Earl King: Task-based Pricing or Price-based Tasking?

Feb. 1, 2009
In our ever-changing industry some things never change. The economy softens; construction dries up; construction companies begin dabbling in service;

In our ever-changing industry some things never change. The economy softens; construction dries up; construction companies begin dabbling in service; prices drop. As predictable as an eastern sunrise, contractors who normally view service as an after thought, scramble to keep employees on the payroll. Building owners and managers are stressed with their own budgets — making cuts wherever possible. Commercial HVAC service tends to be one of the first to go, or at least, drastically reduced. This chain of events leads to a how-low-can-you-go mentality.

Unlike the construction business, commercial service agreements can be priced all over the board. Part of this is the result of contractors who are unfamiliar with service and typically don't have a pricing system. There are others who intentionally offer prices as low as need be to secure the sale.

An on-going axiom in service management has been that estimated gross margin and executed gross margin can vary a great deal on that portion of the base which is full coverage (up to and including unit replacement). While the aggregate of the full coverage base should execute close to the desired gross margin, any given contract in any given year will show extremes in positive/negative deviation.

Not true with preventive maintenance (PM) and inspection agreements. Any service manager worth his or her salt will schedule according to what is estimated, even when the agreement calls for little more than a quarterly filter change. In other words, achieving estimated margin should be a slam dunk. This opens the door for the sales team to secure new service agreements for virtually whatever the customer is willing to pay, and for the operations manager to make it work, at least for the short term. The service contractor knows that as a result of little or no PM, breakdowns and premature replacement will be on the rise, providing additional opportunities.

I've long been a proponent of task-based-pricing. Every component in a mechanical system has a list of PM tasks that are required at designated intervals each year. Each of these tasks requires a period of time to accomplish. Making somewhat of a warranted assumption, all service contractors who are qualified to be on the roof or in the equipment room pay their technicians pretty much the same (a national shortage of HVAC techs drives this assumption). We all pay the same for Chevy vans, gasoline, tools, and parts, leaving only one variable — time spent at the site. My preference has always been, and always will be, to demonstrate to the prospective customer the tasks needed to keep their systems in top operating condition. When the tasks are agreed upon, estimating is simply doing the math.

Price-based tasking, in contrast, is negotiating a price with the prospect and later determining how many tasks will fit the price. Many times in my career, when faced with a prospect who continually trys to drive my service agreement price down (PM), I facetiously ask them to write down what they wish to spend and I will in turn create a program for that amount. Of course, it won't provide comfort, reduce breakdowns, reduce energy consumption, extend the equipment life, etc.

Usually, this turns the focus back upon what is required. When adequate time is not built into the service agreement structure, the number of small failures increase. As we know, small failures eventually lead to major repairs and replacements. Saving money on the front end only results in larger expenses down the road.

There are many sources in the industry that provide a time study analysis for tasking service agreements, covering everything from large chiller and boiler plants to rooftop units. The third party reference is always most effective in offering proof that a substantially lower price can't possibly cover the tasks required.

While the low-balling scenario tends to be the modus operandi that some contractors subscribe to, it's more often an act of desperation. Regardless of the reasons, this pricing methodology is more than a lose/lose situation — it's losing times three. Yes, in the short term, a contractor who prices properly may lose some business. But for those who don't price properly, in the longer term, they destroy their reputations and erode their service agreement base. Last, but certainly not least, the customer loses with a poorly maintained HVAC system. They're faced with unmanageable energy bills, loss of tenants and/or business, increasingly higher repair bills, and premature system replacement.

The economy is bad, but our obligation to prospective customers remains the same: provide them with all of the necessary information to make the best financial decision.

Earl King is vice president of Houston-based Way Service Ltd., a 91-year-old Design/Build mechanical contracting firm located in four cities and serving the entire state of Texas. Learn more by visiting wayservice.com. King is also the founder of King Productions International. Questions or comments can be directed to: [email protected] or call 515-321-2426.