Full coverage commercial service agreements should be the highest gross margin generator in your business. However, there are certain situations where it's nearly impossible to sell this coverage. One of the most common insurmountable conditions is when prospects already have a full coverage agreement in place and say they're satisfied with the service. Further compounding the problem is when you discover the competitor’s price is significantly lower than you'll accept. Rather than surrendering and walking away, I recommend selling away from the full coverage.
To do this, first offer customers a "maintenance audit." Explain that it's difficult to know whether or not their present program is working until it's too late. I never tell a prospect this service is "free," but rather that it will only require an agreement that, when the audit is completed, he or she will agree to review the results. The other commitment that I ask for is a copy of at least one year's service reports.
The audit begins with your salesperson surveying the HVAC equipment. He should remove panels to thoroughly examine the condition of coils, filters, belts, contactors, etc. If units are gas-fired, he also should look at the purge motor, heat exchanger and burner assembly. During this survey, the salesperson should look for units that are short-cycling, note the position of the outside dampers (if the units contain economizers), and note the date and outside air temperature.
If problems are discovered, take pictures. These then become part of the maintenance audit. If the audit reveals a significant number of problems and neglect, this becomes a very powerful selling tool. Many prospects take an apathetic attitude since their present vendor will have to replace components at the vendor's expense. This is when we remind the prospect that the present service provider is not responsible for the replacement of a major portion of the unit such as heat exchangers and coils.
The term "full coverage" or "all inclusive" are somewhat nebulous, if not misleading. Neglecting to ensure that the fuel/air ratio is in proper balance can lead to heat exchanger failure. If the coils are not cleaned and properly cared for, the prospect could experience another large expense—not to mention the energy that is being wasted.
Recording the information from the service reports leads to the second step of this presentation. List all labor and major component replacement cost (if there is any) and total these costs for the entire year.
My estimating system is based upon actuarial studies. Much like an insurance policy, the estimating system assumes that one out of every seven years of coverage on any given full coverage agreement will be a loser. That means that you have one chance in seven of a very small amount of cost for repair and replacement labor as well as major component replacement. The total job cost (TJC) of the estimating system should be applied as follows:
- Planned maintenance labor .......... 35% TJC
- Consumables (belts and filters) .... 10% TJC
- Repair and replacement labor ....... 20% TJC
- Major component replacement .... 35% TJC
This shows that repair and replacement labor and major component replacement makes up 55% of the total job cost. Most years, very little if any is spent by the contractor. I find that most prospective customers who have entered into a full coverage agreement have the understanding that there is some mystical escrow account where that portion of the total job cost resides. Of course, that isn’t true — the unspent portion of the estimated TJC falls to the margin line.
My recommendation: after disclosing this to the prospect, advise them to invest only in a comprehensive preventive maintenance program and escrow the 55% into their account.
You should also remind prospects that their contract states that either party can cancel the agreement with only 30 days notice prior to any anniversary date. What would prevent a service provider to coast for a few years and then bail out on the customer? If that happens, the amount the customer invested for catastrophic failures is gone forever. As dishonest as I believe this is, I’ve seen it happen time and again, especially as equipment reaches the end of the projected useful life.
I think most commercial service contractors would prefer walking away with a signed planned maintenance agreement than nothing. As a proponent of the full service agreement, this shows that one size doesn’t necessarily fit all. Look at each prospect individually, taking into account their budget, how capital expenditures are handled, and the age and type of equipment. This way we can be sure to tailor the maintenance program to each prospect’s needs.
Earl King is the founder of King Productions International, a commercial HVAC contracting sales consulting firm based in Texas. He speaks to associations and HVAC trade groups, and consults with commercial contractors across the country, in addition to writing this column for Contracting Business.com. Email Earl with any questions or comments at: [email protected] or call him at 515/321-2426.