What Exactly is a Preventive Maintenance Agreement?
A Preventative Maintenance Agreement is a contract between a service provider and a client that sets out a scheduled plan for maintenance and periodic replacement of equipment. The purpose of such agreements is to ensure that the equipment is properly serviced and maintained over an extended period of time.
The maintenance covered by an agreement may range from simple tasks such as changing filters in equipment, to periodic maintenance of more complex equipment such as HVAC systems . Other forms of preventative maintenance may include regularly scheduled tests, replacements of certain components, or monitoring of equipment to detect defects at an early stage. Where a client retains an external service provider to perform such services, there are a number of critical contract provisions that can be used to limit risk and ensure that the service provider performs its obligations in a satisfactory fashion.
Core Elements of a Preventive Maintenance Agreement
For each preventative maintenance agreement, clear schedules should be put in place for routine activities. These can be simple calendar dates, or set at certain intervals of completed tasks (for example, every three months after completion of the roof cleaning). The agreement should also clearly establish what actions are required at each of these intervals, whether it is filling in cracks, sealcoating road markings or trimming foliage. The agreement should not only spell out what work needs to be done, but how it will be documented and reported back to the property manager or other responsible party. Regular inspection sheets, reports or logs signed by the contractor and the property manager or owner will help facilitate and ensure this communication.
Both the owner of the property as well as the contractor should be held to the preventative maintenance agreement. A property manager may not be aware of the requirements of the contractual obligations, and fall short in ensuring a contractor is holding true to their duties and responsibilities. It is essential that a bound document be provided to the property manager outlining the preventative maintenance, and it is upon the property manager to perform duties as required of them. If the preventative maintenance is not done according to the contract, this is something the property manager will have to address with the contractor. In determining the liability of whether the preventative maintenance contractor was behind in their schedule or required obligations, it is best to go back to the contract and determine if a specified time frame is outlined and if any deliverables were required. While preventative maintenance does not require the same level of detail as capital improvements, these schedules and deliverables should be more detailed than general obligations, so the property manager will have more forceful tools to ensure the preventative maintenance contractor performs their duties and responsibilities within the required time frame or with all necessary diligence. It is essential that a preventative maintenance agreement outline specific dates and deliverables, as well as when reports are to be provided to the property manager or owner to fully ensure compliance with the contract.
The Advantages of a Preventive Maintenance Agreement
A preventative maintenance agreement (PMA) can be a significant financial and operational advantage to the lessee who seeks to keep equipment in leading condition. From a purely financial perspective, a PMA will often be more cost-effective than one-off maintenance agreements as these agreements are solely focused on maintenance rather than repairs that may take place outside of the agreement. Furthermore, where cost is a concern, the existence of a PMA may allow a lessee the opportunity to spread payments for preventative maintenance so that the costs do not become a significant new investment that may not be affordable. A lessee may find that the benefit of avoiding a complete breakdown of a system or the need for emergency service outweighs the cost of entering into a PMA. This is the intent of a PMA, the avoidance of unwanted costs (whether for repair, loss of business or some other consequence).
The time saved by a well-timed maintenance visit is also a significant benefit. While the finance and leasing industry is well aware of the promise of technology like the Internet of Things (IoT), a PMA is one way to eliminate some of the guesswork involved in when to replace parts or address potential problems. Not every industry has access to a steady stream of information on the equipment the way the equipment finance and leasing industry regularly receives on the equipment that it finances. Where information is lacking, a PMA with a methodical approach to addressing concerns with equipment can not only save money but help a lessee make informed decisions about how to proceed.
Pipelines, telecom companies, and other industries noted earlier all now rely heavily on equipment maintenance in the software world and many of them offer PMA-like services. These midway points between complete service and no service at all allow a user of the equipment to limit their exposure to the rigors of ownership during a period when the obsolescence risk is so high. In the same manner, the financial and leasing industry can offer a PMA, either as part of a larger lease or as a stand-alone agreement with the dealer or manufacturer.
Tips for Creating a Preventive Maintenance Agreement
The drafting process for any type of maintenance agreement is similar to that of any other contract. There are, however, a number of issues to keep in mind with maintenance agreements, and especially preventative maintenance agreements.
First, it is crucial for the parties to determine the specific parts of the premises to be serviced under the preventative maintenance schedule. Does the schedule apply to the entire building? Common areas? Only certain portions of the common areas, such as elevator shafts or stairways? What about HVAC and plumbing systems?
Second, the preventative maintenance provisions should specify the frequency with which maintenance will occur. You may decide that monthly maintenance is sufficient; others may desire more frequent, weekly maintenance. The key is to be specific and to indicate the reason for the schedule you have set. For example, if bi-weekly maintenance is appropriate, state in the agreement the types of damage that can occur if systems are not serviced that often (e.g., an HVAC system freezing or short-circuiting, creating a fire hazard; a leaking pipe eroding the foundation etc.).
