Few businesses are immune to periodic work slowdowns. Slowdowns are usually just seasonal and relatively short, but at other times, as in the current recession, they can be both prolonged and painful.
There’s a way to even out the highs and lows with steadier business volume and cash flow: service contracts. They’re valuable in many ways. As long as a business supplies top-notch customer service, service contracts provide an inside track on retaining the business relationship after the contract expires. That eliminates the hassle of rebidding for work.
Contracts also can serve as a springboard to supplying services above and beyond those specified in the contract. In addition, contracts help fend off competitors who might approach the client during the life of the contract.
“We started using service contracts about four years ago,” says David Wallwork, president of Brian’s Waste Recycling in Lumberton, N.C. The company cleans everything from grease traps and drain lines to lift stations and septic tanks. “The advantage is that the clients know what they’re getting and know all the costs upfront.
“Also, if we have a guy on a service contract and a competitor comes in and offers to clean his grease trap, the client can tell the competitor that he’s under contract. So it helps keep our competitors at bay. At the same time, we both feel like we have obligations to fulfill, so it strengthens the bond between our company and our clients.”
Stung by a swift rise in gasoline prices last year, the company now includes in its contracts the ability to impose a fuel surcharge. “We’ve got that language in there now,” he says. “But just as important, we’ve lowered our prices, since the cost of fuel went down, so our customers know we’re not gouging them.
“Some of our contracts are for one year and some are for three years. We have contracts with fast-food restaurant chains, several school systems, and nursing homes. Occasionally there’s resistance because customers don’t want to be locked into a contract. But they’re more comfortable with it after they review the benefits. For instance, we might offer some of our services for free, like an annual jetting of their influent and effluent lines, as a bonus for signing a contract.
“Aside from the fuel surcharge, our contracts don’t allow us to raise prices, so we have to be strategic with pricing. We’ve thought about including in the contract a certain baseline annual percentage increase, perhaps based on the cost-of-living index, maybe 2 or 3 percent a year, but we haven’t gotten that far along with it. That hasn’t hurt us financially. It’s a great tradeoff in terms of maintaining steady business.”
“We’ve used service agreements since the company started in 1991,” says Laurie Wilson, president of Biotech Solutions Inc., which provides drain-cleaning and grease-trap pumping services in Littleton, Colo. “I have a computer maintenance background, so it was something I was familiar with. Service agreements are great because they generate a continuous flow of revenue. They’re the core on which we build the rest of our services.
“We’ve had some customers on contracts since 1991. The goal is that they never end. A one-year agreement, for example, gives clients the opportunity to stop and think every year and make a decision about whether they want to continue. But as long as you’re taking care of them and giving them service that’s viable, why would they stop?”
Biotech allows its customers to end their open-ended service contracts as long as they provide 30 days notice. “If they do give you 30 days’ notice, that gives you 30 days’ to change their mind,” she says. “People are pretty receptive to the service agreements because of that 30-day notice. It doesn’t hold them in. They can stop it after a month or whenever they want to stop it. It provides them with a certain comfort level.
“When we need to increase prices, we just send out a notice. In 18 years, I’ve actually had maybe three clients complain about price changes. We’re fair. We don’t change prices often. And it’s better to do a little increase on a consistent basis than one big increase.
“It’s all about the quality of service you give in between those price increases. If there’s value in our service and we’re taking care of clients and we’re ethical, if we’re doing what we said we were going to do, then there’s no reason for them to stop. People don’t like to change. They don’t look for other people to solve their problems if they’re getting their problems solved.”
Virtually all of Biotech’s 400-plus clients are on service agreements. They come in handy because Biotech deals with many commercial clients, such as shopping centers, grocery stores and restaurants, where manager turnover is frequent. “If a new manager comes in, you have something to show that you’re already working together,” Wilson says. “If you have a service agreement on file, you can just fax it to them, and then you can meet with them.”
Wilson created her own contract document without legal help. Simplicity is critical because it makes people who are unfamiliar with contracts feel more comfortable, she notes. “The key pieces to a contract are the amount of money you’re charging per month and that it’s a month-to-month agreement with a 30-day notice of termination,” Wilson says. “The only other thing we have in there is a little paragraph that allows us to get our equipment back if the client gets shut down for not paying their taxes.
“Our agreements are just one page long. The less you put in there, the better the comfort level for the client and the easier it is to understand. It’s much less intimidating, and it’s real easy. They sign it and they’re done. They don’t have to send it to their legal department. Why make it difficult?”
“We’ve used service contracts since 1975, when we started the business,” says Lane Post, president of Arrow Pipeline Repair Inc., which provides sewer repair and camera inspection in Vista, Calif.
“In the realm of service contracts, we’re talking about somebody who has a problem or is afraid they’re going to have a problem and want to prevent it. For us, they primarily involve jetter services for clients like shopping centers, strip malls and restaurants that have experienced an extremely bad stoppage or backup and perhaps had bad damage, and they want to prevent it from happening again.
“The advantage is that contracts provide steady income. You can fill in the slow times with scheduled maintenance. You simply put them on a computerized calendar and they pop up. Typically, we call customers the day before or the morning of and tell them they’re scheduled for their cleaning, and get a verbal approval before coming out.
“Our agreements are open-ended, and we raise prices as needed. The contracts typically are for service three times a year, or two times a year – maybe even once a year. A verbal agreement does it for us. More aggressive shops put people under contract; they want it in writing, for two or three years, as long as they can get.”
