Service contracts are nothing new in the commercial sector, but that really hasn’t been the case at the residential level. While many home security systems come with some form of yearly contract or service fee, this work tends to be passed on to someone else once the gear is installed.

But that could be changing. In the US, where times have been tough for a few years, there has been a growing interest among installers to look for opportunities to lock in recurring revenue. As a result, service contracts have been getting a second look.

They have also been given a boost by technology itself. For a start, the traditional division between security and home automation systems has dissolved as everything goes online and home networks merge features, control and management. The ability to remotely monitor and manage home networks right down to the appliance level now means software could potentially be updated remotely, and problems diagnosed ahead of service visits offer greater efficiency or avoidance.

But even in the US the take up of service contracts seems small. A recent survey conducted by CE Pro suggests post-installation income (or ‘recurring monthly revenue as they like to call it) is still only 8% of a traditional custom integrator’s total income. Around one quarter had none at all.

This is despite the fact that service contracts are the most common way a smart home company can generate recurring income, and many installers polled in the survey said they now wanted to explore their potential.

Taking out a contract

Locally, very few companies have actually tried to offer service contracts in the past. One that has is Sydney’s Len Wallis Audio, which developed a service contract that also offered a five-year product warranty in partnership with another firm.

“It didn’t end up working out as the partnership with the warranty company fell down and we only ended up selling one contract,” Len says.

“We spent a year, and a fair bit of money, sorting it out but I’m very interested in doing it again.

“I think it offers the client guaranteed service back-up and know-how, while for us it not only generates an income stream but also helps maintain a relationship with the client that doesn’t automatically happen now.”

Calls to a number of smart home companies and installers around the country failed to find any others that currently offer service contracts, but nearly all said they were beginning to look at doing them and some said that clients were even starting to ask questions about them.

Mark Nettleton from Melbourne based Recluse AV, who had fairly extensive experience with service contracts while working for a company in Canada, says they are moving towards offering one as they saw it as a ‘valuable proposition’ for all involved.

“Service contracts were very profitable for the Canadian company I was with and the clients seemed to love them too as it gave them peace of mind,” he says.

“We only tend to hear from clients when something goes wrong so we see this as a way to be able to walk back in to a client’s home and offer more products and services.”

But not everyone is convinced. Joshua Holko from Cableman says he doesn’t believe clients will accept the added cost very easily.

“My experience is that client’s don’t want to be tied down financially to a particular company and would rather take their chances,” he says.

“We’ve definitely talked about the idea as it would be great to get a recurring revenue stream, but after sitting down and doing the numbers it just didn’t seem to add up.”

What’s in a contract?

Certainly service contracts shouldn’t be entered in to lightly. Product warranties aside, defining exactly what you want to cover in a service contract and what you plan to charge for it can take a lot of discussion, calculation and review. According to Mark and Len, this means sorting out issues like the duration of the contract, how many free services visits to include each year, response times to calls, terms of payment and what’s excluded, all while ensuring it will make you money and still be sellable to the customer. And this is all before you call a lawyer.

According to Swaab Attorneys senior associate Naomi Messenger, who developed the original service contract for Len Wallis Audio, there are now a lot more rules regarding consumer protection for any services being done in the home.

“Even without a service contract there are all sorts of warranties and safeguards in place for clients and one of the most important is that the contract terms need to be fair,” Naomi says.

“Having said that though, service contracts can help as everyone involved gets to agree on what’s involved and covered, and that beats the costs and problems if things go wrong and there isn’t one.

“In the end it’s very much like a normal commercial contract we draw up all the time in all sorts of industries.”

But is it all plain sailing and money in the bank once the hard work of getting the contract into easy-to-understand ‘black and white’ has been undertaken? Mark believes the upsides far outweigh any negatives, except that adds a higher cost to your quotes than a company without one. So it needs to be marketed well so clients understand the advantages. Some US companies have also pointed out that it requires accurate staff planning and cost management once you have a number of clients on the books who know they have the right to call whenever they have a problem.