Renegotiating Contracts

Contract renegotiations should go way beyond an annual sit-down with customers. To be successful, building service contractors need to not only provide quality services, but to also nurture a relationship with customers throughout the length of the contract.

With ever-tightening customer budgets and stiff competition always ready to undercut prices, the cleaning industry can be a frustrating environment for BSCs. But while the market forces change, the need to retain a profit is the one thing that can’t be negotiated.

Managing customer expectations
Business is done differently in the new millennium, says Ed Moschler, vice president of Southern Building Maintenance Co., Inc., Greensboro, N.C. Price increases were a typical part of renegotiation in the ’80s and ’90s, but most customers these days can’t afford any type of increase.

“It’s very frustrating, it really is — but it’s also the climate and we have to understand that,” he says. “In some cases, we can still go up, we can still renegotiate for our benefit, but I’d say in most cases we’re renegotiating for our customers’ benefit.”

Moschler’s company has stayed competitive, however, by building a reputation of quality service with its customers — based on delivering the best deal.

“We’ve got a basic philosophy: to try to get them the best deal they can get, not the cheapest. We’re never the cheapest,” he says. “But we’re always the best deal.”

The competition might lowball the price and land a contract they can’t live up to, and customers don’t like being surprised with unanticipated costs.

Though price can be a roadblock when revisiting contracts, many customers will negotiate with a BSC they trust to do the job, says Sally Schopmeyer, president of Dallas-based Maintenance Inc.

Negotiation objectives can include increases for future years, with additional extensions; for example, for those operating on a one-year contract, it’s nice to try to obtain a three-year contract with built-in price increases. Other things to consider, she says, are increases in hourly rates for emergency work or the tacking on of additional services such as landscaping or lighting maintenance. Minimum wages in many cities and states are anticipated to rise, so that needs to be written into the contract also.

“I think it’s a good time to clearly define the contract so that both parties can be in a win-win, where both parties understand that this is the contract and these are the provisions and we’re both happy with these things,” Schopmeyer says.

Educating customers and keeping them up to date on the latest industry trends, such as green cleaning or day cleaning — even if they aren’t interested — shows you’re a credible business partner, she adds.

The level of difficulty of renegotiations depends on the customer, says Terry Woodley, vice president of Woodley Building Maintenance, Kansas City. The more customer-centric a client, the higher the expectation and the more of a willingness they have to pay more for quality service.

Knowing and managing the customer’s expectations enables contractors to provide suitable services, he says.

“You’ve got to marry your product offering, your service offering, your price offering, to what that customer’s expectation level is,” Woodley adds.

Keeping customers close
Building a solid client base is more important now than ever in an industry where customer loyalty is a thing of the past.
Customers are challenged with rising costs in gas, labor and other areas, making price the primary factor for many when renegotiating, Woodley says.

“You’re starting to see that loyalty just really isn’t there,” Woodley says.

The key to keeping customers is to “provide a great product or service to your customers. That’s first and foremost,” he says.

Keeping in touch, too, is important. There’s nothing worse than having a contractor who doesn’t care about you when you’re sending the check throughout the contract year, but cares when it’s time to renew the contract, Woodley says.

If it is necessary to approach customers about a price increase, continuous attention given to the relationship can pay off.

“When you do have to go back in and ask for more money, you try to do everything you can to show what you’ve been able to accomplish during the contract period and why things are better now with you than when you first took over,” Woodley says.

Customers need to believe that their BSC provides value beyond just price, Schopmeyer says.

During the course of the length of the contract, BSCs can keep customers abreast of changes in the marketplace, preparing them for possible changes in the contract. For example, she says, if the cost of paper is going up, and that cost is built into the contract, let the customer know ahead of time and they’re likely to be on your side when it comes to negotiations.

Moschler’s company shows the added value of contracts using full disclosure bids, meaning customers see all costs, including labor, equipment and supplies, as well as profit.

“The full disclosure bid is the only way to go for us. We show them exactly what we’re cutting out, get their approval, and we try to interview them back to get a good picture of what they’re willing to give,” Moschler says.

That way, profit is still protected.

“You have to stay in business,” he says. “You can’t give it away.”

Maintaining profit
BSCs agree that the one non-negotiable term is that of profit.

“One thing that’s not negotiable for us is that we’re not going to do business at a loss,” Woodley says. There are no guarantees for future business — only the guarantee of what’s in hand, so every job should be profitable and stand on its own, he adds.

A minimal profit for the company can’t be renegotiated, Moschler says. Adjustments can be made, however, to lower the price a customer pays, such as reducing hours or workers. That way, profit margin remains the same.

Applying the “Golden Rule” to customers, or putting themselves in their shoes, is a company concept that can help build a business partnership, Moschler says.

Schopmeyer says both parties must remain true to their company values.

“Both parties will have deal-breaker issues and you need to really know what those are before you go in to renegotiate,” she says.

Beyond that, they say, most other things are on the table.

Negotiations aren’t always successful, and that comes with the territory, Woodley says.

“If the customers have got to save money, and you’re losing money, that’s not a very good combination,” he continues. “You don’t want to make the decision to walk away from a customer, but we obviously want to be profitable, and that’s what everybody’s in business to do.”

The goal in any contract is to maintain a profitable customer, he continues, but there should be good reasons for any increase.

“If we’re in a relationship with a customer where we’re making decent profits, we want to make sure that we don’t lose them by trying to be greedy or trying to up the price just for the sake of upping the price.” Woodley says. “We want to make sure that it’s something that’s justified.”

In the face of enormous competition, BSCs’ ability to renegotiate contracts with customers is extremely important.

Contractors need to be good business partners with their customers, and be sensitive to their needs, Moschler says.

Renegotiating is not just about slashing price — it’s about the package a BSC offers, including protecting the bottom line, having integrity and a good reputation, keeping the doors of communication open, building a quality staff and collecting great references.

“That is the key, and it takes years to get there,” Moschler says.