Service agreements. Any contractor who’s attended a convention or trade show over the last couple of decades has heard those two words bandied about in presentations or roundtable discussions. But how do these agreements, also called maintenance agreements, really work?
The basic principle of service agreements is enrolling a client for a pre-paid fee during a specified period where the contractor will provide maintenance and repairs at a discount. The benefit to the contractor is guaranteed work, much of which can be scheduled during slow times.
“A service agreement program keeps field service personnel working during slow periods,” explains Matt Michel, founder of Service Roundtable and Service Nation Alliance. “Since they are pre-paid, they help with cash (though care must be taken to bank the revenue and draw it down appropriately). Fundamentally, they represent an unstated agreement with the customer that he or she will do business exclusively with the contractor for a pre-determined period in return for certain benefits.
“Ultimately, a service agreement is a relationship marketing initiative; it ties customers to contractors.”
Gary Elekes, founder of EPC Training as well as an HVAC and plumbing contractor, agrees: “This is about creating a sticky customer base. Yes, you need to perform the technical work properly. But it is 100-percent geared toward locking in a client so that at least two, sometimes three times a year, we send a technician to the client’s home. The goal is to build a relationship, create a level of trust and build a customer who is interested in staying with the particular contract you brand.”
He compares home services agreements to dental services, where people have trusted dentists for semi-annual checkups and emergencies.
“When you crack a tooth, you don't go online and search for a dentist; you call your provider, somebody you trust,” Elekes explains. “And that's the same model we're trying to create for the home services platform—where clients trust our brands. That's the name of the game. If you can keep your customers sticky, then you send an ad. You work less hard on your external marketing and advertising.”
Of course, building trust is a crucial step in retaining clients. Establishing a service agreement program not only locks in customers for one, three or even five years, but it also gives those customers perks such as priority service and a 15 percent or more discount on repairs, Michel says. “Some contractors discount or eliminate the response charge—trip charge, service charge, diagnostic, etc.,” he explains. “Some offer overtime at standard rates.”
Elekes distinguishes between a maintenance program and a “club” service program. Within the maintenance portfolio, contractors can offer a variety of services, such as equipment tune-ups.
“The maintenance work also is performed at a discount, or should be,” Michel adds. “The maintenance itself will extend mechanical equipment life, prevent inconvenient breakdowns and restore mechanical equipment to ‘factory fresh’ conditions, which restores efficiency and capacity. All mechanical equipment tends to degrade over time unless maintained.”
But the true service agreement is much like what Costco and Sam’s Club offers, Elekes explains—specific benefits only available to club members.
“There are scaled benefits you give to a client who is willing to join your club,” he says. “We like to suggest that people brand their club, giving it a name. The basic idea of branding the club then separates it in the consumer's mind: ‘Oh, OK, this is different from regular maintenance.’ Then they want to know about the benefits.”
Setting it Up
Before you start determining how you want to structure your company’s service club program, you need to get team buy-in.
“There is a time tested, proven approach to creating a service agreement program that generates buy-in from the team,” Michel notes. “HVAC expert Ron Smith developed it and it continues to work. The process involves eliciting the team to identify everything they personally would do if they could design the ultimate agreement, estimating a value for each step, and building the agreement from there.”
Elekes adds: “Have a definitive purpose, get committed to the idea that this is something you want to do. Service agreements need to become part of the company's fabric, part of its DNA; this is part of what we do every day, all day. It's never going to go away. Appoint a champion; someone needs to own it. One person should be responsible for the success of the program. Then set up your tracking and your measurements; what gets measured, gets done.”
Some membership perks could be priority service, no overtime or weekend charges, monetary incentives and a guarantee on repairs.
“We create a lifetime repair guarantee on any repairs that attach to a club customer,” Elekes explains. “A lot of contractors are going to freak out about that type of benefit. But the point is it's different than maintenance.”
He also created a monetary incentive, similar to the club coupon offered at Costco. “We give the customer double the value of the club agreement to apply toward a separate purchase if they ever want to buy something,” Elekes notes. “Same with equipment.”
Service Roundtable’s typical residential agreement involves discounted maintenance work because it is performed during a period of weak demand, Michel explains. Benefits such as priority service and repair discounts are often included.
“The exceptions are full coverage and partial full coverage agreements,” he says. “In a full coverage agreement, the contractor is responsible for maintenance and any repairs. In a partial full coverage, there are exceptions, such as the compressor for HVAC. A variation on partial full coverage is where the exceptions are a shared cost—such as a 50 percent discount.”
For contractors, a full coverage or partial full coverage agreement involves a thorough diagnostic of the covered items and a requirement for immediate repairs for anything not up to snuff, or it is excluded. This generates work immediately.
“Full coverage and partial full coverage agreements typically have a term of three or more years to even out the impact of significant repairs in the first year,” Michel adds. “If there are a lot of repairs in year one, the contractor may be upside down, so that years two and three are required.”
