Pros and Cons to Flat-Rate Pricing for Trades
There are lots of opinions on the best way to price trade services. Some business owners are interested in the streamlined nature of flat pricing, while others swear by time and materials (T&M) price schemes.
For those businesses who are hesitant to give flat rates a chance, the red flags are fair. There are so many variables involved in each job -- the scope of an HVAC, plumbing, or electrical job can change on a dime. How can a flat rate account for this?
Still, customers prefer flat rates. In fact, Callahan Roach Products & Publications (a flat rate book publisher) did a survey of more than 10,000 homeowners and found that 91% of respondents prefer flat-rate pricing to paying by the hour.
If you’re deciding between flat rate vs. hourly time and material prices, we’re here to help you figure it out. Here are some basics about the two options and when flat rate pricing might make sense for your plumbing, HVAC, or electrical business.
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Flat Rate vs. Hourly T&M Rate Basics
A flat rate contract is one in which your business quotes a simple price for the service ($130 to replace an appliance cord, for instance). If the job takes too long, you could end up making less than your regular hourly rate. If the job goes faster than expected, you walk away with the surplus.
Could be best for: Smaller, more routine services with predictable results.
Time and material rates mean the final invoice is in flux until the moment the job is complete. You quote the customer a rate per hour and the cost of the materials, and usually provide an estimate. One of the reasons some businesses stick with T&M is they feel more confident about walking away with a profit.
Could be best for: Jobs with an unclear scope or large projects.
When to Use Flat Rates: Pros and Cons
Rate books (a booklet that has an itemized list of your services and their flat rates) for home services are becoming more popular. This is due in no small part because customers prefer them. But flat rate books may also present some unique advantages to you, the provider. Here are some pros and cons.
Pros to Flat-Rate Pricing:
Predictability. Customers like flat rates because they’re predictable. They could also help you estimate your growth margins better, if you know how many job calls you typically receive for each type of service. The key to maintaining predictability, however, is having flat rate prices for every scenario. If you quote a customer for the flat rate for a pipe replacement but discover you need to drill into a slab to access the leak, there should be a flat rate for slab repair available to quote them.
Shorter billing cycle. Upfront, flat-rate pricing also translate to a quicker billing cycle. With T&M pricing, your tech may have to prepare a ticket, submit it to the office to create an invoice, then send it to the customer. Customers may be able to pre-pay when you know the cost up front. If you empower techs to receive payment on site, customers are less likely to dispute the invoice when they agreed to the flat rate up front.
Potential for larger profit. Your techs have more incentive to work quickly on a fixed-rate job. This could mean you’re able to book more jobs per week. It could also mean you earn more than you would have per hour. Say you charge $235 as a flat fee for a specific water heater repair. The hourly rate would have been $100/hour and the parts are $45. If your techs can get the job done in an hour, you’ll net $90 more than you would have using T&M pricing.
Potential Cons to Flat Rates:
Limited flexibility. The obvious downside to fixed pricing is that the job could get more complicated once it’s underway, and you’ve locked in a certain price. This problem can be negated somewhat by creating a detailed, itemized price book that allows you to add on additional services. Still, if the issue is not that an additional service is required -- just that the one you promised will take a long time -- you could end up losing money because you didn’t charge hourly.
Requires frequent updates. As inflation changes, the price of your parts go up, and you give your employees raises, you’ll need to update your rate book. Calculating new prices and printing new copies of your rate books could be costly and should happen at least once a year (if not twice).
When to Stick with T&M Pricing: Pros and Cons
Some HVAC, plumbing, and electrical business owners are used to T&M pricing. A lot of that has to do with service standards in your industry -- being the first to switch to flat-rate pricing is a challenge. However, it’s always worth evaluating flat rate vs. hourly to see if it’s time to make a change. An honest look at both the pros and cons of hourly pricing is necessary.
Pros to T&M Pricing:
Greater job scope flexibility. Quoting customers based on the anticipated hours and parts cost at the start of a job is different than promising a flat rate. T&M rates still leave room to add costs in the event of unexpected discoveries during a job. You thought you were just flushing out a water heater but then discover there’s way more sediment in the drain than normal. If it takes another hour to clear it -- you’ll definitely be compensated for that time.
