In the sweltering heat of July, snow is probably the last thing on your mind, but now is the time to be reviewing your snow and ice management contracts if you haven’t already.
“You should be looking at all of your agreements annually for routine analysis of where you stand on the efficacy of the structure of your agreements,” says Mike Rorie, CEO of GIS Dynamics and board member of GroundSystems. “Analysis is very inexpensive to perform versus blindly or unconsciously just agreeing to what the routine has been. If your costs go up 5 percent and you price and budget for a 10 percent profit margin, then you’d be agreeing to a 50 percent reduction in the bottom line with a very modest bottom line already. The time spent to understand your numbers is the highest ROI a contractor can make.”
The main reason you need to review your snow season contracts is to see if they are still profitable and if you need to raise your prices. For many companies, these price increases are often long overdue.
“In the industry, prices have been really held down for a long time, 15-20 years, there’s been pressure to keep prices stable,” says Phil Harwood, managing partner for GrowTheBench.com. “In general, pricing is way behind. Most companies in our industry, they just haven’t been able to get price increases.”
With inflation being so prevalent, Harwood says this is the opportunity to regain some of that ground, as clients are well aware of the cost increases.
Harwood says he’s had some clients who have increased their prices by 30 percent this year or last year and had high retention rates because their customers knew that’s what it would cost. They respected the contractor and wanted them on their property. They understood that if they went out to bid, the other bids would be similarly priced.
“This might be an opportunity to expose some customers that are not necessarily a good fit,” Harwood says. “If someone respects you as a businessperson, especially if it’s a renewal, and you’ve been providing service and you’ve established a relationship and you’ve done a good job, your customer should want you. Your customers should fight for you to be able to get through those price increases.”
Harwood says price increases should not be something you’re afraid to bring up, even if you have a multiyear contract in place.
“I would just be matter of fact about it and say, ‘Hey, if you haven’t noticed, all the prices have gone crazy. So, our contract doesn’t apply anymore. We have to raise these prices,’ Harwood says. “I would just be matter of fact about it and say, ‘We’re recommending an amendment to our contract.’”
Harwood stresses this should be done as a face-to-face conversation, not via an email or a letter.
Rorie adds that contractors should leave variable costs open-ended, like salt, so rising prices can be passed along. Contractors shouldn’t be taking a reduction in margin due to inflationary costs.
“You will likely need to check the language in your agreements to address continued variable price increases that you will need to pass along,” Rorie says. “Next up would be adjusting for increased labor equipment and subcontractor costs. Knowing what your costs have done and adjusting prices accordingly isn’t a choice; it’s a must.”
Harwood says adding a fuel surcharge line in your contracts is your choice as a business owner. Some see it as a gimmicky gotcha, while others have no problem charging for increasing fuel costs.
Other elements to work on clarifying in your contracts are the scope of work and site maps. Harwood says these contracts are typically unclear as far as refreezes, next-day service, how snow drift is handled and where snow should be stored.
Also, if you have a client looking to cut back their costs without canceling their entire contract, you can offer to eliminate areas of service. Harwood says the key is to restrict access to these areas so you’re not exposed to liability. An example of this reduction is not plowing the top of a parking deck.
“Contractors don’t need to take on risk in order to provide service,” Rorie says. “If customers seek to reduce costs, then reducing the service area is the most logical, if applicable. Reducing scope is much trickier. Not performing service to a property typically leaves sites in an in-between state of use. Meaning letting snow get deeper before plowing begins or not salting in timely cycles. Better to figure out when the site can be left untouched, like weekends holidays or parking lots and sidewalks that can be closed off versus the alternatives of overall reduction.”
Updating the sitemaps is particularly important if the client is reducing the serviced areas of the property. Harwood adds that if contractors aren’t comfortable with the contract language, they should renegotiate when the contract is up.
“A lot of contractors don’t think they can negotiate terms, and they can,” Harwood says.
Changing Contract Types
Another thing to consider changing is the duration or type of contracts you offer.
“What I see is still a lot of one-year contracts, which is ridiculous,” Harwood says. “I don’t know why anyone would want to go through this exhausting process every year. I think three years is a good standard.”
Harwood suggests switching to a one-year contract with an option to renew for up to three years to remove the hassle of renegotiating every year. Rorie says contractors should keep a mix of snow contract types.
“Different parts of the country like and use different methods of service,” Rorie says. “Having a strategy and knowing your numbers and/or percentages of different types of agreements should be understood by your company.”
Harwood suggests moving clients to seasonal contracts with a cap and floor that cover your dedicated investment.
“There is risk to accepting anything that isn’t guaranteed revenue, and there are risks to guaranteed revenue,” Harwood says. “You have to think about the total risk that you have in your portfolio.”