A service contract is an agreement between a service company and a customer to provide specified work over a set period, such as a year, for an agreed price. It usually covers scheduled maintenance visits, and may include priority response, discounted repairs or covered parts.
Residential versions are often called maintenance agreements or memberships. Commercial versions tend to be longer and include a service level agreement.
How to measure a service contract
The question for each contract is whether the revenue covers the work it obliges you to do.
Contract margin = Contract revenue − (Labor cost + Parts cost + Travel cost of covered visits)
Say a contract pays $1,800 a year and requires four visits. Each visit takes 1.5 hours on site and 1 hour of round-trip drive, at a loaded cost of $60 an hour, plus $40 of materials. Cost per visit is $60 × 2.5 + $40, or $190. Four visits cost $760, leaving $1,040 before overhead.
Run the same arithmetic for each contract, using the actual visits and drive times from your records, not the ones you assumed when you priced it.
Why it matters
Service contracts give you predictable revenue and predictable work. Both help. Known visits can be placed weeks ahead, grouped by area and moved into quieter periods. The maintenance agreement scheduling page covers how to do that.
The cost side is where contracts go wrong. A contract priced for a site 10 minutes away loses money if it is actually 50 minutes away and each visit is booked alone. Drive time is a real cost of every covered visit. Pricing contracts by service territory or distance, and booking the visits next to other work in the same area, protects the margin. The field service pricing guide covers the pricing side in more detail.
A common mistake
Letting covered visits slip. When the board is busy, contract visits are the easiest to push. Do it often enough and you deliver fewer visits than the customer paid for, which turns up at renewal time.
Related terms
- Service level agreement defines measurable targets inside a contract.
- Preventive maintenance is usually the main work a contract covers.
- Recurring service is the scheduling pattern contract visits follow.
Common questions
What is the difference between a service contract and a warranty?
A warranty is the manufacturer's or installer's promise to fix defects for a period. A service contract is a paid agreement for ongoing service. The two can overlap, so state clearly which covers what.
Should a service contract include repairs?
Some do and some only discount them. Including repairs makes the contract easier to sell but puts the cost risk on you. Price it with your own repair history for that equipment.
How do you price a service contract?
Start from the cost of the covered visits, including drive time, then add overhead and margin. Adjust for distance and the age and condition of the equipment.