Third, consider whether the preventative maintenance agreement should include a provision that requires the tenant to provide notice of any system malfunctions that occurs outside of the regular maintenance scheduled. For example, if the elevators stop working, this could indicate a serious problem with the elevator motors or cables, which would not respond to routine maintenance. This could create a serious problem, especially in a high rise building with hundreds of tenants. A quick notice will allow for faster remedial efforts.
Fourth, in addition to the costs of maintenance, any specific charges for preventative maintenance work should already be agreed upon before the agreement is signed. For example, will you be personally doing the preventative maintenance work, or will you hire a contractor to do the work? When you hire a contractor, it is important to ensure that the contractor carries liability insurance and that it names you as an additional insured on its policies.
Sectors that Commonly Use Preventive Maintenance
While preventative maintenance agreements may be most common with service businesses, they are not only useful for plumbers, HVAC professionals, and electricians. Many different companies can benefit from preventative maintenance contracts or agreements.
Manufacturing Many manufacturers have several employees to maintain industrial processes, equipment, and/or machinery. It is easy to imagine the possible devastation if production machinery were to fail to work, where it can take considerable time and money to repair. Therefore, having preventative maintenance plans in place for such equipment is a very worthwhile investment for manufacturing companies. This goes beyond heavy machinery as well. Air conditioning, sending and receiving shipments, or warehouse machinery can all be covered with a preventative maintenance agreement. Manufacturing businesses that provide or use refrigerant also have specific maintenance needs that require professional attention and maintenance on a regular basis. To avoid the end of the month or quarters being affected by production or shipment delays, it makes sense to make sure machines for all aspects of the manufacturing business are handled properly through preventative maintenance. Some manufacturers may also deal with large machinery with motors that require oils or grease in the systems to maintain performance. Preventative maintenance checks can help make sure that these machines are well lubricated and performance is at peak performance.
Health Care Facilities Hospital systems, group practices, urgent care centers and other healthcare facilities have to manage their heating and cooling systems carefully in order to ensure that patients and their families are kept in a comfortable setting. Critical waiting rooms, operating rooms and even parts of the hospital that house irreplaceable medical equipment need to be continuously monitored to keep them working properly. HVAC systems at healthcare centers often have to run 24 hours a day so preventive maintenance can be a vital component of good management.
Property Management Residential property management companies have special advantages to preventative maintenance plans. For example, maintenance managers, properties could pre-purchase blocks of maintenance to be used over a specified period of time. This have the benefit of assuring residents with maintenance support. Meanwhile, it allows apartments or complexes to have the assurance that staff always has moneys and time available to complete high quality maintenance repairs. Such an option may also extend to commercial property management companies. Preventative maintenance plans make good sense for corporate property management where large property budgets must be evenly distributed.
Legal Implications and Regulatory Compliance
The implementation of preventative maintenance agreements must comply with a multitude of statutes and regulations at the federal, state and local levels, including environmental permitting requirements. Oftentimes preventative maintenance agreements are entered into at locations that are subject to permitting requirements that dictate what type of maintenance may be performed and the frequency with which that maintenance is performed. For example, if your company operates in California, your facility may be required to submit a Risk Management Plan ("RMP") to the local air district which may limit the amount of emissions allowed from the facility. Failure to properly maintain emissions units as required by an RMP can subject your facility to large fines for failure to prevent and minimize accidental releases of hazardous air pollutants. Any preventative maintenance work performed must be in accordance with that facility’s RMP. Likewise, equipment owners should be mindful of the fines that can arise if the equipment is not properly maintained. As mentioned earlier, fines for criminal violations can be steep even if no "spill" or event occurs , so it is critical to ensure that preventative maintenance is conducted as required by the applicable legal framework.
Compliance with financial assurance laws on an existing permit may not become apparent until financial assurance rules are updated on the permit, such as a Publicly Owned Treatment Works ("POTW") updating its Local Limits, a new permit term/condition/standards is imposed, or a permit is renewed at the time of renewal. When this happens, the POTW must review its program, and decide on any new funding needs. Its a good idea to incorporate a schedule for review of financial assurance issues, and to review funding needs at the time of its permit renewal application, if not sooner.
In addition, using a contractor with a certain permit status might trigger the need for financial assurance. The owner of a facility must have financial assurance for its permitted treatment, storage and disposal ("TSD") units, including hazardous waste. If the owner of a facility requires a contractor to utilize its TSDs, then the contractor will need to provide financial assurance. For example, a waste hauler will have a financial assurance requirement for its container, which must not exceed $50,000. Each of these items needs to be considered when drafting a preventative maintenance agreement to ensure compliance with legal requirements.
Selecting the Appropriate Service Provider for Maintenance
When it comes to making sure your preventative maintenance agreement for your commercial building is properly executed, the company that you choose to provide this service is just as important as the agreement itself. As a party with no direct financial interest in your building, your commercial real estate attorney is not likely to have insight into which maintenance provider will best serve your interests. Instead, this is a decision that you should make as a commercial property owner or manager based upon factors such as expertise, reputation, and the range of services offered.
