A Full-Service Contract (FSC) works much like an insurance policy for customer equipment. Under the contract, a service company covers qualifying equipment breakdowns. Customers typically pay a monthly “premium” for this coverage. In return, the service company performs covered repairs at no additional charge, aside from a possible deductible.
People sometimes call these contracts Full-Service Agreements. However, do not confuse a full-service contract with an ordinary planned maintenance “Service Agreement.” A planned maintenance service agreement may form part of an FSC, but the two are not the same.
A planned maintenance agreement generally covers scheduled inspections, tune-ups, and preventative maintenance. A full-service contract goes further by covering qualifying equipment repairs. The specific coverage depends on the terms of the agreement.
For example, a full-service contract might include two annual maintenance visits, priority service, and qualifying equipment repairs. The customer pays a monthly fee. Customers gain more predictable service costs, while contractors generate recurring revenue and build longer-term relationships.
Because coverage varies, clearly identify the equipment, included services, exclusions, deductibles, contract term, and renewal conditions. The Federal Trade Commission’s guidance on service contracts offers useful considerations regarding coverage limitations, costs, and contract terms.
Full-Service Contracts can typically become a sizable profit center for most businesses. To make the most of the program, establish a system to track full-service contract activity.
Start by setting up separate Cost of Goods Sold (COGS) and income accounts. Also, track contract activity by department. Use consistent categories for contract income, labor, materials, and covered work.
Separate income and Cost of Goods Sold (COGS) accounts allow you to track FSC revenue and expenses accurately. For example, you might create:
These accounts make it easier to evaluate contract revenue and the costs of fulfilling coverage obligations.
Proper expense categorization and cost tracking are equally important in other businesses. Aptora’s guide to retail accounting explains how organizing expenses and tracking Cost of Goods Sold (COGS) clarify business profitability.
Be sure to verify your chart of accounts setup with your accounting professional. These examples are only suggestions.
A separate Full-Service Contracts department lets you generate an income statement specifically for this profit center.
This makes it easier to evaluate your full-service contract program without mixing its income and expenses with other service activities.
A separate item category for Full-Service Contracts allows you to track and report FSC activity more accurately.
For example, you might categorize contract revenue, covered labor, parts, materials, and customer deductibles separately. Consistent categorization makes it easier to review the costs of fulfilling these agreements.
Set up a Service Invoice Item for FSC labor. This item typically appears on monthly invoices when you bill customers for their contract payments.
Keeping contract revenue identifiable helps distinguish recurring contract payments from ordinary service-call revenue.
Set up a Discount Invoice Item for FSC work. Use this item to reduce covered service charges on invoices to zero. Customers can then see the value of the work without increasing their accounts receivable balance for covered services.
This is particularly useful when you want customers to see the regular value of repairs. It also highlights the benefits their full-service contract provides.
Once you have the necessary elements in place, you can begin selling Full-Service Contracts and scheduling monthly payment reminders.
The initial sale of an FSC usually includes the first month’s payment. Record this payment using the service invoice item you created earlier. The contract may also include one of your existing service agreements as a complementary benefit.
If the initial FSC sale includes a service agreement, document the relationship between the two agreements. Add the FSC sale or invoice number to the associated service agreement’s description. This helps you manage both agreements, track renewals, and maintain clear documentation.
Use the service agreement to manage planned maintenance visits (work orders) and monitor the FSC’s expiration date.
Keeping these agreements connected is especially important when customers have multiple service agreements. They may also have equipment under different coverage arrangements.
When appropriate, record a sale for the customer’s first automatic monthly payment. This typically represents the second of 12 premium payments.
This transaction can serve as the basis for the remaining monthly payments throughout the contract term. Document the contract number and identify the appropriate department. Also, link the payment to the service agreement associated with the FSC.
After establishing the first recurring monthly payment, schedule the remaining payments and appropriate reminders.
Recurring billing helps you collect payments consistently throughout the contract term. It also reduces the need to remember each customer’s monthly invoice manually.
When an FSC customer requests service, prepare a work order and handle the call as usual. Identify the FSC department on the work order and its associated invoice.
Track labor separately from materials to account accurately for the costs of fulfilling the contract. Invoice for materials as usual, and assign labor and other covered expenses to the appropriate contract.
Next, apply the FSC discount to reduce the covered service-call charges. The customer sees the regular service price followed by the FSC discount. Depending on the agreement, the discount may reduce the balance to zero or leave only a nominal deductible.
Then, track the actual cost of the covered work through the appropriate COGS or expense account.
Tracking these costs is essential to understanding whether your full-service contracts are profitable. Labor, materials, and the frequency of covered service calls can substantially affect the program’s financial performance. Proper job costing helps contractors evaluate these expenses and understand their profit margins.
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