands and to keep wholesalers honest, he said. Administration can track OEM warranties and ride herd on service subcontractors to make sure they are insured.

Smith said he believes in telling his employees the company’s total revenue, cost of sales and margin. Any more information than that is up to the contractor’s discretion.

A service division should have its own people, especially customer service reps and salespeople. Salespeople must be managed, he noted, and management has to instill discipline in estimating and pricing. That might take the form of a selling general manager. Salespeople should be paid on profitability, not volume. They should get bonuses based on keeping and adding new customers. ACCO has no cap on how much it will pay a sales rep.

Service management must define the contractor’s markets or, more importantly, what they are not. ACCO, for example, will only sell to owners, never to property managers.

Dedicated technicians, not all of whom need to be journeymen, should do most of the service work. Service cannot be a dumping group for “B” trades people, Smith said. Not all new-construction workers can do service, but service is a good way to hang onto a contractor’s best construction workers. Personnel from the construction side can do retrofit work.

Smith differentiates service and retrofit according to field or office involvement. If people in the field can make all decisions, it’s service. If it has to come back to the office and requires an estimate, engineering, equipment and perhaps permits, then it’s retrofit.

Construction employees should still report back to their supervision in the construction division, Smith said.

Smith said he believes in having a policy on uniforms and ID badging that needs to be enforced. Driver training is mandatory. His company performs DMV searches and background checks. A bad result is not necessarily grounds for automatic dismissal — unless the technician lied about a DUI.

A service contractor must have service software, he noted, that is not new construction software and not Excel. The key functions for the software are call taking, dispatching and maintenance tasking. It all has to tie into the contractor’s main accounting system.