Pricing and Selling Commercial Service Agreements

Dec. 1, 2004
Here's a step-by-step system that allows you to price out a parts, labor, and preventive maintenance agreement on nearly any size equipment of nearly any age in nearly any condition without requiring a large initial investment on the part of the customer. The system also will help you get paid to inspect the equipment. Additionally, it holds the possibility of built-in guaranteed replacement sales at a pre-negotiated price.

Here's a step-by-step system that allows you to price out a parts, labor, and preventive maintenance agreement on nearly any size equipment of nearly any age in nearly any condition without requiring a large initial investment on the part of the customer. The system also will help you get paid to inspect the equipment. Additionally, it holds the possibility of built-in guaranteed replacement sales at a pre-negotiated price.

Commercial service agreements that include regular maintenance, cover breakdowns, and sometimes replacement equipment. These agreements are one of the easiest things our industry has to sell. Building owners love them because they:

  • Eliminate surprises
  • Ease budgeting/cash flow projections
  • Provide accountants with the regularity of writing the same size check every month to the same vendor
  • Ensure that HVAC equipment runs, is safe, and is being well cared for
  • Know who to call for service.

Contractors love service agreements because they provide:

  • Additional profits
  • Increased cash flow
  • Work when times are slow
  • Opportunities for replacement equipment and accessory product sales
  • An increased customer base through exposure to the commercial customer's employees
  • Diversification.

The most common difficulty with service agreements is pricing them, due to such things as:

  • The age of equipment often poses too large a liability to include repairs as part of the agreement
  • The condition of equipment requires the customer to spend cash up front to bring equipment up to a level the contractor feels comfortable insuring
  • Pricing is often complicated, involving confusing charts, formulas and a lot of guesswork
  • It’s time consuming to inspect the equipment.

Step 1: Survey the Equipment

You can insure just about any size equipment of just about any age . . . for a price. You'll need to survey the condition and environment of the equipment before quoting the price, and you won't want to do this for free.

When a customer inquires about service agreements, suggest to them that the starting point is for you to send an experienced service technician to perform one inspection on both the heating and cooling system, for a fee.

The prospective customer's investment for this service should be quoted in advance, at an hourly rate or a set fee, the total of which will be applied toward the service agreement. Should they choose not to accept the agreement, you are still paid for the service. Any customer who declines even this first inspection either doesn't understand how service agreements work or simply isn't serious about wanting one.

Additionally, explain to the customer that your technician will do only those things which need to be done every year. Anything requiring attention that is above and beyond normal routine maintenance will be quoted as part of the agreement.

Naturally, the technician will record the brand name, model, and serial number, from which you can determine the capacity and approximate age of the equipment. The tech should also compile a list of every component or condition that seems likely to fail or cause additional expense over the next 12 to 24 months.

Step 2: Price the Agreement

After consulting with the technician who performed the inspection, determine how many maintenance calls per year will be required, how much time and materials will be necessary, then set the price (flat rate) to perform them. Be sure to account for any special environmental circumstances unique to the application, such as excessive lint, dust, sawdust, chemicals, or other airborne pollutants. Some businesses will require no more maintenance visits than residential customers, others will require several visits, in addition to periodic filter changes.

Since your technician just worked there, you’ll avoid some of the surprises you find only after agreeing to maintain the equipment — problems such as difficult access and heavy corrosion.

Determine your risk for the next 12 to 24 months. The list your technician compiled will do that for you. Look at a worst-case scenario and figure that, once you assume responsibility for the equipment, everything will go wrong.

The customer's investment for the term of the agreement is your price to repair all anticipated breakdowns, combined with your price to perform maintenance during the length of the agreement.

Equipment Not To Cover

What about equipment in such poor shape that the customer should consider replacing it now? Assuming the customer understands the benefits of replacing now versus waiting, it must be a question of affordability. That's when you can use a service agreement to make a replacement affordable.

Figure your price for replacing the equipment in question and add that to the cost of the maintenance. Make the agreement cover a longer period of time, say three to five years, and offer one for that length of time with the provision that the equipment in question will, at some point during the course of the agreement, be replaced at your discretion.

You'll find that adding replacement equipment to a full-service agreement to be an easy way to lock in customers for the long term, while reducing your own risk. Commercial customers love this because it reduces their anxiety and helps them budget. It also eliminates their need to obtain credit to purchase a new system during a time of crisis.

Another “hidden” way to keep their costs down is often to include installing high-efficiency, high capacity air cleaners as part of the service agreement. Often, you can demonstrate that adding indoor air quality (IAQ) products will more than pay for itself in reduced maintenance costs in a very short period of time. When the agreement expires, the filters have been paid for, and are the customer’s to keep.

Include a clause stating that, should the customer terminate the agreement early, all services rendered will be priced out at your prevailing rate and are due and payable. A wise contractor doesn’t perform more services than covered in payments.

Should the customer choose your replacement-option service agreement and the equipment in question has a breakdown, go ahead and replace it. Just make sure the customer has been under agreement long enough, and consequently paid enough, to cover the expense. If only a minor breakdown occurs and your installation crews are busy, then repair it. You may also choose to replace the equipment before it breaks down, when your installers have nothing else to do.

The agreement covers normal breakdowns during normal use of the equipment. The agreement does not cover damage due to negligence, misuse or intentional damage, and acts of God (fire, flood or disasters of any sort), or modifications required by a governing agency such as code violations.

Step 3: Offer It to the Customer

Since your technician just performed maintenance, the customer already knows whether or not you provide an acceptable level of service, so there’s no need to do a sales job on your quality of service. Your sales presentation is simple and direct — it consists of how you rate the current condition of their equipment and how they are covered under the agreement. It’s usually advantageous to have the technician who performed the inspection participate in the presentation.

The customer will either respond favorably and go with the agreement, or decide to take their chances and pass on it. Either way, you walk away a winner. You were paid for the services rendered and, as long as you and your tech made a favorable impression, when the anticipated breakdowns do occur, they'll call you for the repairs or replacement.


Check with your state’s licensing board and insurance commission to see whether or not full-service agreements of this type fall under their jurisdiction.

You may be required to acquire an insurance license (usually consists of submitting a form with no testing or classes required) and establish a regulated “reserve fund” that retains the unused portion of the funds collected until the services are rendered. This is a good thing because you’re supposed to open a separate cash account for service agreements anyway.

Don’t let the fact that it may be a little complicated to set up deter you. That’s one of the secrets to success. Tom McCart used to say, “Successful people do what unsuccessful people are unwilling or unable to do.” The fact that it’s difficult or complicated to set up may be the very reason you want to offer this type of agreement. You could become the only contractor in your area with the ability to provide this type of service.

Next month, I’ll cover prospecting commercial customers for this type of an agreement.