Elevator Maintenance Contracts 201 – Top 7 DifferencesRolly Mechler
Nearly 7 years ago we published a blog entitled: “Elevator Maintenance Contracts 101” which was well received. While much of the information and advice remains the same, we have seen a number of recent trends that we feel elevator owners would appreciate hearing about, and we have therefore published this updated blog.
Recently we were informed that we were not awarded the maintenance contract for a building in the middle of our service area. While we obviously “can’t win them all”, this one was surprising because we knew that we could provide the highest value and lowest risk for this customer. The response we received was: “your price was too high”. But what was this evaluation based on? What was the competition proposing? Was it a fair “apples-to-apples” comparison?
In fairness, it is not a simple task for an elevator owner to compare proposals. Each elevator company has their own maintenance contracts, and in fact most large elevator companies have multiple elevator maintenance contracts. While each maintenance contract has much in common, there are also many differences in contract terms, and these differences can reduce or increase actual costs to the customer. Often a contract that is 30% to 50% more expensive in the proposed monthly fee is actually the less expensive option when you consider all the proposal terms and the contractor offering.
Top 7 Differences to Look For
- Frequency of Maintenance Visits – One concerning trend we have seen in the past years is ambiguity regarding the frequency of maintenance visits. This is extremely concerning for end-customers because it is like going to a donut shop and paying $8 for “donuts” and not being told how many you get. Ignoring the quality of the donut for a moment, if you get 12, it’s a great deal. If you get 4, you really got ripped off. To give some history here, this was not an issue in years past when monthly elevator preventative maintenance visits was the law. Through lobbying and code revisions driven by the elevator companies, who felt monthly maintenance was overkill, the minimum legally required preventative maintenance moved to quarterly (every 3 months). When this happened approximately 10 years ago, many elevator companies simply started doing quarterly elevator maintenance visits, even if a contract was in place to do monthly maintenance. While they may have covered themselves from a TSSA perspective, they certainly were not meeting contractual obligations. Today, many elevator companies’ standard contracts avoid this issue with wording such as: “we will perform maintenance on a regular and systematic basis”. Recommendation: Do not sign a contract without a firm commitment of the number of maintenance visits you will receive each year: (i.e. for an elevator, 4 or 12 visits.)
- Indemnification of the Elevator Contractor – Another trend which we have seen in recent years relates to indemnification; that being “the legal agreement by one party to hold another party blameless – not liable – for potential loss or damages”. Typical wording we have seen recently reads something like: “the owner will indemnify the elevator contractor”. This may seem innocuous on the surface; however, the reality is that if you accept this as an owner, in the case of a legal dispute the elevator contractor does not have to represent themselves, but rather you as the owner (in addition to representing yourself if named) are also required to pay for the representation of the elevator contractor. We have seen this wording frequently come up in the contracts of small elevator contractors (not surprisingly as they typically don’t have the financial resources to undertake potential legal battles), but we have also seen it come up in many of the large elevator company contracts (again not surprisingly because it limits their liability and therefore costs). Recommendation: Simply stroke out this term. When the term is not in place, the legal precedent is that each party named in a suit is required to represent themselves.
- Level of Service – At a high level, there are typically 3 types of contracts. There may be slight differences in labels but typically they are: OG (Oil and Grease) or LOG (Labour Oil Grease); Full Maintenance (FM); and Extended Full Maintenance (FMX). An OG or LOG contract typically only includes the basic TSSA preventive maintenance tasks and may include basic lubing and greasing (while this is not a TSSA requirement). Any trouble calls (labour and equipment) are not covered under these contracts but instead are chargeable. It is vital that you understand in advance what you would be charged (hourly rates, minimum charges, what city travel originates from, travel charges etc.). Beyond the basic preventative maintenance visits, an FM contract will usually include trouble calls during regular business hours (including parts), but overtime labour is excluded and typically travel expenses are excluded. Finally, an FMX contract or FM Plus typically includes all of the above and also includes overtime calls and travel expenses. Recommendation: It is important to determine what contract level is best for your organization. For example, a condominium which potentially has elevator users 24/7, really should have an FMX contract in place whenever possible to avoid costly overtime calls, whereas an office building open 8-4:30pm may only require an FM contract. An LOG contract may be the wisest choice for a rarely used accessibility lift, for example.
