Hey folks, Phil Zito here and welcome back. In today's post, we're going to talk about how to scope and price service work. Specifically, we are going to be diving into plan service agreements. We're going to talk about time and materials service work and retrofits service work. So, those are the three categories of service work. If you learn how to do one, you can pretty much learn how to do the other three.
So, when we are looking at scoping and pricing service work, the first thing we want to do is identify the scope. When we are looking at plan service agreements, which is going to be our first form of service work, we are going to be looking at what we are doing in regard to a planned service agreement.
Plan Service Agreements
So, this breaks out into a couple buckets.
- Full coverage plan service agreements, which cover mechanical and control systems, and those are the most expensive.
- Task-specific plan service agreements, which are performing specific tasks on a regular basis.
- Block-hours plan service agreements which is where you simply allocate a block of hours, and the customer can use that block of hours.
Block Hours Plan Service
Block hours are exactly like they sound. You determine which technician you're going to have work with the customer. You simply want to understand, “Hey, Mr./Mrs. Customer, what tasks do you have to have done? Where would you like them to augment?” That's kind of the phrase you want to focus in on.
That's typically where a block of hours plan service agreement comes into play. It’s specific to the customer wanting to augment their staff, they are going through an energy project, they just brought on a new building, etc. They want this person to do a specific task over hours and hours of time, but they don't know how long this task is going to take, and maybe they want to be able to do other tasks. This is where it differs from task specific. That's when the block of hours comes into play.
Your biggest risk with block of hours is going to be availability of your technicians. So, if you have service tech A who makes $40 an hour, and you have service tech B who
makes $25 an hour, you have these two different cost structures, a difference of $15 an hour. If you have 10 hours, that's a difference of $150 a month. What you need to account for is:
- Are you always going to send the same tech out?
- Is that tech potentially going to get raises?
- Are you potentially going to have to send out a different tech?
These are all questions you should be asking yourself and then you should price those block hours accordingly. You can compensate for that variability of wages either through increased margin or by pricing your most expensive tech, and then maybe adding a little bit on top to account for inflation, to account for wage rises.
So, that’s how you do block hours. Really simple, right? You just quote them the time needed. I like block hours because it's a contract and it's typically a year at a time. It helps me as a service manager, whereas a former service lead enables me to go and identify that I have X block hour commitments. I work them into the schedule and then as far as labor forecasting, it makes things a lot easier for me. It does have some cons in that it takes away potentially availability for higher margin retrofit work. Additionally, it does commit your team to having to execute a certain number of hours, and if you have a variable staff, that can be quite difficult at times,
Task-Specific Plan Service
Task-specific is where we focus on a specific task. This is where things, as we progress from planned service agreements of block hours, to task specific, to whole contract, we are increasing our level of risk. Block hours, there's almost no risk associated with that. Task-specific, there can be risk associated with that.
So, basically, you have to analyze the task that the customer is scoping, you have to get very clear in your scope letter that these are the tasks that are going to be performed, and then you allocate a cost associated with that task. If it's a purely labor-based task, then you don't have to account for materials, but if it could potentially involve materials, then you need to account for that as well. Materials, you'll typically put markup on, labor you'll typically put margin on.
Now, when you have that specific task, you're going to bullet point out that task into basically a work-breakdown structure. I like to go at least two levels deep. So, if my task is to “maintain the building automation system,” what does that mean? Maybe that means regularly viewing graphics one day a week, to check for dead links, check for overrides, etc. You start to break down to at least two layers.
Layer one will be your task, and then layer two will be the subtasks. Once you have those subtasks, then you can start to assign specific hours to those subtasks. You can say, based on your experience, it takes this much time. Then you also have to account for travel time, whereas with block hours, depending on how you write the contract, travel time may be included, or it may be excluded and you need to account. In task-specific, usually travel time is assumed to be included and absorbed. You need to know, “where is this person traveling from, what are the mileage costs, etc.”
So, you get those tasks and subtasks, you assign the hours and material costs to each subtask, then you totalize that up into a price, and you assign margin on top of that price. Sometimes you'll split out material, you'll only do markup on material, and you'll only do margin on labor. Sometimes, you will do material and labor together and put margin on top of that, it just depends.
Now in this scenario, this has a risk in that if you overshoot your hours, you could potentially find yourself in a world of hurt. That's why I don’t like to do task-specific plan service agreements multiyear. You'll hear from a lot of sales leaders that they want multiyear plan service agreements, and that you can give a discount because you're locking someone into a multiyear agreement. You could put a cost of living, or a rate increase each year, that's indexed to inflation or something like that.
