Service contracting can be very profitable, providing electrical contractors with a steady income that may balance the cyclical nature of new construction. In addition, on-going customer contact gives electrical contractors an advantage over competitors when customers renovate or expand existing facilities, or build new ones.
In January 2000, more than 20 National Electrical Contractors Association (NECA) members formed a Service Contracting Task Force, which met to develop innovative approaches to service contracting. Their goal is to provide the electrical contractor with the necessary tools and strategies to successfully enter or expand its existing service business.
Electrical contractors need to address many issues before they can successfully negotiate in this market, asking themselves questions such as:
What is the scope of service contracting?
It seems that there are as many answers to this question as there are electrical contractors. “Everyone’s definition of service work varies,” said Tom Morgan, president of Harrington Electric Co., Cleveland, Ohio. One typical electrical contractor’s view is that service work is a time and materials project that is performed as needed. Others examine the project’s dollar volume and even consider $500,000 jobs as service work.
For Harrington Electric, which does not yet have a dedicated service department, service work is defined as work done through service trucks for customers who require fast service and that have developed a relationship with the service technician. Service work also includes emergency and preventative maintenance, and repair projects.
“Service contracting mostly involves jobs small enough that the customer doesn’t want competitive bids and for which the technician can demonstrate efficiency and quality,” Morgan explained.
At Christenson Electric, Portland, Ore., service work is also considered to be any project worth less than $50,000, including renovation work, tenant improvements, general service or repair work, emergency and preventative maintenance, and small new construction projects for long-term clients. “We have run, actually, a $3 million project through the service department. That decision is based on the project manager’s relationship with the customer,” explained Brian Christopher, president. Conversely, the company has, on occasion, run service projects through its industrial and construction departments. “Again, that is based on the personal relationship between the manager and the customer.”
Ron Autry, vice president of Miller Electric Co., Jacksonville, Fla., agreed that the primary scope of service work is emergency repair and maintenance, preventative maintenance, and renovation. “One of the most important aspects of this market, however, is that service calls for maintenance have a pass-through value that generates additional business,” he said. On average, every $1 of maintenance work generates $4 of additional maintenance or renovation work.
Service contracting is not just maintaining or renovating traditional electrical systems. At TEC-CORP, Sioux City, Iowa, service electricians work on voice/data/video (VDV) systems. “Work includes moves, adds and changes on networks and testing all low-voltage systems,” said Skip Perley, president and CEO.
What are the characteristics of service contracting?
Service contracting is overhead intensive and requires that service vans be well stocked with the necessary tools and equipment. “It is more cost-effective for the customer when materials are available immediately,” Morgan observed.
Depending on the size of the operation, service contracting means having the personnel in place in the office to support the service technicians in the field. “In addition, the service technicians that you hire must like being mobile, the variety of the work, and the demand and pressure of having to accomplish multiple tasks at the same time,” said Morgan. Harrington’s technicians are independent and enjoy being responsible for building their own customer following.
Christopher agreed. “The typical service electrician must be independent, knowledgeable, able to make his or her own decisions, and know how to provide customer service and satisfaction.” Customers call in 80 percent of Christenson’s jobs directly to the service electrician.
According to Autry, the characteristics of commercial repair and maintenance are different from industrial or residential work. The service department electrician that responds to industrial service calls needs a different skill set than the electrician that services commercial or residential customers. “Servicing a large, medium-voltage motor in a paper mill, for instance, would be quite a different challenge than changing lighting ballasts in an office building,” he observed.
As a result, there are different overhead levels, job costs, and margins associated with the different market segments. Industrial service work is much more capital intensive and requires a larger investment in testing and heavy equipment.
“Service contracting work typically has a higher margin and is a fast-paced, high-energy segment of the business,” observes David Raspolich, vice president and general manager of Dynalectric Co., San Diego, Calif. Service contracting is also a high-image sort of business, with trucks bearing your company’s name all over town. “This means your service trucks and technicians must consistently present a clean or orderly image to the public.”
Heavier investments in tools and equipment are another characteristic of the business, Raspolich added. Service contracting success depends on having a mobile fleet and specialized tools, such as testing and recording meters, amp probes, etc. “Most critical is that the service technician must be outgoing and be willing to be on call at odd hours.”
