In this episode, we discuss how to scope and price controls service work.
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Phil Zito 0:00
This is the smart buildings Academy podcast episode 314. Hey folks, Phil Zito here and welcome to episode 314 of the smart buildings Academy podcast. We're gonna kick this off just a couple minutes early. Because get some stuff done so we can kick it off a couple minutes early. So in today's episode, 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, we are going to talk about retrofits service work. So those are the three categories of service work, this will probably be a shorter episode, due to 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 we want to identify guess what the scope, right because I mean, this is called scope and price service work. So 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 are we doing in regards to a planned service agreement. So this breaks out into a couple buckets, you have full coverage plan service agreements, which covered mechanical and control systems, and they cover basically anything, those are the most expensive. And I'll talk about how to price those in just a second. Then we have more tasks specific plan service agreements, which are you know, you're saying, Hey, we have these specific tasks, and you're going to perform them on a regular basis. And then we have block hours plan service agreements, which are even more simpler. And it's where you just allocate a block of hours, and the customer can use that block of hours. Let's start with that, then let's go into test specific and then let's go into full coverage. So block hours are exactly like they sound you determine with which technician, your skill level you're going to have work with the customer, you just understand kind of Hey, Mr. Mrs. Customer, what tasks do you have to have done? Where would you like them to augment? And that's kind of the phrase you want to focus in on, that's typically where a time block or block of hours plan service agreement comes into play, is specific to hey, this customer wants to augment their staff, they are going through an energy project, they just brought on a new building, whatever. And 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 tasks specific. That's when the block of hours comes into play. Your biggest risks would block of hours is going to be availability of your technicians. So let's say you have service tech a who makes 40 bucks an hour, and you have service tech b Who
Phil Zito 3:14
makes 25 bucks an hour, these are just round numbers. And right you've got these two different cost structures a difference of $15 an hour, if you have, you know, 10 hours, that's a difference of 150 bucks a month. Now 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 yourselves 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. But that's how you do block hours. It's it's really simple. You just quote them 840 hours, whatever it is, and I like block hours because one, it's a contract and it's typically a year at a time to it goes and helps me as a service manager. Whereas a former service lead enables me to go and say, Okay, I've got this many block our 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 amount of hours, which you know, if you have a variable staff that can be quite difficult at times, living on the test specific This is where we go. And we focus on a specific task. And this is where things as we progress, right 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, especially associated with that task specific there can be risk associated with that. So basically, what you have to do is 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. Okay, so just understanding the difference of those two right there. Now, when you have that specific task, you're going to bullet point out that task into basically a work breakdown structure. And 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 go and check for dead links, check for overrides, etc, you get the point, you start to break down on to at least, you know two layers. So layer one being your task, and then layer two being the subtasks. And once you've got those subtasks, then you can start to assign specific hours to those subtasks. And you can say okay, based on our experience, it takes this much time, and you also have to account for travel time, whereas with block hours, depending on how you write the contract, travel time may be included in block hours and may be excluded and you need to account in task specific, usually block hours is or sorry, travel time is assumed to be included and absorbed. So you need to go and know what that is. 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 sub task. And then you totalize that up into a price and you assign margin on top of that price. Sometimes you'll split out material, and 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 like to keep tasks specific plan service agreements at I don't like to do them multi year.
Phil Zito 8:02
If they are, and this is kind of an area of contention, you'll hear from a lot of sales leaders that they want multi year plan service agreements, and that you can give a discount because you're locking someone in to a multi year and you can put you know, like a cost of living or a rate increase each year, that's indexed to inflation or something like that, right. But the thing I don't like about multi year, especially if you are newer service organization, if you're a mature service organizations, not so bad. But if you're a newer service organization, multi year can become a problem. Because if you're doing a task in effectively, and you're like oh my goodness, I should have been 10 hours, but I've got this at five hours, then for multi year, unless you've got an adjustment written into the contract, which most people don't, then you're gonna 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 a year. And this is good for your customer to in my opinion, because what happens is your customer gets to experience your level of service. And if they like your level of service, they can recommit and you get to understand like, Okay, this task while maybe it takes four hours at customer a at Customer B because maybe it's a prison or it's a hospital, it actually takes six or eight hours. So you can account for that. And at the end of the year, you can reflect that in your updated pricing and you can clearly communicate that to your customer like hey look, if you are a commercial office building it only take us four but because you're a prison, it takes us eight because you know we have to go through security do all these things. So I highly recommend that you start off especially if you're new to service initially with the year you clearly delight. delineate your scope out into subtasks you associate costs With those subtasks, you evaluate them at the three, six and 12 year or three, six and 12 month mark. And then you take that information, you feed it back in, and you basically create a new price for a multi year agreement post year one. Alright, so a whole service contracting for this is good and bad. So there's a lot of risk associated with this, but there's a lot of reward. So priced appropriately, what will happen is you will be covering everything, you would cover the mechanical systems, the control systems, and even in a whole service scenario, total service scenario, you still usually have in scope and out of scope. These are, you know, things like a home warranty where you have in scope and out of scope. Now, this varies across the board. And this, like I said, is very risky. So I highly encourage you to look at it and truly understand what you're doing. Are you doing just a hey, we're servicing this, are you doing a service and replacement? Are you doing a service and replacement at cost or cost plus, you need to understand what these contracts look like and what you're getting into.
