When to choose a service contract

Learn when it's a good idea to get a service contract for your major purchase and how to get the best plan rates.

When to choose a service contract

After you’ve done all the research, comparison shopping, and vendor interviews to make a major purchase for your business, you’ll often be presented with a choice you may not be prepared for: whether or not to buy a service contract.

Many people know that in the consumer arena, these contracts are rarely a good buy. The service contract may not cost much, but the chances of your new TV needing repairs that aren’t covered by the original warranty are fairly slim. With business purchases, however, there are more situations where the service contract is a good idea. Here are some guidelines on when to consider it.

What type of purchase is it?
First, the type of equipment matters. Modern electronics such as LCD projectors, computers, and video cameras don’t tend to need much service. They can have manufacturing defects, but you’ll usually find those during the warranty period. Users also tend to treat them carefully.

Equipment that takes more abuse is more likely to benefit from a good service contract. Construction equipment, for example, is constantly toiling in the mud and being stressed – a service contract can help offset the risks and daily wear and tear. Forklifts used exclusively indoors on smooth concrete may not need the insurance – but those that are bounced around a lumber yard might.

Software service contracts tend to work differently: instead of covering repairs, the contract will cover upgrades and troubleshooting. It’s almost always a good idea to sign on for ongoing updates of major software purchases: the bug fixes and new features can easily make the costs worth it. This is even more true if you’ve paid for extensive customization or integration of the software package – a service contract can ensure that the software vendor is there to help with any issues that come up that are unique to your installation.

What can you do in-house?
Consider the resources you have in-house to do repairs. If you’re buying computer equipment that your IT staff is familiar with, you’ll be able to count on them to fix problems. Likewise, if you’re buying industrial machinery like a generator or air compressor and have qualified mechanics on staff, you can probably skip the service contract. Do make sure you get the manufacturer’s preventative maintenance schedule to give your employees a starting point.

A related point is that the more specific expertise you need to do repairs and maintenance, the more worthwhile a service contract is. Copiers are a good example: doing preventative maintenance on a copier is such a specialized skill that even if you have technicians on staff, it’s worthwhile to pay an expert to do it.

Negotiating service contracts
One of the other good things about service contracts is that they are almost always negotiable. You can get better rates, more service, or longer terms – but probably not all three! If applicable, use future purchases as leverage: if the dealer knows you’re going to be making more purchases from them over the years, they’re more likely to give you a deal on the service contract.

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