The thing I don't like about multiyear, especially if you are newer service organization, is that multiyear can become a problem. If you're doing a task ineffectively, and you suddenly realize you should’ve booked 10 hours, but you have it at 5 hours, then for multiyear, unless you have an adjustment written into the contract, which most people don't, then you're going to find yourself absorbing that cost and you can actually lose a lot of profitability. So, unless you're absolutely sure on the level of effort to execute, I recommend initially one year.
This is good for your customer too, in my opinion, because your customer gets to experience your level of service. If they like your level of service, they can recommit. You also get to understand, “This task, while it takes 4 hours at Customer A, at Customer B, because maybe it's a prison or a hospital, it actually takes 6 or 8 hours.” So, you can account for that, and at the end of the year, you can reflect that in your updated pricing and can clearly communicate that to your customer.
So, I highly recommend that you start off, especially if you're new to service, initially with the year. You clearly delineate your scope out into subtasks, you associate costs with those subtasks, you evaluate them at the 3-, 6- and 12-month mark, and then you take that information and basically create a new price for a multiyear agreement, post year one.
Full Coverage Plan Service
Whole service contracting, there's a lot of risk associated with this, but there's a lot of reward. Priced appropriately, you will be covering everything. You would cover the mechanical systems, the control systems, and even in a whole service scenario, you still usually have in scope and out of scope. These are things like a home warranty where you have in scope and out of scope.
Now, this varies across the board, and like I said, is very risky. So, I highly encourage you to look at it and truly understand what you're doing. Are you just doing:
- We're servicing this.
- A service and replacement.
- A service and replacement at cost or cost plus.
You need to understand what these contracts look like and what you're getting into.
I'm most familiar with total service contracts being that you are servicing everything, but replacements are outside of the scope of the contract. So, you would do a full index very much similar to how we did our previous retrofit site walk and how we got a full index of everything that's in the building. You're going to do that same thing. Then we're going to do a work breakdown structure where we're going to break down the specific tasks for each piece of equipment, we're going to get customer buy-in that these are the tasks that they agree that are covered in this whole coverage service agreement, and then we are going to price that accordingly. Okay, so that is our approach for scoping.
Now, once we have that, we have to then project out, “What is this going to cost me?” Once we understand what it's going to cost, then you have to look at the opportunity cost. The premise of opportunity cost is, if you commit an hour to something, that hour is sunk. Maybe committing an hour to that task generates $10. Maybe it only generates $5. So, if you have a bunch of different things that you can allocate an hour to, and one of them generates $20, and the other only generates $5, then the opportunity cost of going with that $5 one, you're potentially losing $15.
Now, to make that even more money, let's say that $5 opportunity, initially only $5, but it delivers you seven retrofit opportunities that are each $40. Well, now you have $280 on top of that $5. So that looks like a much better scenario. That's where these total service contracts come into play.
You're sitting there, maybe using analytics, you're monitoring things, you're realizing that there are issues that things are failing, that things aren't working, and you're submitting these retrofit opportunities directly to the customer. Now you're able to generate work. The thing is though, are you able to generate work? If you're doing a total coverage for a commercial office building, the likelihood of them having the capital budget to do major upgrades, probably not very likely. If it's a hospital, or a school or maybe a university, there's a higher likelihood of them being able to execute any of these retrofit projects and wanting to execute the retrofit projects.
The rule I tend to use: If this is an investment property that is meant to be flipped, or they're just trying to get income out of it, and they don't really care about the value of the asset, then I'm not going to expect to get retrofit opportunities out of it. If this is a permanent asset like a hospital or a university, where they are going to keep using this building and throughout its lifecycle, then I can expect to potentially get retrofit opportunities from this.
So, what I will look at when I'm planning a total coverage contract is, does this contract potentially give me retrofit opportunities? How can I tell? I can look at history of retrofit opportunities, especially if it's a public domain. I can look at, if it's government or healthcare or something public, I can look at their previous capital budgets and understand, they've spent money on maintenance, they've spent money on retrofit, etc. So, investing in a total service contract here is going to have a higher likelihood to generating more retrofit work down the road, because they've shown the signs that they are going to take those actions.
As far as pricing, it very much follows the task-based model of: we're going to create our tasks, we're going to list out our tasks, we're going to say these are the tasks we're doing based on each piece of equipment, and then once we have those tasks, we're going to associate our material, labor, and subcontractor costs related to that. Typically, it's just going to be labor, maybe a little bit material, depending on what we're doing. We want to identify, are we going to have the highest labor? Are we going to have a mix of labor costs of maybe a high-level person and a low-level person? We have to make those decisions.