Phil Zito 11:21
I'm most familiar with total service contracts being that you are servicing everything, but replacements are outside of the scope of the contract. And so what you would do is you would do a full index very much familiar or similar to how we did, I cannot speak today, very much similar to how we did our previous retrofits, sidewalk and how we went, 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 is covered in this whole coverage service agreement. And then we are going to go and price that accordingly. Okay, so that is our approach for scoping. Now what we're going to do once we've got that is we've got to then go and project out. All right, what is this going to cost me once we understand what it's going to cost you, then you have to look at the opportunity cost. So the opportunity cost, basically, the premise of opportunity cost is if you commit a hour to something, that hour is sunk, and 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 five, then the opportunity cost of going with that $5 When you're potentially losing $15. Right. Now, to make that even more money, let's say that that $5 opportunity, initially only five, but it delivers you seven retrofit opportunities that are each $40. Well, now you've got $280 on top of that $5. So that looks like a much better scenario. And 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. And now you're able to go and generate work. Now 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 go and do major upgrades, probably not very likely, if it's a hospital though, or a school or maybe a university, there's a more, 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 though a permanent asset like a hospital or a university, or maybe a government building, where they are going to keep using this building and throughout its lifecycle then I can expect to potentially get retrofit opportunities from the so what I will look at when I'm planning a total coverage contract is I'll say does this contract potentially give me retrofit opportunities? How
Phil Zito 14:58
can I tell I can look at history of retrofit opportunities. I can look at history of this, especially if it's a public domain, I can look like if it's government or healthcare or something public, I can look at their previous capital budgets. And I can understand, okay, they've spent money on maintenance, they've spent money on retrofit. 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. So that is what I would do there. And 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, okay, 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. And we will look at are we going to have the highest labor are we gonna have a mix of labor costs of maybe like a high level person and a low level person, we have to make those decisions, right. Alright, so that is our approach to total service contracts, like I said, pretty straightforward, pretty simple. Next, we move on to looking at a more time and material. Now, this is very similar to task. But it is not a service contract. It's more like a block hours, but it's specific to time and material. And there's time and material not to exceed and then there's time and material to exceed with approval. And then there's just what is called kind of estimated cost where this is our estimated cost. But we're going to execute this task, and we may potentially go over it. So there's kind of three buckets in there. So time and material not to exceed means you literally give a cost for time, and material. So labor and material. And the customer can use this and it may be specific to a task. And it may just be specific to a block of time and material. And 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'll only be charged for what they use. Other contracts will say that they have this amount very similar to block ours that they are purchasing. And if they use it great, if they don't they lose it, it doesn't roll over, you know, all depends on the contract and depends on the state and organization you're doing business with, then you have time and material plus approval if exceeded. So you have a specific task, you estimate that task and say, here's our time and material estimate for that task, or here's the time and material cost. And then if we exceed that time and material, we will seek your approval before doing any other specific task. And sometimes you can even write these contracts in such a way that you're like time and material. And for specific items, like if it's critical, or whatever we will, we will exceed without approval. If it's not deemed critical and not a specific item we will not exceed without approval. So you have those. And then the third is kind of this is our estimated time and material cost, but we could go over. And so here you go, we're gonna go and execute to perform this task. This is more akin to a project. But the thing is, you may have a ceiling on it, you may not have a ceiling on it, 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. So 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 material very much similar to a blocked plant service agreement. The third is retrofit work. Now we've spent several podcasts on retrofit work, so I'm not going to dive too terribly deep into retrofit work. Suffice to say that with retrofit work, we are going to go and 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 okay, you want to achieve energy efficiency, you want to increase indoor air quality you want to do whatever this is how you Do it, we've audited your systems, this is what they have this is the scope of what we would need to improve, we pick a in a approach, whether that's rip and replace top down or bottom up. And then we estimate accordingly. And we add our margin accordingly and execute. So pretty straightforward for retrofit work. And if you're curious about that, go back. And I think it's maybe Episode 312, maybe 311, where we dive through that. So my hope is that you have kind of been a little demystified around how you scope and price service work. Some tips, you know, I want to start trying to leave some like quick action tips that people can take towards the end of the episodes. So a couple tips around this would be as you perform common tasks, things like graphics, things like monitoring points, things like tuning PID loops, etc. As you perform common tasks 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 say, alright, for these different vertical markets, it takes me this much effort to do this specific task. And you start to build out a task matrix by vertical market. And then what you can do is you look at the common tasks, and you can quickly price up scopes based on this task matrix. So you said in the past, it took this, alright, this is what we're going to price. And 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 better it will make it much easier to perform swag numbers, it'll make it much easier, which swag number is just a rough estimate, it'll make it much easier to perform those rough estimates. And 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 by going and doing that, because what's gonna happen is that feedback loop is going to continue to help you know, okay, I lost this project, or I lost this estimate, and proposal because of XYZ. And you're going to go and feed that information back in to your sales process and adjust accordingly. So the more touches you can get with a customer from an estimating and proposal perspective, the quicker you're going to be able to kind of smooth out anything that is price and scope related. You know, there's always going to be selling skills, things like that, that are more or
Phil Zito 22:59
less to find that you're going to have to go and improve. But as far as the hard things, like numbers related to estimates, numbers related to labor numbers related to scope, you can go and 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 pretty dialed in pretty fast. And that's what a lot of the large OEMs do is they have a database of past performance. And based on that past performance, it feeds into their estimating tools. And once they understand what kind of vertical market they're dealing with, they're then able to go and 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. I hope this has been a good use of your time. As always, if you have any questions do not hesitate to reach out. Let us know whatever questions you have. And I look forward to seeing you in our next episode. Everything that is discussed today can be found at podcast smart buildings academy.com Ford slash 314. Once again, that is podcast that smart billings academy.com Ford slash 314. Thanks a ton for being here. And I look forward to seeing you in our next episode.
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