Are You 'Riskaphobic?'
When you think about the typical PHC business, it is truly a risky venture.
Any number of issues could derail the average business, including owner sickness, employee theft, regulatory and licensing agencies, organized labor, bad estimating and nonpayment on large jobs, etc. If you talk to any company owner in our industry that has been around for 20 or more years, each of them will have a story where one of the issues listed above almost took them down.
Most contractors learn to accept these risks and move on, doing their best to stay clear of big problems that could put their businesses on the rocks.
I find it interesting that one area of the business where it really seems contractors are almost “riskaphobic” is warranties or guarantees for customers.
For most companies, a common repair warranty is 30 days. In many cases, no warranty is offered. Occasionally I will see a 90-day labor warranty or a 30-day warranty on labor and one year on the material.
For bigger-ticket jobs such as sewer replacements, repipes or larger appliance installations, the typical contractor may offer a labor warranty of 90 days and a material warranty of one or two years. Of course, when there is a manufacturer’s warranty, it will be extended to the customer on material only. Some contractors will even offer a full one-year labor warranty on bigger-ticket jobs.
The thinking behind short warranties is to remove risk and reduce the chance of a costly recall in the future. For repairs where the current piping or appliance is not replaced, there is always the chance the repair will not solve the problem, which could result in a quick customer recall.
If a 90-day warranty is offered and the customer has a problem with a repair or an installation a year later, most reputable contractors would take care of it at no charge.
This makes no sense. If we are going to stand behind our work past the stated warranty period, why not tell the customer before they make a buying decision?
Big talkLet’s chat about sewer repairs for a moment. The worst nightmare is to have to repair a pipe under warranty buried six feet in the ground.
One of the great things I get to do through Nexstar is teach a sewer repair sales class. Hundreds of member employees have gone through this class the last four years. During the class I ask people what their typical warranties are for full sewer replacements. I see ranges on labor warranties from 90 days to two years. Sometimes they are longer on the pipe itself, but rarely longer than two years on the labor side.
After asking that question, I ask how many people have had a warranty issue on a sewer replacement that happened more than one year after installation and after the end of the warranty period? To this day, I can’t remember one hand going up. What I hear is that if a stoppage is going to occur due to poor workmanship, it will happen in the first year of operation.
Why are companies so miserly in extending warranties? What is the true exposure to the business? It does not appear to be much if my sampling size of hundreds of companies installing tens of thousands of sewers each year is to be believed.
There is no doubt warranty-term increases, at least in theory, will increase recall costs. That is undeniable, but for most contractors I think the exposure is negligible or modest at best. What impact on sales do extended warranty terms have? By increasing warranty terms, will you increase sales?
Let’s return to the sewer example and see if we can figure this out.
For a small repair less than $600, I am not sure it will make a huge difference if you significantly increase the warranty term. The cost is not that extreme, the repair need is urgent and there are some legitimate concerns with offering long warranties for spot repairs on older plumbing and heating systems.
Let’s take a 10-year period of time and say a company is quoting three sewer replacements a week, closing one and offering a standard one-year labor warranty. Using some assumptions on average sale, the total sales for the company in sewer replacements over that 10-year period would be as follows:
52 sales a year x $5,000 average sale = $260,000 in sewer repairs annually
$260,000 x 10 years = $2,600,000 in sewer repairs over 10 years
What if this same company, instead of offering a one-year labor warranty, offered a 10-year labor warranty? Would a longer warranty here result in more sales for the company? Would more customers feel comfortable parting with $5,000 knowing a company was confident enough in its work to offer a 10-year labor warranty? The answer is yes.
Being conservative in our estimates, let’s say it would result in four more sales a year. What would be the incremental revenue to the business over 10 years?
4 sales x $5,000 average sale = $20,000 in incremental sewer replacements annually
$20,000 x 10 years = $200,000 in incremental sewer replacements over 10 years
Assume the average gross margin (sales minus direct labor and material expense) is 60 percent on the $200,000 in incremental sewer. This would result in $120,000 (60 percent of $200,000) that the company would clear after performing the work. These dollars would go to overhead expenses and net profit.
Do you think by extending the labor warranty term from one to 10 years that the company would incur an additional $120,000 in warranty or recall expenses? Remember, my informal poll of hundreds of professionals in this area indicates there is virtually no exposure, so it is highly unlikely. In fact, when you consider all other very real risks to the business that we accept as a matter of course every day, this one falls way down the list.
There are many similar examples such as repiping, fixtures, water heaters and general repairs where the same logic applies. In all these areas, ask yourself two questions:
1. What would the increase in sales be if warranty terms were increased well above industry standards?
2. What would be my real warranty exposure from the increase in terms? Don’t factor in short-term warranty costs. You already have those with your standard warranties that cover workmanship issues.