Your Service Agreements Are Probably Mispriced

The 18% Lie

Search "service agreement profitability" and you'll find the same number everywhere: 18-22% average gross margins on maintenance contracts. It shows up in HVAC blogs, industry reports, and consultant slide decks.

It's wrong. Or more precisely, it's misleadingly averaged across a population that includes contractors who are literally losing money on every service agreement and don't know it.

When I was at BuildOps building AI accounting products, I had visibility into the service agreement financials of hundreds of contractors — real P&Ls, not survey data. The picture was dramatically different from the conventional wisdom.

The actual distribution:

The median is 40-45%, not 18-22%. The commonly cited number is skewed by contractors who haven't done the math — and by the ones actively hemorrhaging cash on SAs without realizing it.

The Contractors Losing Millions on SAs

This isn't theoretical. I've personally reviewed the books of contractors bleeding real money on service agreements:

One HVAC contractor was running -23% margins on their entire SA book — losing $3.8 million per year on maintenance contracts. Revenue was $16.3 million, but costs were $20.1 million. They had no idea. Their SA book was growing, they had strong customer retention, and everyone assumed the agreements were profitable. They weren't.

Another contractor was at -6% on SAs with a 58% collection rate. Double problem: underpriced AND not collecting what little they billed.

A landscaping company was at -366% margin on service agreements — spending $1.5M to deliver $328K in SA revenue. The original contracts were priced for minimal service, but the scope creep on actual delivery was catastrophic.

These aren't outliers. When I looked at companies with meaningful SA books (100+ agreements), roughly 15-20% were operating at negative margins. They were paying to do the work.

Why SAs Get Mispriced

Service agreements get mispriced for predictable reasons:

1. The "Loss Leader" Trap

The conventional wisdom says SAs are loss leaders — you lose money on the maintenance visits and make it up on the repairs and replacements they generate. There's a kernel of truth here, but it's dangerously overextended.

Yes, contract customers spend 3-5x more over their lifetime than non-contract customers. But that only works if the pull-through revenue actually materializes and is actually profitable. If your techs are doing maintenance visits and walking away without identifying any opportunities, you're losing money on the front end and generating nothing on the back end.

The fix: Track pull-through revenue as a percentage of SA revenue. The best contractors I've worked with generate 50-70% of their total SA revenue from pull-through — additional repairs, replacements, and upgrades identified during maintenance visits. The median is around 11%. If you're below 10%, your "loss leader" is just a loss.

2. Not Tracking Actual Cost Per Visit

Most contractors price SAs based on estimated visit time — "two tune-ups per year, 1.5 hours each, our tech costs $40/hr, so our cost is $120." Clean math. Wrong math.

Real cost per visit includes:

• Actual tech time (often 2+ hours, not 1.5)
• Drive time (15-45 minutes each way — billable hours that aren't billed)
• Truck cost ($30-50 per visit in fuel, maintenance, insurance)
• Parts and filters (included in the contract but not always tracked)
• Emergency callbacks (some percentage of SAs generate emergency calls between scheduled visits)
• Administrative time (scheduling, reminders, paperwork)

When you add these up, the real cost is often 40-60% higher than the estimate used to price the contract. That's the margin gap.

3. Scope Creep on "Included" Services

SA contracts get more generous over time. A salesperson adds "priority scheduling." Customer service throws in a "free diagnostic." Management agrees to "include refrigerant top-offs." Each concession is small. In aggregate, they can add 20-30% to your cost of delivery.

The fix: Audit every SA tier annually. List exactly what's included. Calculate the actual delivery cost at current labor rates. If the cost exceeds the revenue, raise the price or reduce the scope. This sounds obvious but most contractors haven't done it since the agreements were first designed.

The Pull-Through Revenue Gap

This is the single biggest missed opportunity I've seen across the contractor businesses I've reviewed.

Pull-through revenue = additional work (repairs, replacements, upgrades) generated during routine maintenance visits.

One contractor I worked with generated 72% of their SA revenue from pull-through. Their techs were trained to photograph issues, present options, and generate recommendations during every visit. Another contractor generated 2%. Same industry. Same customer demographic. Completely different economics.

