Customer Loyalty Guaranteed?
Generate More Revenue by Giving Away Work (Yup, You Read That Right)
S.S. Saucerman / January 2019
A while back, I was sitting in on a late Monday morning meeting with my boss and a client (let’s call him “Bob”) with whom we’d completed a building project some years prior. Bob was upset. A fierce storm had pummeled our area over the weekend, bringing with it torrential rain and pounding wind gusts upward of 70 mph. (It does that here in North Dakota.) If that wasn’t bad enough, the wind attacked at an almost horizontal trajectory, the kind of angle perfect for creeping up under soffits to pry roof structures up from their bearings. Fascia cap and siding peeled away like wood shavings. Trees were down, and fractured remnants of decimated buildings and dwellings littered our streets. Power was still being restored in some areas. It was nasty.
And (as you’ve likely already guessed) Bob owned one of these decimated buildings—and we were the ones who’d built it for him. Since I’d been project manager on the original construction (and I was still around), my boss wanted me in the room for the meeting. He told us he’d just left a walk-through of his building with his insurance rep and that he was troubled by some of the adjuster’s comments. As they surveyed the wreckage, the adjuster began bringing up—and questioning—original construction methods as they now related to damaged building elements.
This caught Bob off guard and, whether proper or paranoia, he began interpreting these comments as an attempt by the adjuster to “lay groundwork” for denying some or all of his insurance claim. As the walk-through progressed, Bob pressed back as to what the result (in theory) might be should the original construction indeed be deemed substandard by the insurance company. The adjuster returned: “Well, I guess the balance would come out of your own pocket.” This, of course, is a phrase no businessperson likes to hear. The adjuster continued: “… or you’ll just have to take it up with your builder.”
So, although everything was completely hypothetical at this point (the insurance company would respond in writing with their final assessment), this exchange was enough to cause Bob some level of anxiety and motivated him to include our company in any further discussions, so “we’d all be in this together.” Better put, Bob wanted to put us on notice that if the insurance company did deny some or all of the claim (due to culpability on our part), we were going to be the ones on the hook for the balance of any funds—warranty or not.
I’d retrieved the project folder for the job prior to the meeting, so I already had the key dates certain to pop up in our talk. It’s fairly common (though not mandated) in commercial construction for a company such as ours (a general contractor/construction management firm) to offer a warranty for product and services of one year starting from the date of occupancy on the project. This was the warranty period on Bob’s building. This one-year guarantee also extended to vital subcontractors on the job, who became tied to this promise via our company’s individual subcontractor agreements.
It had been a little over five years since we obtained the certificate of occupancy on Bob’s building. It was pretty standard stuff as commercial construction goes: a 30,000 square foot, pre-engineered steel warehouse attached to 2,500 square feet of office space in front, including sitework and finishes. The office was conventionally framed as a “bump-out” addition to the rectangular warehouse footprint. The storm damage centered primarily on the front façade of the addition and consisted mostly of lost soffit/fascia/siding, one damaged window, wet insulation/sheathings and arterial water damage that found its way inside to some interior finishes. The warehouse portion escaped unscathed.
Preparing for Another Storm?
Both my boss and I had been in this construction game for some time. We knew why Bob was here and we knew what he hoped to accomplish. We also had a comfortable understanding of our legal position and felt confident, due to the fact we had the best quality-control measures around and also kept meticulous notes/logs on every project we built, the insurance company would be unable to show our original construction was at fault. We were more than prepared for a fight.
But here’s where things didn’t go quite as you might expect. Instead of a terse, tense meeting featuring two opposing sides knocking heads and drawing indelible business lines in the sand, the air was surprisingly civil. At no time did the discourse degenerate into assertions of who signed what, nor did either side keep a running tally of gotcha clauses from the contracts. Lawyers, law firms and litigation never entered the conversation. Why? Because when Bob finished the story of his harrowing morning, we told him first to not worry. Then we affirmed that we were in this together. And finally, Bob was told that regardless of the insurance company’s verdict, his five-year old, out-of-warranty building would be restored and that we would provide any shortfall in funds necessary to see the work done.
Bear in mind there was nothing contractual compelling us to repair the building. The contracts were clear and the meanings concise. We didn’t have to do this. Bob, visibly relieved, left the meeting happy and a little stunned. So why did we do what we did? I’ll explain our reasoning in a moment, but first, I think it will help the discussion going forward if we provide a little background on our subject:
Although the exact wording in construction warranties differs from firm to firm, they generally include language like this: “We guarantee this building/construction to be free of structural, electrical, plumbing and other defects and further attest that it is fit for its originally intended use” and/or “We will provide necessary material, labor and equipment to replace and/or repair any damaged or defective products or applications at no cost within the warranty period.” This wording is often—and should be—adjusted to suit market niches and projects.
But there’s an aspect of warranties that many don’t understand. Although a year sounds good to many builders, there is (for the most part; warranties called out in spec books for particular projects are a separate issue) nothing in place forcing anyone to adopt a particular length of time for your warranty period. It could be one year, six months or, if you could get away with it, you could offer no warranty (good luck getting work that way, but at least it was your choice).
Of course, extended warranties (EW) aren’t new. You see them (and their evil stepsisters: service contracts) offered on automobiles, appliances and power tools. EW has even made inroads in the residential construction markets where (often pro-rated and limited) five- or 10-year warranty plans can be purchased or qualified for if the buyer agrees to, for example, a particular level of energy saving implementations and/or quality measures, which of course cost more to include in the original construction so no matter what, you generally end up paying for it.
