Cents & Sensibility

The Ups & Downs Of Elevator Contracts

By Paul A. McCurdy

An issue which is always difficult, is a potential change in an elevator service contract. The basic question seems rather straightforward: do you select a maintenance only contract-the less expensive option-or do you select a repair and replacement contract, sometimes referred to as a "full-service" contract-which is more expensive but covers more of your potential costs? But if you look at this question more closely, a few twist and turns requiring additional analysis are revealed.

Two primary methods of contracting for elevator service are offered by elevator service companies. The first type of contract is for maintenance service and maintenance service only. Simplified, this means they will lubricate, adjust, and make small repairs which usually take less than a couple of hours and require only one service technician. Repair and replacement of system components is the responsibility of the owner-the association. The other type of contract is a full service replacement contract. In this arrangement, anything which breaks is replaced by the service company at their expenses. The payment for this type of contract is substantially higher.

Both types of contracts are written by the elevator company's lawyers. And since the consumer is usually a small single entity, few resources and less leverage are generally available to negotiate more favorable terms.

The Motivation to Perform

Under both types of contracts, there is a concern over the service company's motivation to provide quality repairs and maintenance. With the maintenance only contract, what motivation is there for the company to perform maintenance perfectly? When equipment breaks down, they generally are in the best position to be awarded a contract for repair-the contract may even require that you use the service company for repair, replacement, and upgrade projects. With the full service contract, what is the motivation for the company to repair or replace anything they don't absolutely have to?

They receive no additional revenue for the repair or replacement.

Of course, if you are concerned about monitoring the maintenance under either of these types of contracts, you can always hire an elevator consultant to conduct an inspection and provide a report on the condition of the equipment and effectiveness of the service company. But in looking at the motivation to perform, associations need to recognize that the needs of the customer-well maintained equipment-and the needs of the service company-making a profit-are more than likely diametrically opposed.

The Costs Over the Life of the Contract

I have statistics available from several associations which use these two types of contracts and various service companies. The typical monthly cost for the first type of contract, the maintenance contract, is approximately $400 per month, per elevator. The typical monthly cost for the second type of contract, the full service contract, is approximately $700 per month, per elevator. The difference of $300 per month is what the elevator company is paid to replace or repair any and all components. It is very important to note that, in most cases, the company is not required to upgrade elevator components, only replace with like-kind.

I recently met with an elevator service company to discuss how much an association should budget for the elevator in the reserve study. The company indicted that for an upgrade-controllers, new motors, renovation of cab interiors, and changing all fixtures to comply with the Americans With Disabilities Act (ADA)-it would be judicious to budget $125,000 per elevator. Sounds expensive. But this isn't an expenditure you are going to make today; it's 20, 30, or 40 years into the future.

Let's assume your elevator will be upgraded in 20 years. We've just established that project would cost your association $125,000. Now let's look at the full service contract through which you pay an additional $300 per month in order to receive repair and replacement of existing equipment.

$300 per month for 20 years at 5% interest grows to $123,310 (and if you're dealing with a 30 year project it grows to $249,677 and $456,805 for a forty year project). This is a serious amount of money. And if the elevator company is replacing with like-kind equipment, not upgrading the components, the cost must certainly be less than the $125,000 indicated for an upgrade.

Comparing Future Costs Today

The real dilemma occurs if you've already been buying a full service contract and want to change to a maintenance only contract. What do you do?

For maybe 15 years you've invested an additional $300 each month and perhaps the components haven't worn enough for the maintenance company to need to replace anything. The major replacements are coming in another 5, 10, or 15 years. After all, the company is working hard to keep everything in tip-top shape to avoid having to replace anything.

To determine the validity of switching to a maintenance only contract, my recommendation is to use an elevator consultant to evaluate the condition of your elevator system. Specifically, you need an estimate of the remaining useful life of the major components and reliable cost estimates for their replacement. Armed with this data, there is a basis for analysis. To make the decision, you need to compare the present value of the payments for the maintenance only contract plus the present value of the future repairs, to the present value of the payments for the full service contract.

For example, if your consultant estimates the existing equipment will need $40,000 of work in 15 years, the cost of the project in 15 years will be $62,319, adjusted for inflation at 3%. Therefore, the present value of the maintenance contract ($400 per month for 15 years) plus the present value of future repairs is $80,065. In comparison, the present value of the full service contract is $88,518 ($700 per month for 15 years). This means that right now it is $8,452 more advantageous to select the maintenance only contract.

It's important to calculate the present value of these figures. Your board of directors need to be able to make a decision today. These calculations compare events in the future in today's terms. I would further test these calculations for five years before and after the estimated dates provided by the consultant. This way you can assess the risk or benefit should the equipment fail early or perform better.

Properly maintained, elevators should last the life of the building. Some regular and anticipated repairs and replacement will be required. It doesn't seem to make sense that associations pay additional monthly costs for repairs and replacements which may not, and if properly maintained should not, ever occur. Controlling the funds, being able to bid repairs of significant value, and not wondering whether or not value being received equals the funds expended, seems to be a better choice.