Ask the Experts | Extended Labor Guarantees on Existing Equipment

Question: What are your thoughts on offering extended labor guarantees on new installs and existing equipment?

Drew Cameron; President, HVAC Sellutions & Energy Design Systems, Inc.:

Well, new installs and new equipment for sure, I’m a big fan of offering the extended warranties as part of the job – and it’s included in the price. And then it sounds like we’re talking about, if we’re taking on a job, let’s say where we’re replacing the air conditioning but we’re keeping the existing furnace – that’s the way I kind of read that question.

On existing equipment with a new component sale only, I would take that on time and inspection of the equipment – not necessarily by my salesperson, per se, but by my service technician or installation technician who goes on that job. Inspect the existing piece of equipment that’s remaining in place, make any repairs that are necessary to bring that equipment up to acceptable condition, as well as including a tune-up, and that would, obviously – the cost to incur that would be included in the price of the job.

The caveat in my mind, for the company’s protection – and really truly for the best interest of the customer – is that we’ll make any repairs to that existing equipment that we put under this extended warranty free of charge, other than, in my mind: failed compressors or coils; cracked heat exchangers or boiler box on boilers; act of god or vandalism; or if the value of the repair exceeds the value of the system.

Gary and I talked about the 4K rule on these calls in the past, the other thing you could look at is the value of the system, and I’ll talk more about how to calculate that in a second. But in these events, I’d recommend a $300 – or some amount – but we used to offer a $300 credit toward the replacement as long as the maintenance agreement had been maintained on that piece of equipment after we did that initial job.

So let’s say you sell that job today, and three years out you’re at a point where one of those instances kind of shows up here – it’s beyond the value or it’s an act of god or it’s a cracked heat exchanger or a dead compressor, something like that – on the existing piece of equipment that you have on this warranty. I’m then going to say, OK, you’ve maintained the service agreement for the last three or so years, we’ll go ahead and replace that (let’s say) cracked heat exchanger or furnace for you at whatever prices we have that particular day, and you’ll qualify for a $300 credit towards the replacement of that furnace because you had this warranty in place on that existing piece of equipment.

That’s typically how I’ve done it, and done it with my clients over the years, and make sure I include an allowance, like I say, in the price for the job based on the age and condition of that existing equipment. So we even had a service agreement that we would offer years ago called the “ultimate service agreement,” which included not just the tune-up but also the parts and labor up to the value of the repair exceeding the value of the system. So we also had that service agreement priced based on the age of the equipment. So 0 to 5 years was a certain cost, and 6 to 10 years was a different cost, and over 10 years was the highest level of price.

So you could do the same thing on an existing install where you take on an existing piece of equipment and just, to protect yourself, have a higher allowance allowed in the job to cover your costs there. Now what I did to figure out the value of the system if we weren’t using that 4K rule -- and the 4K rule is simply take the cost of the repair times the age of the equipment, and if that exceeded $4,000 then you would go ahead and tell the customer it’s beyond repair, and we would offer to go to a replacement there.

The other scenario I talked about is just picking the value of the system. So we looked at what we called annual depreciation of the system. I’d typically know what a component of that nature would cost when it was installed new, let’s say 10 years ago; so take that estimated original install price divided by the life expectancy. So let’s say I’m looking at a 10-year-old system, if I estimate it was $4,000 when it was put in new I think it should last about 15 years, then I would take $4,000 divided by 15 and I’m going to get my annual deprecation on that machine. So gonna say now we’re at 10 years – we’re not at 15, we’re at 10 years -- $4,000 divided by 15 to get my annual number, then multiply that by 10 years, that’s going to tell me how much of that system’s life has been depreciated. And then look at the cost of repair versus the remaining life on that system and come up with a number.

Then you tell the customer if we’re beyond that number we’ll go ahead and replace, and if we’re below that we can repair if they want. Again, setting aside cracked heat exchangers, leaking coils and failed compressors; those are the three caveats we always make allowances for to take out of that.

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