But this isn’t the case (yet?) in commercial construction. There are a variety of reasons for this, not the least of which is that on a project average, we’re normally talking about a lot more money for a commercial product. An “average” project for my company was $1 million, but I know there are many of you who work with $10 million or even $100 million projects every day. Warranty takes on an elevated significance when the price tag to repair a single damaged element is $500,000!
Risk Versus Reward: Warranty Style
So with this information as our backdrop, let’s return to our meeting with Bob. The immediate question on your mind is probably, “Are you crazy!? Sure, we feel sorry for your client, but that doesn’t justify giving away company resources when you clearly have an iron-clad out! How it that good business?” Well, let me lay out our reasoning: First (and at the risk of sounding pretentious), we felt a genuine loyalty and obligation to our community. The storm was unexpected, was undeserved and did cause many of our friends and neighbor’s deep distress. We sincerely wanted to fix that.
Second (and far less altruistic), we knew from past experience that it never hurt a company’s public persona to demonstrate benevolence in a time of need. (OK, I’ll say it, we thought it had advertising value.) But before you go casting dispersions, keep in mind that we are far from the first business to employ this tactic. Each time you sat through a Shell Oil® nature documentary or attended a health program sponsored by MegaConglomerate Pharmaceutical Company, you became part of this tried-and-true market exercise.
Next, Bob was a known entity. We knew what we were getting into. We knew his likes, dislikes, tastes, and we had a pretty solid understanding of what we were committing ourselves too. This was a huge part of our decision and isn’t something we would have considered with a newer and/or lesser-known client. The greater the knowledge, the greater the comfort. The greater the comfort, the smaller the risk. We felt comfortable taking a risk on Bob.
Am I Repeating Myself?
But without question, the most compelling motivation behind our choosing to help Bob was, well, Bob. He’d granted our company multiple building opportunities in the past. Some of the projects were good, some mediocre, but it was all work. And as any good contractor knows, repeat customers are vital in achieving success in this industry. Bob was one of our “repeat” rocks. We knew that without a reliable stable of “Bobs” to form our company’s core workload, far too much is left to chance and luck, which we also knew was not a good business platform.
Repeat customers fill the gaps and smooth the valleys in construction schedules. It also offers management a clearer and more consistent basis for projecting cash flows and planning work resources. But perhaps most important of all, a more predictable, consistent work flow helps to ensure workers feel secure and safe in their continued employment. Gaps in schedules send up red flags. Smooth flow keeps key, experienced people where they are, and limits learning curves suffered under environments with heavy turnover.
And so, upon weighing all of these (and other lesser) pros and the cons, we felt Bob was worthy of receiving extended warranty treatment. You might be thinking that’s too risky, and that’s fine. There is risk involved, and we all have different tolerances for what is acceptable. But it’s been my experience that there was a microscopic percentage of warranty callbacks to most jobs and, on the rare occasion it did occur, the work was modest and didn’t require significant man-hours and/or company resources (again, equipment, appliances and most internal/exterior finishes were all covered under multiyear warranties of their own).
Warranty as a Sales Tool
So let’s take this all one step further. Since we’ve established a rationale behind offering better customers longer warranties, why not use it as a sales incentive for landing the next job? Why would we do that if they’re already repeat customers? Remember that “repeat” doesn’t mean “automatic.” Giving you four projects in a row does not obligate Bob to simply hand over number five. In today’s bottom-line-net-net business world, even the most loyal client first owes a responsibility to their own management, investors and board. Nope, you still have to work for it.
Sure, the Bobs genuinely do like you and your company. They may even consider you a friend outside of business hours. In the end, however, this doesn’t relieve them of their obligation to negotiate the best overall deal for their firm. So, given this, it behooves you to offer new and fresh incentives to ensure your repeat customer retains proper justification for going back to your firm. This is where I believe extended warranties may be just that incentive. Instead of the standard one-year pact, what about offering three? Or five? How about even 10? You know the client, and you know the project. Offer what makes sense to you, and you may find that it’s all you need to seal the next deal.
It’s proper when dealing with subjects such as warranty to include qualifications to our discussion. For instance, this article is not attempting to address or advise on the legal aspects/ramifications connected with warranties or guarantees. This is more a thought-study. Everything I’m suggesting and discussing in this piece is based on my own experiences in dealing with the customer-focused and (I believe) more practical side of guaranteeing your work. Of course, any and all company warranty/guarantee policies should be reviewed and cleared through your lawyer, surety and (yes, even) accountant prior to implementation.
I also hope it goes without saying that this is a premise that will vary not only from client to client but also project to project. You will absolutely need to weigh the risks and ramifications of extending warranties for each and every building opportunity. You’ll also need to create exclusions and address notable high-risk work items that simply won’t lend themselves to extended warranty arrangements. Smart is still smart. But I do think you’ll be surprised by how many projects fall within your personal acceptable risk range, and be further pleased with the effectiveness of extended warranty as a sales tool.
Finally, and just so you know this wasn’t another “insurance company bashing” piece, which would be waaaay too easy, I should tell you that in the end, Bob’s insurance company did pay the full amount for repairs and found no fault with our original construction. Bob was quite pleased with everything and even had us do the repair work. All in all, a happy ending. And it was the meeting with Bob that proved to be the catalyst for a series of discussions and debates in our office dealing with the subject of extending warranties to loyal, repeat customers. I urge you to take up the subject in your office. You never know where it might lead. Good luck!
S.S. Saucerman is a retired commercial construction estimator and project manager in the Midwest. He is also an established freelance writer and author whose work spans 20 years.