How much should you charge customers for a club program?
“Do not burden it with your standard overhead,” Michel advises. “Either departmentalize maintenance or price it on a marginal cost/marginal revenue basis. There are not many added costs to performing maintenance beyond rolling a truck and fully burdened field labor (without overhead). Fundamentally, a service agreement program is a customer retention and marketing program. If you merely cover your marginal costs, you are ahead of the game.”
He adds that most top contractors have begun to shift away from annual payments and now offer monthly plans. Many still give clients a choice, but the direction is toward automated monthly billing.
Setting the right price will help with a potential obstacle, which is the labor pool. Contractors do not want to send their highly trained, highly skilled technicians to perform maintenance calls. Yet, the relationship with the technician builds the brand and the trust.
“We like to teach contractors that as you grow your program, you need to create a new job classification—a maintenance technician—to handle these calls rather than a full-scale service technician,” Elekes explains.
Maintenance techs might be just out of school or new to the trade, or someone already on your payroll may enjoy a low-stress job and not dealing with distraught customers in an emergency.
“If I enroll a thousand customers who pay me $200 upfront for a one-year service club agreement, I can place technicians in their homes because I can afford the payroll,” Elekes adds. “As we get busy in April, May, June, and July, we use the maintenance techs to run the maintenance calls and the regular service techs go back in and run service.”
Michel adds: “The classic approach to get customers to enroll is to present two repair prices on the invoice. One is the standard price. The other is the discounted price for service agreement customers. Customers see the discount and ask about it or the field service person points it out.”
HVAC vs. Plumbing
Typical HVAC agreements (twice a year) involve a “precision tune-up and professional cleaning” before or at the start of the cooling season, Michel notes. Also, a safety check and combustion adjustment are performed before the heating season (assuming gas heat).
“As Ron Smith noted, a service agreement is a replacement waiting to happen,” he explains. “In HVAC, contractors should expect a replacement for every 10 to 12 service agreements. These replacements involve higher close rates and better margins than leads coming in over the transom or from marketing.”
Michel adds that plumbing service agreements came to be seen in a negative light by consumers and many plumbers. They became more of an avenue to inspect the system looking for repair or replacement work than true maintenance.
“Once contractors create a great club program, they have to train their technicians on the client experience,” Elekes notes. “We're not in the business of going into clients’ homes and trying to sell them everything. There's a lot of animosity inside of the trade about it. But that’s more of a cultural problem. Instead, you should talk to the customers about what's going on in their homes.”
Service Roundtable’s plumbing agreements are “heavy on maintenance work and light on the rest, with the mission of demonstrating value to the homeowner,” Michel says. “However, they are once-a-year maintenance programs.”
Commercial Agreements
Commercial maintenance is driven through the direct contact relationship, Elekes says. On the residential side, homeowners call a contractor for a service call and a technician is dispatched, who completes the repair and enrolls the client into the club agreement.
“On the commercial maintenance side, we would want to find commercial buildings and commercial developers with a lot of equipment, and then we would talk to them and offer them a maintenance schedule,” he explains. “Everything is custom to that set of equipment. And every commercial agreement is priced uniquely. It's the age of the equipment on the roof, the types of equipment, the quantity, the location of the equipment, is it easy or difficult to access.”
Some building owners may not have a large maintenance budget, so you need to work within the budget, recommending lower-cost equipment that will still get the job done.
Another agreement option is to do all the recommended maintenance that the manufacturer would set up for the equipment types to bring it up to factory condition.
“Usually, we’ll find a mix of products on the roof, so we're going to give a very specific recommendation and that comes with a higher price,” Elekes explains.
But it’s the next option that readers may balk at, he says—The Guaranteed Solution.
“We create a price for the client’s building and equipment, and the client will pay us quarterly,” he says. “The agreement puts a full parts and labor guarantee on all the equipment. So, it doesn't matter what is installed; it doesn't matter how old it is. I'm going to create a price. The guaranteed solution might be $30,000. However, you will not pay another dime. If anything fails, I, as a contractor, own the relationship with the failure and the costs. There's going to be some work and repairs to get done upfront. That's the condition.”
This is when multiyear programs come into play. It is wise to note the repairs and replacements are considered building improvements so that clients can write off the depreciation on their taxes.
As we end 2020 still in the midst of a global pandemic, contractors should look to 2021 as an opportune time to educate their customers on equipment and services that can keep their homes and businesses safer.
“With COVID-19, we should be asking our customers about their indoor air quality,” Elekes notes. “How can we enlighten them about air-to-air exchange, filtration systems, water softening, the need to change filters. The marketing funnel is how you talk to those customers, how you're going to reach them.”
Michel adds: “We have yet to see how the impact of the SARS-CoV-2 virus will affect the way we perform service in the future. Masks may or may not remain. However, there should be good opportunities to sell health and IAQ products that will absolutely require maintenance. This includes water filtration and air purification systems. Service for these should be added into the price of a service agreement.”