A Period of Risk

Doug Olson, president of Premier Electrical Construction, Brooklyn Park, Minn., hasn’t faced a major complication when it comes to post-warranty risk, and he hopes he never has to.

“They just nickel and dime you,” he said. “Hopefully I won’t have to deal with that in my lifetime.”

For ECs across the country, post-warranty issues do not tend to be major concerns, but they can create unexpected costs a contractor should plan for on every project.

“It’s not a huge risk,” said Joel Moryn, president and CEO of Parsons Electric, Minneapolis, about warranties. “It’s not something we think too much about day to day.”

But as the economy gets worse, owners are always looking for ways for someone else to pay when something goes wrong. That can be a dangerous scenario for the electrical contractor.

What are post-warranty risks?

A post-warranty risk occurs, as the name suggests, after the warranty period ends. That sounds simple enough, but according to Andy Berg, chapter executive of the San Diego County Chapter of the National Electrical Contractors Association (NECA), it is much more complicated. He said the problem with warranties comes when there is a question of when the warranty period begins.

“Is it when the building is completed? Is it when the installation is complete? Is it when there is a notice of completion? Or is it when it is in use?” he said. “If something fails two years after completion, when did that warranty period start?”

A warranty usually covers installation, and Berg recommends the time of warranty coverage to be from the date of installation. If it is not, you may be setting yourself up to lose money, he said.

“If you put it in, you’ve got 365 days from when you installed it,” Berg said.

Accordingly, Berg said any warranty you give ought to cover only the work you do and nothing more.

“Manufacturers are responsible for giving a warranty for the materials installed,” Berg said.

If there is something wrong with a part, Berg said the manufacturer should be responsible for fixing the problem. However, if a part fails after the manufacturer’s warranty ends, the customer may call you in to fix the problem and expect free service.

Post-warranty risks and the contractor

Post-warranty risk affects contractors in small ways that add up in the long term. For example, if something fails on a job site, it costs the electrical contractor money to send a team out to investigate and fix the problem.

“If you pay attention to quality control, it mitigates a good share of the risk,” Olson said. “I put the responsibility of the product on the manufacturer, but they don’t cover the labor. We try to leave that open to negotiations when we’re buying the product.”

Olson also sees the risk as something he can control to an extent. For his business, it makes sense to plan for risks from the beginning, knowing what it is going to face from the start.

“We put in a warranty item in the operating budget, and each year, that goes up,” he said. “We know we’re going to have to go back to jobs, and we recognize it as a business expense.”

Olson recommended contractors include the money to deal with warranty issues in the business model, and the expectation ought to be that issues will come up that will need fixing once installation is complete.

According to Berg, contractors should plan to redo one-half of 1 percent of costs of a project to stay ahead of warranty issues. It makes sense to plan in advance for these added costs.

“We have a heart-to-heart with the owner before the project,” Olson said about ways he avoids this issue. “Some owners are getting quite sophisticated with asking for 10- and 15-year warranties, but the product doesn’t last that long. We put the replacement and the labor to replace it in the bid.”

Knowing there is risk is half the battle, but planning for it by putting it in your bid will save you money later.

Contractors also risk losing money when on-site maintenance crews start tinkering with components before they have been called to fix a problem.

“Does the contractor know about the tinkering?” Berg said. “If they don’t, they may be working on something someone else damaged at a cost to them.”

According to Berg, there have to be limits in place on in-house work to protect contractors against this problem.

“The installing contractor ought to be contacted before owners tinker with work,” he said.

If they are not called, contractors may be forced to fix something that is not their responsibility. Contractors should have specific language defining when the term begins and ends and what and who can work on the systems if something fails, Berg said.

Joel Moryn sees a potential problem with warranty issues with new and untested products and technologies.

“There are a lot of new products out there, such as LED lighting and solar. I’ve seen multiple failures, and you have to deal with them. These technologies are pretty untested,” Moryn said.

If new technologies fail, the contractor could lose a good chunk of change trying to figure out why.

“By the time you identify the problem and isolate it, you’ve spent some significant money. Troubleshooting is costly, and manufacturers are reluctant to take on that responsibility. You have to prove it was their fault,” Moryn said.

New technologies come out all the time, and contractors do not have the benefit of decades of experience using them to help deal with a failure of some kind. This lack of experience should be planned for in the bidding process, as well.

Protecting your business

Contractors have many options for protection against post-warranty risks. First, the language in the contract should be as clear as possible. Putting it in the contract lets the owner know what you, as the electrical contractor, are responsible for and under what circumstances you will come back and fix a problem. Laying this out early sets your responsibilities in stone and protects you from unexpected costs.

Contractors should agree with owners on a specific time period—one year in most cases—and should define when that period starts and ends.

“Bite the bullet, and talk to your suppliers. Have them take on some of the responsibility. The standard is one year, but sometimes they will agree to two,” Olson said.

Regardless of the time period, Olson advised contractors to know when their responsibility begins and ends.

Keep the conversation open between yourself, the owner and your suppliers. Joel Moryn looks at warranties from a different angle. He sees it as a three-way conversation between owner, electrical contractor and manufacturer.

“We try to limit our risk to what the manufacturer covers. We limit our risk to those same problems. It’s important to get the manufacturer in the loop with a three-way conversation,” Moryn said.

By including the owner and the manufacturer in the discussion before a project starts, all three parties can plan for the risk appropriately.

In general, post-warranty risks are not big, but they can be an annoyance and a detractor from your bottom line. Post-warranty issues are risks only if you don’t plan for them. If you incorporate them into your budgets each year, you will not have to worry about how they affect your business. Keep in mind the trend to extend warranties beyond the normal one-year time frame. In some cases, these warranties go beyond the normal lifespan of a product. And speak openly with your customer about what can happen if the product you install fails and isn’t covered by the manufacturer.

KOHMSTEDT is a freelance writer in Champaign, Ill. He can be reached at jeff@jkohm.com.

About the Author

Jeff Kohmstedt

Freelance Writer
Jeff Kohmstedt is a freelance writer in Champaign, Ill. He can be reached at jeff@jkohm.com .

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