What are the critical success factors in service contracting?
The success of any contractor’s service operation lies mostly with the technicians. “Technicians have a tendency to be personable, friendly, and conscientious, and are willing to focus more on the actual needs of the customer,” said Morgan. The technicians that make themselves valuable to the customer are the ones who build long-term relationships for the company, as well as providing the necessary technical services and advice.
In companies with a dedicated service department, which Task Force members consider critical, a dispatcher is critical to the operation. Dispatchers need to be flexible, able to maintain complicated schedules, and have the technical expertise to help customers determine their needs.
“Most critical,” said Morgan, “is providing the necessary support to the technicians, including vehicles and all the tools, equipment, and materials needed to perform the work.” Companies need to be willing to invest in their service operations for them to succeed in the long run.
Once you have the right mix of people and equipment, service contracting requires that quality work and superior customer service be provided. “Explicit trust in your technicians is critical,” said Christopher.
If you provide people with the right tools, expect them to perform, and trust that they will, they will not disappoint you. “Trust earns loyalty,” he added.
“Punctuality, efficiency, and the ability to fix the customer’s problem the first time are critical to your success,” agreed Autry. Most service customers never see the office or the rest of the organization, so the service electrician must make a positive impression.
Perley observes that dedicating a competent manager is also critical. “If you try to have someone do it part time, it’ll never work,” he said. The service manager has to be able to select and train the workforce, build the customer base, and establish long-term relationships with those customers. The manager must also provide the technicians with the support they need, and develop a pricing structure that will allow the company to both get work and be profitable.
Another critical success factor is the willingness to invest in training beyond the Joint Apprenticeship and Training Committee (JATC) programs. “Since there is more direct customer contact between the technician and the owner, the workforce has to have skills beyond the basic electrical knowledge,” Perley said. Additional training includes customer service, high-tech skills, developing interpersonal relationships, and communication skills.
How do I reduce the risks of service contracting?
The nature of service contracting means that you are constantly dealing with new customers as well as established ones. “There’s always a risk with new customers that they may not pay promptly,” said Morgan.
It is not, however, a risk of the same magnitude as with new construction because the amount of money for each service job is much smaller. One way to reduce the risk, Morgan believes, is to ensure bills are submitted promptly, as opposed to allowing monthly billing. “Of course, you need to be more flexible with long-term customers with good track records.”
There’s also a risk of over investing in material and equipment without the service projects to support the venture. “For more conservative companies, building the service contracting business slowly will reduce risk. However, if more aggressive growth is desired, the risk grows accordingly.”
Christensen Electric has found non-payment to be a minor problem and recommends taking normal precautions, such as credit checks, or avoiding potential clients who don’t seem to care about cost. “If someone doesn’t seem to care how much the job is going to cost, he or she may have no intention of paying,” Christopher said.
According to Autry, the primary risk of service contracting is safety. “Service electricians are exposed to more varied electrical environments,” he explained. They not only have to be trained technically, but be able to work safely. TEC-CORP reduces the risk by having monthly meetings, weekly bulletins, and regular monthly training that focuses just on safety methods and practices.
Another risk is not making a profit because of improperly priced or planned service jobs. “We provide training in proper estimating procedures and cost accounting to avoid this problem,” Autry said. This training is provided not only to the office staff, but also to the electricians, as they are often estimators for a project, particularly for smaller service calls.
“The risks of performing service contracting are not much different than working on traditional construction,” said Raspolich. Dynalectric does occasionally experience some problems collecting payment from some customers, but it is not a major issue, especially with the higher margins commanded by the type of work.
Higher liability exposure is another potential risk when performing service work. “Technicians constantly on the road are exposed to more potential traffic accidents. And since they also tend to be working more around energized circuits than electricians in traditional construction, on-the-job safety is an issue,” Raspolich says. The company requires its service technicians to attend weekly safety meetings and provides them with in-house training on emerging technologies such as controls systems and energy management. “Awareness training is the best way to ensure that employees are provided with the safest possible work environments.”
What is the necessary business infrastructure to ensure success in service contracting?
On this point, there is no disagreement among the Task Force members. To succeed in service contracting, the company must commit to dedicating a separate, distinct service department. That department must be staffed with adequate administrative support, including accounting, scheduling, and dispatching. “A billing section is critical to a successful service operation,” said Morgan.
