by Richard Harshaw

Most contractors agree that service agreements are a good idea, but most don’t offer them. This is due in part to fear in how to price them— setting a price that is attractive to the customer yet provides enough margin for the contractor to assume the risks and obligations he commits himself to. Let’s tackle that issue head on! It’s not as difficult as it may seem.

First, decide what kind of agreement you want to offer— full coverage, maintenance, or inspection only. A full coverage agreement covers all parts and labor (with heat exchangers and compressors falling under the OEM warranty rules); a maintenance agreement covers annual inspections and run-tests of the units with minor adjustments made at no charge; and an inspection agreement is nothing more than annual “clean and checks” in a pre-paid form.

The inspection only agreements are easiest, since no parts are involved (other than perhaps a 1-inch throwaway filter). You only need to estimate the average time it will take to perform a pre-season clean and check (two of them if you cover both the heating and cooling seasons) plus a little drive time. Most techs can run an inspection in about 30-40 minutes, plus an average of, say, 10 minutes of drive time. (Remember, you will run the pre-season calls in the same part of town for that day, so drive time will not be as much as you might think.)

The only thing left to do is decide on what labor rate to use. You do not need to use your normal street rate, because your normal street rate has all your service overhead built into it, and that includes the costs to acquire a customer. If you normally used a street rate of $70 per hour (whether or flat rate or time and material), you might try $55 or $60 an hour for the service agreement  labor rate. So a typical 55-minute agreement would sell for $55 (using $60 per hour) plus another $5 for a filter— $60 total would do it. If your labor rates were higher (say, $80 to $100), the agreement would run up to about $97 per inspection.

The maintenance agreements would start with the inspection only price and add some extra time and cost for the extra labor a maintenance agreement entails (full run-test of the system with pressures, temperatures, voltages and currents checked, as well as testing all safeties, cleaning of blower wheels, and lubrication of serviceable bearings). That might add 15 to 20 minutes to the job, so adjust your labor charge accordingly. As for chemicals and materials, add another $10 to cover them and you’d be in the ballpark. So a single-inspection maintenance agreement (using the $60 labor rate we decided to use for agreements) would run about $95 per call. If you want to include changing a humidifier pad, add that to your price.

The full coverage agreements are the trickiest to estimate, since you are escrowing customer funds to cover all labor and parts and you really cannot predict with great accuracy what a unit might do in the coming year. Basically, you will take your maintenance agreement price and add to it to cover labor and parts. Don’t make the mistake of thinking you should escrow half and hour and $100 in parts to every unit you cover under these agreements. You are going to play the “breakage.” For every 100 units  you cover, a certain number may require a covered repair during the year. How many you need to allow for in your calculations may vary with what part of the country you live in, but in well-maintained units, failure rates of 10% or less are very realistic. So for every unit, you would need to escrow only 5% to 10% of the cost of parts and labor to cover yourself. If a typical covered repair (remember, we are treating compressor and heat exchanger replacements under the OEM warranty provisions) took 2 hours and $150 in parts, you would need to escrow between 0.10 and 0.20 hours of labor per agreement and $7.50 to $15.00 for parts. Then you must add a markup for the parts— let’s end up, say, at $20.00 to $40.00 for parts. Your full-coverage agreement then would run about $95 for the maintenance portion plus another $12.00 for covered labor and $40.00 for parts, making it come in at about $147 per inspection. If you include humidifier pads, add that figure.

Good luck pricing your agreements, and may you sell enough of them to ease your discomfort at this difficult time in our country’s economic struggles. Cash in the bank always beats credit on the line.