- Contract Exclusions – It is critical to closely read exclusions. Again, while exclusions may seem innocent, they constitute a massive difference for elevator contractors when it comes to potential liability and actual costs. There is nothing devious about exclusions to a contract; in fact, they bring clarity to the offering, however it is critical that the signing party understands the impact of any such exclusions. Standard exclusions in elevator contracts (i.e. those that almost all contain, including those developed by independent elevator contractors) would include: items related to the interior of cabs, buried pipes, main electrical power, vandalism, acts of god (power outage, flooding) etc. There are others, however, that are less typical, and a value should be connected to them. For instance, a customer recently made us aware of a clause that a bidding competitor had included. The exclusion was: “proprietary or single sourced parts”. While it is reasonable for an elevator contractor to exclude parts which are impossible or price prohibitive for them to source because they are proprietary, excluding “single sourced parts” makes little sense. For instance, Delta Elevator is an Ontario manufacturer of elevators and they develop their own controllers. If we install a Delta elevator, we install their Delta Diagnostic Indicator which makes it non-proprietary, however the only place to buy the controller boards is from Delta. They are easily accessible, and their prices are consistent with the marketplace. These boards are thousands of dollars, so excluding single sourced parts significantly reduces an elevator contractor’s liability, and thereby their costs. Recommendation: Do not accept “single sourced parts” as an exclusion. For Proprietary exclusions, have the elevator contractor specifically write out the exclusions: (e.g. “Otis hoisting belts”; “Schindler 3300 controller parts” etc.)
- Contract Inclusions – One of the more difficult things for elevator owners to understand is “contract inclusions” or “included work”. While it may be a challenge for a non-elevator-expert to understand what a specific exclusion means, it is far more difficult to read a long list of “included equipment” and try to determine what critical components are missing. A full maintenance (FM) contract really should include all major components (unless clearly excluded), but we have been surprised to review some competitors’ FM contracts to see major (expensive) components that have been excluded. From our perspective, a contract with integrity will clearly state “excluded work” rather than simply keeping key components out of the “included work” section. Recommendation: Have either a trusted contractor or consultant review your contract to identify key components or work that is missing under the “included work” section. Examples of key items to look for (that are often excluded) are: “travel cables, hoisting cables/belts, and circuit boards”.
- Contract Escalations – It is typical to sign a 5, 7 or even 10-year elevator contract, especially if it is a full maintenance contract. An elevator contractor has a significant liability if expensive repairs are required in a given year, and a longer term would allow them to recoup some of those costs. Logically, a contractor’s expenses increase each year. Parts prices increase, but most significantly, labour costs increase. A good portion of the elevator industry is unionized, and union rate increases (3 years worth) are generally published after a deal is settled. While we are not a unionized company, to assure we attract and keep the best elevator technicians we pay them union wages and escalate their wages by the union increase (as this is a fair objective industry increase). Over the past 10 years or so, those increases have generally hovered around the 2-3% range and we always assumed that unionized elevator companies were increasing their contracts with customers by this same rate. We have been shocked to hear from elevator owners who have looked into their increases to see that some have been escalated by as much as 7% per year. If you understand compound interest, this excessive increase has significant impact on the contract price, especially after 5, 7, 10 years or more. Recommendation: Do some calculations. Look at your original contract to see what it was sold for, then do calculations to see how much it escalated each year. Find the clause in the contract that talks about escalations to see if the increase has been in line with the clause. Our contract states: “The Billing Amount shall be subject to adjustment one year from the Start Date and yearly thereafter, and shall be increased or decreased in direct proportion to the increase or decrease in the hourly labour rate.”
