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How to Create or Update a Service Agreement

Service agreements are the backbone of future profitability for a residential service and replacement company. Service agreement customers are more loyal, less price sensitive, and cost less to serve than customers-at-large. Every contracting company should have a service agreement program. Sadly, many do not. Of those with a program, most are ‘me-too, out-of-date knock-offs’ or 30 year-old service agreements.

If you lack a service agreement, don’t waste any time. Create one. If you’ve got one, maybe it’s time to update it.

There's a time tested method for developing a service agreement that was originally created by Contracting Business Hall of Fame member, Ron Smith. It starts with an introduction of the concept to your service employees. Then, you lead them through a brainstorming session where they offer up all of the maintenance steps that could and should be done in a perfect world. Next, the technicians assign a monetary value to each task, which also serves to justify the program’s value for the technicians. The result is more than a service agreement. You will also create employee buy-in.

Identify The Tasks

Assemble your employees for a meeting and kick it off by asking them what types of maintenance and inspections customers should have done every year. Here are some items commonly found in HVAC service ageements:

• Check refrigerant levels

• Clean debris from the condensing unit interior

• Inspect and clean condenser coil

• Comb fins as necessary

• Inspect and clean contactors, relays, board, and other controls as necessary

• Inspect line sets for damage

• Inspect and clean air handler blower assembly

• Inspect and clean evaporator coil

• Inspect drain pan

• Flush condensate drain line

• Visually inspect furnace heat section for leaks

• Conduct a carbon monoxide test

• Clean and adjust burner assembly

• Inspect flue for corrosion and proper draft

• Clean or replace filters

• Inspect duct system

• Measure and record outdoor dry bulb. indoor dry and wet bulb, high and low side system pressures, temperature rise, volts, amps, and supply and return air flow.

• Test and adjust gas line and manifold gas pressures

• Clean and adjust burner assembly

• Clean furnace heat exchange or elements

• Verify good flue draft

• Test safety controls

• Tighten electrical connections.

This is not meant to be a comprehensive list, but a possible starting point. Get your technicians to list every item or task they can think of to build your own list.

Assign Times and Values

Once you’ve developed a comprehensive list of maintenance tasks, ask your technicians how long it would take to perform each task. Separate those tasks that demand their undivided attention from those that can be done while another task is performed.

Ask your employees to assign a monetary value to the customer for each item on the list. It could be the cost you would charge to perform the task. It could be the cost of further damage if a breakdown is prevented due to a maintenance procedure or an inspection.

Some people make it harder than necessary to assign a value to preventing a problem. Your technicians should have some idea what the odds are that a problem will occur in a year. Ask how many homes out of 100 will have the problem in question over the course of the year if no maintenance is performed. For example, out of 100 customers, how many lose a compressor due to improper charge? One? Two? One out 200? One out of 500?

It doesn’t matter what they come up with as long as the technicians think the number is reasonable. Their answer gives you the odds of a breakdown occurring without maintenance. Multiply the odds by the cost of a repair. For example, if your technicians selected one out 200, multiply the cost of a compressor replacement by 1/200. If the average cost to replace a compressor is $1800, the value preventing the replacement is $1800 X 1/200, or $9.00.

Do not be surprised if your technicians disagree on the value. Let them talk it through. You might select the average or the low estimate to be conservative. Write down all of the costs and adjourn the meeting.

Take the list of tasks your employees brainstormed and write them up. List the time required for those tasks that demand complete attention and list the value to the homeowner besides each task. Total up the time and the value. Don't be surprised if the total value seems astronomical.

Set Your Selling Price

Work up a cost to the homeowner for providing the service, based on the variable costs (e.g., fully burdened employee pay, cost of operating vehicles, etc.). Add to this an appropriate amount of overhead to represent the added cost to administer the service agreement program, print up forms, and so on. An “appropriate” amount of overhead is limited to the marginal overhead incurred as a result of adding the service agreement.

Finally, add an appropriate level of profit to determine your selling price. You may want to adjust the price up if it seems too low or down a little if it appears high. Regardless, your selling price will probably be far less than the total value to the homeowner that your employees estimated. If not, hold a follow up meeting and suggest new, high value tasks to increase the perceived value of the service. And don’t forget to include the value of repair discounts, waived diagnostic fees, and so on.

Achieve Employee Buy-In

Hold another service meeting. Present the list of tasks. Get agreement from the technicians that these tasks are necessary and/or beneficial. Remind them that it's their list, not yours.

Once your technicians agree on the list of tasks, present the total of the value figures they provided. Some technicians may express disbelief. Remind them that these are their values, not yours. Ask which items they would like to adjust and make adjustments accordingly. It shouldn't make much difference overall.

Don't let one technician dominate. Get others to agree as well.

Once everyone agrees on the tasks and the value to the homeowner, ask your technicians to come up with a sell price. It's almost certainly going to be higher than the one you calculated. Your sell price is cost based. They're looking at the value to the homeowner.

Present your sell price and ask if that would be a good deal for the homeowner. Say, “The customer wins!”

Ask if everyone should have a service agreement at this price. Finally, seek agreement that they would be doing the customer a disservice if they didn't let him this was available.

Ask your technicians how they benefit from a service agreement (here is where you might introduce a spiff or incentive). Remind your techs that the service agreement is designed to be performed when calls are light. It keeps their hours up when they might otherwise be sent home. Say, “You win!”

Now, show how the company benefits. Your technicians need to understand this because they know you're not doing it for pure benevolence. You benefit, of course, by locking up the customer, by keeping your people working off-season so they keep working for you, and by the cash flow that comes from prepaid work. Say, “The company wins!”

Periodically, revisit the service agreement to see if new tasks should be added or existing ones dropped. Follow the same process, but start with your base agreement.

This process has worked well with companies across the country for decades. By involving your technicians in this manner, they take ownership of the program. Your maintenance program is comprised of the tasks your technicians think are necessary. It's the value your technicians determine. It's become “their” program.

Matt Michel is the CEO of the Service Roundtable , HVAC’s largest business alliance. The Service Roundtable has a full array of service agreements, maintenance forms, service agreement brochures, service agreement pricing calculators, and much, much more for a $50 monthly subscription. Call 877.262.3341 for a free website tour.

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