• Full Coverage Service Agreements: Are They Worth It to You?

    Feb. 1, 2011
    The truth is, if a full coverage agreement is estimated properly, applied to the right types of systems, and managed diligently, it provides the highest gross margins in our industry.

    Today, there's still much reluctance and skepticism regarding the sale of full service agreements. The truth is, if a full coverage agreement is estimated properly, applied to the right types of systems, and managed diligently, it provides the highest gross margins in our industry.

    Three conditions must be in place before the full coverage base begins to work. First — proper estimating. Since there isn't room here to give justice to the topic, here are several key estimating elements.

    Sales personnel should record all pertinent information from the nameplate of each unit. Each compressor and fan motor should be listed according to RLA and LRA numbers. Model and serial numbers must be recorded. This provides a means for the service operations team to verify the tonnage and age of each unit.

    All conditions should be noted. I recommend the person doing the survey take pictures of all units. The pictures will show proximity of the equipment and also record problem areas.

    Filter sections must be opened and the filters counted on each unit. Don't rely on what another technician writes on the outside of the unit.

    Secondly, the type and age of equipment needs careful consideration. The ASHRAE Fundamentals Handbook states that packaged and split systems have a mean life expectancy of 15 years. While there are always exceptions, I typically won't offer full coverage on units older than 10 years. Your surveyor should go beyond just the age before determining whether units qualify. This includes visually inspecting equipment to determine what shape they're in. Are there any known or documented problems with the type of equipment to be covered? For example, it's a safe bet that every manufacturer occasionally produces a unit that's troublesome. Your surveryors need to know what to look for. Your service managers can help by establishing parameters on what will be accepted, according to equipment size and type.

    Here's a good practice: don't offer full coverage on any equipment that you're uncomfortable replacing. If large boilers and chiller plants, for example, aren't your forte, there are several underwriters who will offer insurance on them.

    Equipment that should be acceptable for a full service agreement is equipment that your technicians can effectively perform comprehensive preventive maintenance on, replace components, and perform fast and accurate diagnostics. On large service agreements requiring hundreds of yearly hours, make sure your labor pool can handle the load, or, at least have a strategic plan to ramp up quickly.

    Managing a full coverage service agreement base begins with an experienced service manager and a checklist. The checklist should include items such as cost per ton, a review of equipment age and size, the size and quantity of filters, and the number of belts to be provided. Even things like parking restrictions and height requirements, travel time, and travel labor should be included in this review. Overtime calculations should be on the checklist. The type of building occupant is also a factor: an 8-to-5 operation needs less overtime than a three-shift operation.

    Third, after all the bases are covered, there is still one major requirement for your operations team — the start up procedures on the first inspection and/or seasonal start-up should be performed meticulously. Once the service department signs off on a new full coverage customer, they own it. Temperature and pressure readings should be recorded and all equipment observed through a complete cycle.

    If you don't have a "grandfather clause" in your full coverage contract, I recommend this one, "If, during initial inspection and/or seasonal start-up, equipment is found to be inoperable or non-maintainable, the contractor shall provide a quotation for repair and/or replacement within 30 days. If the customer doesn't accept the quotation, said equipment shall be deleted from the contract and the contract price adjusted accordingly."

    If these steps are implemented, you will find that the executed gross margin (on the aggregate) of full coverage agreements are the highest percentage of any portion of your business.

    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 commerical 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.