Alright, so that is our approach to total service contracts, pretty straightforward. Next, we move on to looking at a more time and material. Now, this is very similar to task-based, but it is not a service contract. It's more like a block hours plan, but it's specific to time and material. There's time and material, not to exceed; there's time and material, to exceed with approval; and there's just what is called estimated cost. With estimated cost, we're going to execute this task, and we may potentially go over it.
Time and Material Service Work
Time and Material, Not to Exceed
Time and material, not to exceed, means you literally give a cost for time and material. So, labor and material. The customer can use this and it may be specific to a task, or it may just be specific to a block of time and material, but it's not to exceed that cost. If they use all that cost, great! If they don't use all that cost, well, that depends on the contract. Some contracts will say that they will only be charged for what they use, while other contracts will say that they have this amount, very similar to block hours, that they are purchasing. If they use it great, if they don't, they lose it and it doesn't roll over. It all depends on the contract and on the state and organization you're doing business with.
Time and Material, Plus Approval
Time and material, plus approval if exceeded, means you have a specific task that you will estimate. You will present that as, “Here’s our time and material estimate for this task, and if we exceed that time and material, we will seek your approval before doing any other specific task.” Sometimes, you can even write these contracts in such a way that for specific items, like if it's critical, “We will exceed without approval. If it's not deemed critical, and not a specific item, we will not exceed without approval.”
Lastly, we have estimated time and material cost, but we could go over. This is more akin to a project where you will execute and perform the task, but you may have a ceiling on it. You also may not have a ceiling on it, but most of them do have a ceiling.
So, you'll have your time and material cost, and then you'll have a ceiling at which execution stops, which is above that time of material cost. Scoping these is as simple as looking at the task you're trying to perform, and then pricing and estimating accordingly. Or, if it's just a block of time and material, you just give them a block of time and material, very much similar to a blocked plant service agreement.
The third is retrofit work. Now we've spent several posts covering retrofit work, so I'm not going to dive too terribly deep into this topic. Suffice to say that with retrofit work, we are going to analyze the site. We are going to understand the customer's desired outcome. Once we understand the desired outcome, we are going to look at what needs to be changed or improved to achieve that outcome. Once we understand that, then we're going to go and say, “You want to achieve energy efficiency and you want to increase indoor air quality. This is how you do it. We've audited your systems, this is what they have, and this is the scope of what we would need to improve.” We would then pick an approach, whether that's rip and replace, top down, or bottom up, and then we estimate accordingly. Finally, we add our margin accordingly and execute.
So, pretty straightforward for retrofit work. If you're curious about that, go back about 2 posts where I cover How to Review, Scope, and Estimate Retrofit Projects and The 4 Point Method for Bidding Retrofit Work.
So, my hope is that you have kind of been a little demystified around how you scope and price service work. So, a couple tips around this would be as you perform common tasks, things like graphics, monitoring points, tuning PID loops, etc, start to track how much that takes as far as labor via our labor by vertical market.
So, you look at healthcare, you look at higher ed, you look at these different vertical markets, and you identify that for these different vertical markets, it takes me this much effort to do this specific task. Then you start to build out a task matrix by vertical market. Then you can look at the common tasks, and you can quickly price up scopes based on this task matrix. That works for construction work as well.
So, I encourage you, the sooner you can start building that database, even if it's just simply an Excel sheet, the easier it will be to perform swag numbers. Swag number is just a rough estimate, but it'll make it much easier to perform those rough estimates. The more accurate you can get with rough estimates, the more estimates you can get out the door quicker. And that enables you to have a higher hit rate, because statistically, the more estimates you get out the door, the more likely you are to close one of those estimates, thus, you increase your hit rate doing that.
What's going to happen is that feedback loop is going to continue to help you. You may have lost this project, or lost this estimate and proposal because of XYZ, so you're going to feed that information back into your sales process and adjust accordingly. Bottom line, the more touches you can get with a customer from an estimating and proposal perspective, the quicker you're going to be able to smooth out anything that is price and scope related.
There will always be selling skills, things that you more or less are going to have to improve, but as far as the hard things, like numbers related to estimates, numbers related to labor, numbers related to scope, you can get those pretty dialed in, I would say, within a full selling season. So, January to December.
If you're doing enough touches as an organization, you can get that dialed in pretty fast, and that's what a lot of the large OEMs do. They have a database of past performance, and based on that past performance, it feeds into their estimating tools. Once they understand what kind of vertical market they're dealing with, they're then able to adjust those estimating tools accordingly based on performance data.
So, I hope this helps you. I hope this gives you some strategies and some ideas and has been a good use of your time. As always, if you have any questions do not hesitate to reach out.
Thanks a ton, and take care.