Service & Maintenance Contracts

Sign on the dotted line


They must specify how many upgrades and patch installations are covered. An unlimited contract assures the customer is always current. But is the security dealer responsible for compatibility issues when the client decides to upgrade everything to Windows 8? However, the dealer must remember that APIs can change as equipment is upgraded. Upgrading access control may affect the video and that, in turn, may affect cameras. Suddenly, a lot of time is being invested by the integrator.

There are legal pitfalls a dealer must avoid. “Unfortunately, there are many,” Carlisle said. Foremost, the law changes frequently—both through legislation and court decisions.

“It is important to review your contracts with an attorney regularly to make sure they comply with your state’s law,” Carlisle said. “Also, your contract should be tailored for your state, not a cookie-cutter document.”

“Be wary of automatic contract renewals,” she continued. “Many states are enacting laws with which you must comply for the contract to renew.”

“And be wary of leases,” Carlisle said. “If you are leasing security equipment, you likely need to comply with federal truth in lending regulations.”

To any of these issues, there are no right or wrong answers—unless terms are not delineated. That always is wrong.

 

Making money due to you

That said, contracts must give the integrator the ability to make money. “We look at the profitability of every service contract that will be renewed in the next three months,” Ladd said. They check to be sure they are making enough money. They also examine if their rates are too high or perhaps they have charged to much in some circumstances. “We may give the client a credit for the next year’s service,” Ladd said. “We don’t give dollars back. But the clients who get a credit remain our happiest customers.”

“Service agreements are priced all over the place,” Bozeman said. That is because certain systems are more prone to maintenance.

It used to be that a good rule of thumb was to charge one percent per month or 12 percent annually based on hardware and software minus labor.

It would be silly, however, to price service on a fixed IP-camera system with solid-state storage the same way one prices a nitrogen-purged system with PTZ in domes. Thus, therein lies the need for contract specifics.

First, Bozeman recommended, decide whether it is a software, maintenance or service agreement you are writing. Whatever the case, it likely will not have the same sort of exit valuation that a burglar alarm system has.

“The reason is the RMR for the burglar alarm is stable and mature. Attrition is built into the calculation. Gross profit on an alarm is a good bit higher than on a system,” Bozeman explained.

A service contract is lucky to deliver 36 to 40 percent where a standard alarm contract will have 75 to 80 percent gross margin. On the other hand, an alarm contract probably brings $30 a month in RMR. A comprehensive software, hardware and monitoring service contract may bring in $3,000 a month or more.

Because the cash for a retainer plan is paid up front, mobilization charges typically are waived. “A retainer plan gives the client the VIP status they want,” Ladd noted. “It assures them you will be there.”

More important, perhaps, than getting the client to buy the service plan, is assuring your own sales team understands the value of contracts. What if the client’s NVR breaks? Can the sales team explain why your $20,000 umbrella contract is better than the competitor’s $10,000 parts-only contract?

“How do you create value?” Ladd said. “The client must appreciate the fact that we provide a loaner NVR while theirs is being repaired. They have to see the advantage of having all software upgrades and patches covered whether it is one a year or 10 a year.”

That kind of thinking makes a “stickier” customer and a more profitable security company.

 

Curt Harler is a regular contributor to SD&I magazine; he can be reached at curt@curtharler.com.