Introduction

Service contracts and support contracts are agreements that span a predefined period and are subject to automatic or negotiated renewal. Contracts typically include recurring services and coverage such as inspections, preventative maintenance, break/fix support, warranty, upgrades, consulting, and training.

Although the terms “service contract” and “support contract” are often used synonymously, they are in fact different in approach.  Service agreements are typically based on the occurrence of service incidents on the covered equipment. This is a reactive and a transactional approach.  Support agreements are based on a long-term relationship with the integrator to support the equipment in a proactive manner and with a refresh strategy.  Both contracts represent a good source of recurring monthly revenue (RMR), provided the administration of these contracts is executed with minimal overhead and the client recognizes the value of the agreement.

Business Challenge

With the potential for many service contract agreements in place with many customers, it is important to determine the most efficient way to manage contract renewals and avoid the expiration of these contracts. This can also pose a challenge given that integrators can have multiple service agreements with the same customer based on multiple buildings, floors, and systems.

Recommended Practice

The recommendation for renewing contracts is to include a clause in your agreement stipulating that the contract will auto-renew unless otherwise cancelled ahead of time. As there may be exceptions, there are three common scenarios for contract renewal.

All scenarios

Regardless of the scenario you choose, the following general practices should be implemented.

• Designate a person in your organization as the service contract administrator. This role will involve monitoring, actions for renewal and in some cases, collaboration with the sales team.
• Use a queue to monitor all contracts, including auto-renewable contracts
• Set appropriate billing frequency and sufficient value for bill-in-advance days per contract for processing the invoices and receiving payments ahead of the renewed coverage period
• Define a company-wide automation rule to auto-expire service contracts that have not been set to auto-renew
• Compile data to demonstrate the value of contacts to customers. This can help in the contract renewal process and upselling your services.

Scenario 1: Legal requirement to send renewal confirmation

The designated contract administrator should be responsible for the following:

• Monitor contracts that are nearing expiry
• Review and renew the contracts. This is typically done by printing the service contract and sending a confirmation to the customer.
• Renew contracts by moving the end date out the agreed upon future date

Scenario 2: No legal requirement to send renewal confirmation and contract auto-renews per terms

• The contract administrator sets up the contract for auto-renewal
• The contract administrator monitors contracts that are nearing auto-renewal
• Q360 is configured to auto-renew all applicable contracts on nightly basis

Scenario 3: A sales team is involved in renewing service contract and are commissioned on renewal

• The contract administrator monitors contracts that are nearing expiry
• The customer can initiate a review of the contract pricing and terms
• The sales team is involved in the renewal process by going through quotation process
• Service contract expires the old contract

In Q360

• To auto-renew a contract, select AUTO from the Renewal Type drop-down on the contract. When the contract period is reached, this will cause the system to automatically extend the end date of the contract by a period that equals the contract’s billing frequency.
• Every night, Q360 automatically creates invoices for all service and support contracts that are due for billing. Due for billing is determined by the following fields in the Service Contract record:
  • Start Date
  • End Date
  • Billed Thru Date
  • Bill in Advanced Days
  • Renewal Type
• The Next Invoice Date field calculates the expected date of the next invoice
• Find the invoices for all auto-billed contracts under the Invoices to Print bucket of the Accounts Receivable workflow. These invoices will be of type SERVICE.
• If you have large number of invoices to send at once, consider using batch invoice printing or emailing functionality, found in the Invoices to Print Q.
• To monitor expiring service and support contracts, use Q360’s Service Contracts Renewal Q. You can specify Days Till Expiry as an input parameter.
• To manually renew a service or support contract, edit the Service Contract record and adjust the End Date field
• To manually expire or put a service or support contract on hold, edit the Service Contract record and change the status
• To auto-expire service and support contracts that are not set to auto-renew, go to the Accounting > Admin > Company Setup, Misc tab. Then change the Service Contract Inactive Days and Service Contract Inactive Status fields.
• To create a quote for a contract renewal, go through normal quotation process. Once approved and the new contract is set up, ensure the old contract gets expired.
• To get data for services delivered as part of a contract, access the Service Calls tab of the Service Contract. This will list all service calls linked to the contract.

Frequently Asked Questions

How do I project the revenue and cash flow from on-going service and support contracts, including auto-renewable ones?

Use the following Live Data reports:

• Service Contract Invoicing Projection
• Service Contract Revenue Projection

How do I assess the profitability of service contracts to help with negotiating renewals?

• Use Service Contract Profitability live data report to assess multiple contracts at once. Alternatively, the Profit tab of an individual service contract provides similar information.
• Use the Customer Profitability live data report to evaluate the whole of a customer’s profit makeup, including projects, box sales, service, and service contracts.

Published: May 21, 2020