The difference is training and incentives:

• Techs need to be trained to identify work — not just perform the maintenance checklist, but inspect for repair needs, aging equipment, and upgrade opportunities
• Techs need a reason to recommend work — commission, spiff, recognition, or at minimum a culture where recommendations are expected and tracked
• Recommendations need a system — documented, photographed, presented to the customer, followed up on if not approved immediately

If your SA book runs at 11% pull-through and you move it to 40%, you've more than tripled the revenue generated from customers you already have, during visits you're already making.

How to Audit Your SA Profitability

If you don't know your SA margins, here's how to find out:

Step 1: Calculate total SA revenue. Easy — pull from your accounting system. Include all maintenance contract billing.

Step 2: Calculate total SA cost. This is where it gets real. Include:

• All labor hours your techs spent on SA visits (not estimates — actual hours from your field service software)
• Drive time and truck costs allocated to SA visits
• Parts, filters, and materials used on SA work
• Any subcontractor costs on SA work
• A share of scheduling, dispatch, and admin overhead

Step 3: Divide. (Revenue - Cost) / Revenue = your SA gross margin.

Step 4: Segment. Don't just look at the total. Break it down by:

• Agreement tier (basic vs. premium)
• Customer type (commercial vs. residential)
• Equipment type (HVAC vs. plumbing vs. electrical)
• Contract age (new vs. multi-year)

You'll almost certainly find that some segments are profitable and others are underwater. The aggregate number hides the variance — and the variance is where the money is.

If you need help setting up this analysis, our guide on job costing in QuickBooks covers the accounting setup. For the strategic layer — repricing, restructuring, and optimizing the SA book — that's what a fractional CFO does.

When Service Agreements Aren't Worth It

The contrarian take: not every contractor should have service agreements.

If you're a pure project/install contractor with no service division, SAs don't fit your business model. Don't bolt them on because a consultant said "recurring revenue is king." Recurring revenue is only king if it's profitable.

If your market won't support the pricing required to make SAs profitable (sub-$150/year residential contracts in price-sensitive markets), you may be better off selling individual maintenance visits at full margin rather than locking in annual contracts at a loss.

If you don't have the systems to track SA delivery cost, you can't manage what you can't measure. Running SAs without tracking actual visit costs is gambling — and the house usually wins (meaning: you lose).

The contractors who win with SAs are the ones who price them correctly, track delivery cost obsessively, and use maintenance visits as the engine for pull-through revenue. Everyone else is subsidizing their customers.

---

The Bottom Line

The conventional wisdom on SA margins is wrong. The median is 40-45%, not 18-22%. The contractors who cite 18% are averaging in the ones who are losing money — and the ones losing money don't know they're losing money because they've never run the math.

If you have a meaningful SA book (50+ agreements), audit it. Calculate the real margin by tier, by customer type, by equipment. You'll almost certainly find segments that need repricing and segments that are performing well. That visibility is the difference between a service agreement program that builds your business and one that quietly drains it.

Q: Can Level audit my service agreement profitability? A: Yes. We connect to your QuickBooks and field service software, pull the actual labor, materials, and delivery cost per SA, and calculate your true margins by agreement tier and customer segment. The first audit is free — and it's often the most eye-opening deliverable we provide. Most contractors are surprised by what they find.

Q: How do I improve pull-through revenue? A: Start by tracking it. If your field service software supports tech recommendations (BuildOps, ServiceTitan, and others do), turn it on and set a baseline. Then train techs on identifying opportunities, create a simple incentive structure, and review the numbers monthly. Moving from 11% to 30% pull-through typically takes 3-6 months of consistent effort.

Q: Should I raise SA prices or cut costs? A: Usually both, but pricing first. Most contractors undercharge for SAs because they priced them years ago and never adjusted. Annual price increases of 5-8% (matching labor cost inflation) are standard and expected. Pair that with tighter scheduling (reducing drive time) and you can move margins 10-15 points without losing customers.