Customers want billing information promptly to determine their own costs and allocate them accordingly. Morgan also suggests implementing a smooth-running material acquisition process in the warehouse and/or developing good working relationships with distributors to ensure that the necessary materials are available immediately.
In addition to administrative support, a service department should also have a dedicated staff of project managers and estimators. Christenson Electric has seven project managers that coordinate the activities of 200 service electricians in the field.
“Project managers and estimators must have the skills to manage a large group of people that are performing different types of work in several facilities at the same time,” added Autry. He also advises that to be competitive in the service market, a company must have enough trucks and projects to get the economy of scale that allows for more competitive pricing.
Perley observes that a company’s service department also needs a fleet of well-maintained vehicles that include the proper numbers and types of tools. “All of that needs to be backed up with the highly specialized tools used in testing and troubleshooting systems,” he added.
In general, the business infrastructure needed to support service contracting activities is the same as in regular electrical construction. “The business has all the same elements, there are just more of them because there are a larger number of jobs to manage,” Raspolich concluded.
How do you market, price, and benchmark service contracting?
Advertising service contracting services is not the medium of choice among Task Force members. “Advertising doesn’t seem to work because the customer may be skeptical and would rather base the decision on the contractor’s proven record,” says Perley. TEC-CORP relies on word of mouth, truck signage, and great customer service to expand its service operation.
At Dynalectric, the new construction and information technology departments help to direct work to the service department. “We always try to sell a service contract when completing a traditional or voice/data/video construction project,” said Raspolich. The company also promotes its services through networking at industry association meetings and events.
Harrington Electric, on the other hand, markets its service contracting through its TEGG franchise, electric drive service division, and its project managers. “This way we ensure that our customers know that the company can provide for all of their service needs,” Morgan explained. A Web site and company brochures are also good tools to use in promoting services.
“We find that most business comes from relationships and word of mouth,” agreed Christopher. One method the company uses to bring attention to its service contracting department is through its fleet of service vans. “Most service vans are white. Ours are red, and we’ve found that having a different color makes your company stand out.” Christenson Electric also issues a quarterly newsletter to its complete client list to inform them of current programs and services.
Pricing service contracting is more complicated. Options include hourly rates, time and materials, and firm fixed price. “The advantage to hourly charges,” said Raspolich, “is that it is easier than breaking down all the variables, such as wages, benefits, and taxes.”
The other advantage of using an hourly rate, according to Morgan, is that the customer is paying for what they get. “Customers seem to like hourly charges more than lump sum quotes, which have contingencies built in for unexpected surprises during the job.” In the residential market, however, unit pricing seems to be gaining popularity, particularly for simple projects, such as installing a new receptacle.
When firm pricing is required, it is recommended that the company price the job the quickest way its tolerance for risk will allow. “The customer wants a firm price when he or she calls, not an estimate and not a delay,” said Perley. The risk of quick quotes is that you may lose money on the job, but if you have a high tolerance for that risk, firm pricing could potentially help you make more profit.
It’s not necessary, however, to price service contracting in just one way. “It seems the company has as much special pricing as it does customers,” said Christopher. Each job and client at Christenson is handled individually and pricing is determined on a case-by-case basis.
Benchmarking success by dollars billed, growth in the number of service vans needed, and repeat business and profitability are the most common methods. “Anyone who pursues the service contracting market seriously should be able to double operations until the market is saturated,” said Morgan. Conversely, a large volume of callbacks is a sure indicator of poorer workmanship and the need to closely examine the operation for improvements.
What are the benefits of providing service contracting?
“Service work pays for a lot of a company’s overhead,” said Raspolich. This allows the electrical contractor to perform other, high-profile jobs at possibly a more competitive price. Service contracting also holds the least risk for a company and the highest profit potential because of its high margins.
Possibly most important, however, is the number of pass-through dollars that service contracting can generate for the electrical contractor. “Customers who are pleased with the service work performed and with whom the company can build long-term relationships provide extra work beyond the scope of service and maintenance,” concluded Autry.
BREMER, a freelance writer based in Solomons, Md., contributes frequently to Electrical Contractor. She can be reached at (410) 394-6966 or by e-mail at email@example.com.