0052: How Service Agreements Can Increase Contractor Profits And Net Worth

Why Sell Service Agreements?

It goes to the heart of the question of the difference between a customer and a client. Service agreement holders are more likely to be clients that add more value to your construction company because they represent the most loyal segment of your customer base. Every service agreement customer represents a future work. In the meantime, service agreement customers are a source of cash flow and are predetermined to call you instead of your competition when repairs are necessary.

Non-service agreement customers are more likely to be customers and fickle. They may call your contracting company for future work or they may decide to shop the competition and use the information they find to negotiate for a lower price. In some cases they may not even remember you or your construction company name.

In addition, your replacement sale close ratio is normally higher with service agreement clients and your overall pricing and related service care level can be much higher resulting in even more raving fans. Service agreement clients trust you, follow your recommendations, and do not normally shop around.

When and if you ever decide to sell your company potential buyers understand the value of service agreements and your company will be more attractive if you have a strong base of service agreement clients and they are normally willing to pay even more for it than you expected.

Service Agreements Place On The Financial Reports

The Balance Sheet is the summary report which shows all of the assets minus the liabilities which equals the "Book Value" or owner's equity. Owner’s equity is in theory what would be left over if you liquidated the company, sold the assets and paid all of the debts or liabilities.

The true value of your service agreement clients will not show on the Balance Sheet before the business is sold; however, it is used to calculate “goodwill” if buyer pays more than book value for the company.
Construction Accounting As It Relates To Service Agreements

The price of a service agreement must pay for the corresponding maintenance and whatever is left after the cost of material, labor and other costs is gross profit. This means every service agreement carries a hidden cost for future maintenance work, which equals the total cost of services yet to be performed.

For example, a plumbing contractor might sell an annual service agreement which entitles a restaurant to four follow up drain cleaning package visits each calendar quarter for $600 and a 20% discount on all additional services.

This means you will send a plumbing drain technician to clean the main drain of the restaurant four times a year at a cost to your company of $75 for labor and overhead each = $300. The income from the service agreement is $600 - your cost $300 = $300 additional income.

Keep The Service Agreement Cash Separate

One of the best parts is you have an immediate increase in cash flow. Successful contractors put the cash in another interest bearing bank account and do not transfer any of it until the work is performed. In fact, it is not even necessary to recognize it as income until the work is done.

Maintenance That Is Never Performed

Some clients will not return phone calls and never let you schedule their service. Here are two suggestions to consider:

#1 Disconnect The Work From The Payment Think about a pre-paid annual gym membership. It gives you the right to use the gym for the next year, but if you fail to take advantage of this benefit of membership, you do not receive a refund after the fact.

#2 Maintenance Is One "Free” Benefits of owning a service agreement. The obligation to schedule the maintenance should rest with the client. We recommend you customer service representative contact each service agreement client to schedule services; however, if the client refuses to set an appointment the contractors obligation is met.

Five Benefits:

#1 Your dispatcher can group service agreement calls together saving travel time

#2 It can be used to fill in slack times when there is not enough work to go around

#3 It is a great way to train new technicians by having them shadow experienced technicians

#4 Add on sales while the technician is onsite they can ask if there is anything else that needs to be fixed or upgraded

#5 Immediate increase in cash reserves

Five Drawbacks

#1 Your dispatcher may not be able to group calls together

#2 You may not have any slack time to fill

#3 It costs more in the short run to train technicians this way

#4 It will require you to have a way to track the upcoming service agreement dispatches

#5 It requires a bit more construction accounting than most bookkeepers know how to do

Summary

The final decision rests with you to decide if adding service agreements to your contracting company makes sense or not.

If your contracting company uses QuickBooks and you need help adding the correct accounts in the Chart of Accounts and the correct set of Items and Groups in your Item list Call Sharie 206-361-3950 or email sharie@fasteasyaccounting.com

This is one more example of how Fast Easy Accounting is helping construction company owners just like you put more money in the bank to operate and grow your construction company. Construction accounting is not rocket science; it is a lot harder than that and a lot more valuable to construction contractors like you so stop missing out and call Sharie 206-361-3950 or email sharie@fasteasyaccounting.com

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Need Help Now?

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