By Jon Crandall, CSP
I truly believe the snow business is one of the most difficult businesses to manage given the variables involved. Given the variability and volatility, contract structure, portfolio balance and the ability to weather the ups and downs of a given year are crucial - and that goes not only for snow and ice management contractors but also property managers.
The State of the Industry survey found 31% of contractors were planning to adjust their portfolio balance because they had too many per-inch/per-push contracts. In addition, 35% reported clients requesting contract type changes due to the previous season.
It is an extremely challenging business to forecast financials. However, after many years of trial and error we have become increasingly more accurate. The more history and data you collect and analyze, the more intelligent you will become in making your own predictions and decisions. One of these decisions is how many of each type of contract to take on each year.
With a well-planned budget and properly diversified portfolio it shouldn’t matter too much if one client decides to change from one contract type to another. By working through the data and educating yourself, you will also be able to educate your clients on the options available to them and the cause and effect of each one. This education will likely prevent them from flip-flopping from one contract type to the next year over year.
Even more valuable to us is our ability to determine the client type we are most successful in servicing. We have come to realize we have a limited resource. Each season we carefully distill the data we have collected and fine-tune the client makeup we service the best, how we can service them better and what product/contract mix we want to offer to best diversify our own portfolio.
With a 20% growth plan year over year, a 94% renewal rate and 1,000-acre goal over the next seven years, we are very intentional of what our service mix looks like. We need to do all of this without risking our effort of being best in class with culture and client satisfaction. In our model, we believe each one of our clients deserve top-notch service. Historical data, reflection and intentional strategic thinking will make that happen.
While great progress has been made, there is more to do in terms of educating property managers on how to ID a faulty bid or whether they’re in a dishonest relationship. Consider the following:
Watch out for poorly worded and unrealistic contracts and clauses (e.g., hourly capped, nondescript blizzard clauses). Make sure to understand the best contracts to mitigate risk.
Look out for rates that have not risen in years such as hourly wage for labor and/or machinery hourly rates. Either the contractor doesn’t know his numbers or they could be padding hours.
At the end of the day the property manager’s budget is in the hands of the weather and the contractor. Documentation such as in/out service times and unbiased, outsourced meteorologist reports can serve as backups to snow totals and hours on-site.
If a proper manager has any inkling that they are being taken advantage of, they should comparison shop. Find two reputable vendors and ask them to analyze the property for the past season. Compare pricing, labor and equipment allocations, insurance, etc. A good vendor will put together a concise report backing up the data they present to you.
The latest SIMA best practices guideline focuses on quality RFP creation and processes. You can download it for free at www.sima.org/bestpractices
Striking the right contract balance
After more than 20 years in this business I’ve heard it all when it comes to contract types. The type of contract(s) you use depends on the biggest variable of all: the weather. From a global, macro and micro level, you can’t escape the impact weather has on your business. You must benchmark it, regardless of which variable you choose to use when setting contract type, pricing, etc.
On a macro level, we have studied total snowfall, measurable snowfall events in a season, qualifying deicing events in a season, number of days below 32°F in a season, number of plowable storms in a season, and so on. If you track the 5-, 10-, and 20-year average in Boston, they are extremely different.
You could also consider that something globally is causing greater season-to-season swings and extremes on a macro and micro level. Personally, this causes me to look closer at the 5-year average instead of the 10- or 20-year average, even though longer data sets are typically more reliable.
On a micro level, we have evaluated the number of 1- to 3-inch plowable events that took four hours or under to plow and those that took four-plus hours to fall; events that finished snowing in the middle of the day that needed cleanup later that night; events that started as snow then changed to rain then back to snow again, etc.
We look at contract mix, and diversification of equipment and manpower, including whether to self-perform all services, subcontract, lease equipment, etc.
It is a nightmare for accounting, forecasting and budgeting. I have been looking at the analytics for years and studying the year-over-year variables and driving factors. Following is what I have learned about certain contract types and how they can impact both the client and snow contractor.
These contracts give clients peace of mind since they can set budgets with no surprises. Without caps, however, contractors can really take it on the chin during high snowfall seasons. Contractors who sell these services at rates based on a less-than-seasonal average go back to the client looking for more money during high snowfall winters. Even worse is the contractor that doesn’t go back and ends up insolvent and unable to fulfill the remaining years on the contract. Price the season for a slightly greater than average snowfall year, which will help balance margins in a below-average or above-average year. Try to lock in the deal for three or more years, which should allow the law of averages to play out.
Per-inch and per deicing treatment
Clients only pay when services are performed. The challenge from the contractor’s perspective is they have overhead costs either way. In a low snowfall year, they must still pay insurance, equipment loans or lease obligations, management costs, and office or shop expenses. From the client’s perspective, they can go severely over budget with a heavy snowfall year. Sometimes managers have a bonus tied to P&L responsibility that can affect the snow budget. The manager has no control over the weather, and if a heavy snowfall year persists, his only leverage is to reduce spending on services like deicing. This usually causes a conflict of interest and can result in an unsafe property as well as potential friction with the contractor/client relationship.
Hybrid, cap-based contracts
These contracts typically use the seasonal averages to base the cost with an over/under mechanism. At JC Grounds, we have created a capped contract based on the seasonal average that is a mutual win for the client and the contractor.
Here’s how it works. In the Boston area, we would suggest a slightly above average seasonal snowfall of about 50 inches and 45 deicing treatments. The client can choose a risk level by going with the seasonal average or by going lower or higher on the scale as to number of inches or number of deicing treatments. If snowfall in that season is greater than 50 inches, we charge extra based on a per-inch, per deicing treatment cost. Anything under that amount would roll over for one year.
If the first year of the contract saw a 40-inch winter, the client would have 10 inches in credits. In the event of a 60-inch winter on the second year of the contract, the client would not incur additional costs. Any overages are charged on a storm-by-storm basis using predetermined rates after the cap has been exceeded.
Need help getting started?
Templates for snow contracts and clauses are available to all SIMA members for free. Contract elements include Scope of Work, Pricing, Terms & Conditions, and a Signature page. Download these resources at www.sima.org/resources.
State of the Industry 2017
- 58% - Respondents who stated they do not plan to adjust their portfolio balance for the 2017-18 snow season.
- 30% - Respondents who stated they had too many per push contracts last season.
Jonathan Crandall, CSP, is chief visionary for JC Grounds Management. Contact him at firstname.lastname@example.org.