In the commercial real estate arena, the devil is truly in the details. The specific needs of each building can vary significantly, so it is a good idea to look for a maintenance provider with experience with similar real estate types and age. While you might be tempted to try to save money by getting proactively involved in your building’s maintenance issues, such as by managing the provider directly or by using an in-house staff member, it is important to understand that the time that you spend managing routine maintenance and repair work will likely be time that you could have more effectively spent on another aspect of your business.
This does not mean that you need to pay for excessive maintenance that a professional provider will handle unnecessarily, but also remember that a proactive approach to maintenance can be both highly cost-effective and can help to reduce your risks of being forced to deal with a major equipment failure that may affect your bottom line.
Another point to consider regarding your provider is how broad their range of services is. If you are only looking for someone to perform basic maintenance services a few times a month, a limited provider may do the job for you. However, if you are hoping to avoid having to hire a new provider every time you want to upgrade your building’s energy efficiency, ensure compliance with new building codes, or otherwise implement a wide range of changes to your building’s infrastructure, you should first carefully assess your goals for your building.
Examples in Practice: Successful Preventive Maintenance Agreement Applications
The premise of preventative maintenance is that by keeping equipment in good repair and eliminating potential issues prior to failure, businesses can eliminate major repair costs and increase the lifespan of the equipment. Predictable service agreements help organizations meet this goal, incorporating structured routine maintenance plans that often prevent emergency repairs and costly unexpected downtime. As an increasing number of seasoned professionals are about to retire, many experts see PPAs as an effective way to pass on advice from the most experienced by delegating the selection of contractors, determining appropriate care, and setting up necessary routines.
Less than two years ago, Blue Cross Blue Shield implemented a preventative maintenance agreement that encompasses 104 locations and multiple systems. The agreement is broken up into two parts: 1) scheduled everything, which includes a unique schedule for training inspection and verification of all building systems that is customized based on historical data and manufacturer equipment specifications, and 2) unscheduled everything, which covers any unforeseen problems that may arise in between scheduled maintenance intervals. As a result of implementing the new agreement, Blue Cross Blue Shield has reduced both the quantity and the severity of issues that historically occurred, as well as reduced the time spent on emergency repairs, which has saved the organization $2.4 million and lowered the average monthly problem resolution rate to less than five percent over the past two years. In addition, the scheduled events not only meet the OEM specifications for theoretical value, but also include on-site inspections that look at manufacturer recommendations and how the equipment is operating in its actual context.
However, PPAs are not just for major corporations with large campuses. Small and independent companies can also see the benefits of entering into a preventative maintenance agreement with their contractors. After the implementation of a regular PM program, an independent school experienced a 37% reduction in work orders and increased equipment availability from 91% to 98%. Rick Antes, Director of Operations/Engineering at the National Institute of Health, said that the organization utilized a traditional brick and mortar approach to maintenance before switching to a comprehensive preventive maintenance program. Prior to the switch, the NIH had a backlog of 860 work orders and an average round trip of 20 minutes for staff to retrieve tools and materials from the shop when attending to issued calls. However, by switching to a predictive/prescriptive system, their maintenance department generated over 800 PMs and eliminated all work order backlogs.
Both facilities and maintenance staff benefit from having predictable work. The schedule of maintenance allows for predictable work hours and fewer emergency calls. This allows personal time commitments to be planned around work. Additionally, fewer emergency calls means that more experienced workers spend less time on the road, allowing them to mentor or train others. The clients save on costs of emergency repairs by having routine maintenance as well. The costs of PMAs to the company are essentially the same as paying for the large, unexpected repair while the costs to the organization are reduced.
In addition to providing these tangible outcomes, PPE also allows for customer and staff satisfaction and retention and a decreased amount of infrastructure capital expenditures. All of these elements allow it to be a strong investment.
The Future of Preventive Maintenance
Emerging trends and technologies are playing a critical role in the future of preventative maintenance strategies. The Internet of Things (IoT), for instance, is having a tremendous impact on how organisations perform maintenance on their equipment. IoT refers to the growing trend of connecting devices and machinery to the internet and to one another. These devices can communicate their status and functionality online, allowing for real-time data collection and analysis. By gathering and analysing this data, businesses can identify issues early on, helping them to avoid costly downtime. Another important trend in preventative maintenance is the use of predictive analytics. Predictive analytics involves using advanced algorithms to process data and make predictions about an asset’s lifespan. Businesses can become more proactive, rather than reactive, to maintenance with the ability to anticipate problems . Combined with IoT, predictive analytics can help businesses optimise their equipment maintenance schedules, reduce downtime and maximise return on investment. Augmented reality (AR) is yet another emerging trend that will impact the future of preventative maintenance. AR can be used to create 3D visualisations of equipment, highlighting components that may need maintenance or repair. Additionally, by combining AR with IoT technology, businesses can create interactive maintenance instructions, giving the technician step-by-step guidance on how to complete the work. These trends and emerging technologies will continue to shape the future of preventative maintenance strategies, helping businesses to work smarter. The proactive approach to asset management will be more data-driven and will allow for improved planning and more precise maintenance scheduling.