- Contract Cancellation – In Ontario, having a valid and current elevator contract in place with a licensed elevator contractor in good standing, is the law. The Technical Standard & Safety Authority (TSSA) enforces this. For this reason, many elevator contractors not only have a “contract term” (i.e. 5 years), but many have an autorenewal, meaning the contract will renew if not cancelled. In this way the elevator owner will never be in a liability situation if both the owner and contractor forget to supply a new contract at the end of the current one. A longer contract term also allows the good elevator contractors the ability to perform proper repairs even if they are costly rather than performing a less costly temporary repair. A longer contract term also saves significant administrative time and money if both parties are still happy with the arrangement. In years past, such contracts could be cancelled in advance at any time in the contract (for example if 3 years into a 5 year contract a customer decides that they are not excited about the service they are receiving, or they simply want to go out for competitive bids at the end of the contract, they could cancel at any time in advance). A number of years ago elevator owners began to see something new in elevator contracts – “cancellation windows”. For example, certain contracts will typically say: “the elevator contract may be terminated with written notice no later than 90 days prior to the end of the contract period, but not earlier than 120 days prior to the end of the contract period”. So, if you have a 5-year contract in place you have a 30-day window every 5 years to cancel a contract. While we understand the value of an auto-renewing contract, having only a “cancellation window” appears to simply be a strategy for customers to miss the cancellation opportunity. Recommendation: If your contract proposal has a cancellation window, stroke out the portion that creates a window (i.e. stroke out the “not earlier than 120 days”). You thereby are still covered to have a contract in place if you forget about the end date, or are happy with the service, but it still allows you to cancel the contract in advance any time during the contract period.
There are other key factors that you should consider when awarding a maintenance contract that are outside of the legal document, but are nonetheless critical:
- Company Strength – What is the financial viability of your contractor? How long have they been in business? (as many small businesses go out of business in the first few years, many consultants don’t entertain contractors until they have been in business for at least 5 years). What insurance do they have in place? (typical elevator insurance is at least $5 million liability insurance). Are they bondable by a bonding agency? (have them get preapproved bonding to prove they can; if a bonding company is not willing to guarantee their work, do you really want them working on your elevator?)
- Company Size – There are advantages and disadvantages to all types of companies. Small contractors can often offer you more personalized service (especially early on in their existence when they have few customers), but logically, how can a two-man operation free your trapped passenger in Barrie when they are doing jobs in Sudbury and downtown Toronto, especially on a snowy February day? A large company theoretically has many elevator technicians available to you, but do you get any personalized office service? Also, if you have a contractual issue, do you have pockets deep enough to fight with organizations whose legal department is 10 times the size of your entire organization? In the end, you need to calculate the risk and associate some value as you consider the “initial contract price”.
- Company Location – It is critical to determine the office location of your contractor. Unless specifically written otherwise, elevator contractors typically charge travelling time and expenses from their home office location. If you have a chargeable call, you will typically be charged: either a minimum charge (often 2 hours plus) or actual hours of the call; travel time (to and from); travel charges (typically per km). These can be significant expenses, especially if you are in Central Ontario and you find that the home office is in Toronto or in North Bay. Again, company location has to be factored into the “initial contract price”.
High Level Final Recommendations
As acknowledged at the outset, it is a difficult task to evaluate the various elevator contracts that are in existence. It is often difficult, even for us as “elevator experts”, to understand many of the clauses we read. Here are three recommendations for elevator owners:
- Contract Comparison – If you are comparing elevator maintenance proposals, ask a trusted elevator contractor to review the contract terms (you can always cover up the price) and ask them to identify areas of concerns and key contract differences.
- Incorporate a Standard Contract – One solution, especially for organizations with many elevator units, is to create a standard contract. If there is an elevator contract you are comfortable with, you can ask the elevator contractor if you can make that your standard. Alternately you can retain an elevator consultant to create one for your organization. In this way, all bidders are bidding against a contract you are comfortable with and (assuming that they intend to honour the contract terms) the comparison will be more apples-to-apples.
- Create an Objective Measuring Tool – Because of poor experiences, many public and private organizations have moved away from “tendering” maintenance (based 100% on price) to a “Request for Proposal”. The latter uses more than price to award a maintenance contract. We recently won a contract which was evaluated in the following manner: Company Experience/Expertise (20%); Strength/Size of Company (20%); Reference Checks (20%); and Price (40%). Meet with your own internal stakeholders and find out what is important to everyone and add a value to those items (i.e. one of our customers puts extremely high value on the ability to reach office staff and to get timely response). It is obvious that “lowest initial price” is only a small part of what is important to the overall offering. Create your own objective criteria to be rated and then filter each contract offer through these objective criteria, which your team created in advance. This can be extremely formal (with actual proposals submitted from bidders), or informal by asking bidders for the pertinent documents and information. Whatever time you invest will be well worth it as you will be able to choose the “highest value” contractor.
Rolly has been in the elevator industry for nearly 20 years in both a sales role and running an Operations Department. He works hard to help implement methods to provide superior service to Elevator One clients.