Works for jobs of all scale. While flat rates are ideal for jobs that tend to be routine (emphasis on tend to -- we know even simple jobs can turn difficult), T&M pricing works for small and large scale projects.
Potential Cons to T&M Rates:
Customers may not like uncertain prices. As we mentioned above, customers overwhelmingly prefer flat rates.Flat rates could lead to faster sales. If you’re charging by the hour, you will deal with more complaints from customers asking why the techs took so long, why they took a break, etc. Some customers may also hover to make sure the techs are working “fast enough.” Similar issues can crop up even with fixed rate pricing, but customers are more likely to complain when an invoice is higher than they expected (not that we have to tell you that).
Requires more experienced techs. Assessing the scope of a job and offering a projected scope to the customer requires more experience than going by a price book. You’ll need experienced techs in the field to offer T&M estimates. If you have a lot of turnover, this could present problems. It’s easier to train someone on a rate book than how to draft an accurate T&M estimate.
Price List Options for Plumbing, HVAC, and Electrical
You have two main options when it comes to creating a flat-rate price book. You can make your book entirely on your own, or rely on a professional to create one for you. If you’re new to flat rates, going with a pro is usually worth it. Still, here are some things to consider.
Calculating Appropriate Flat Rate Fees
You want to make sure your profit margins are covered. For hourly rates, this means making sure you can pay your techs, cover their transportation costs, price the parts at above cost, and still have a profit. When it comes to flat rates, you have to bake all relevant factors together into one profit pie.
According to flat rate software provider Grow My HVAC, flat rates should include variables like:
Unique local labor costs
Parts and material costs
Local tax rates
Unique overhead costs
Should You Use a Software to Calculate a Price Book?
When we talked to some of our Housecall Pro business owners about whether you should build your own price book from scratch, they came back with varied opinions. The bottom line seems to be this: if you can find a software price book that integrates with your invoicing and scheduling software, it’s probably worth it. Techs in the field find it easy to pull up a price book on an iPad and show the customer the standard rate in seconds.
On the other hand, if you’re unable to find a software that integrates with your other programs at a price point you can afford -- it is possible to create your own price book and educate your techs on it.
Examples of Common Flat Rate Services
Each industry will have slight variances in how their services are offered. They share more similarities than differences, however. For instance, many service industries are great candidates for flat-rate warranty plans, billed annually, that include service discounts and free inspections.
Plumbing, HVAC, and electrical all require intricate pricing plans that account for things like drain length, types of pumps used, and required hours for the repair. Here are some examples that give you an idea of how a flat rate scheme for your industry might look. Remember that you are the master of customizing your price book -- so these are just suggestions.
These examples (offered by Grow My HVAC) provide an idea of how to break up plumbing services based on the scope of the job and equipment used. As Plumber Magazine points out, you can also create add-on prices. For instance, the cost of one toilet rebuild might be $175, with a price of $125 for each additional toilet to make the pricing fairer to the customer.
Clear Main Sewer Line Up to 50 Feet
Clear Main Sewer Line up to 100 Feet
Clear Main Drain Using Gas Hydrojet up to 2 Hours
Clear Main Drain Using Gas Hydrojet up to 3 Hours
Clear Toilet Using Hand Auger
Clear Toilet Using Hand Plunger
Treat Main Drain Using 1-lb Chem Drain Cleaner
Treat Main Drain Using 2nd 1-lb Chem Drain Cleaner
HVAC pricing also needs to account for a lot of variables, from the pounds of Freon used to the type of thermostat that’s being worked on. This helpful example (and this one) from an Ohio heating and cooling company gives you an idea of how to break up line items in your price book. It also brings to light that sometimes a typical price range should be offered in your flat fee book, not a single guaranteed price (items where a price range is appropriate are noted).
Recharge Air Conditioner with 1st Pound of R22 Freon
Each Additional Pound of R22 Freon
Recharge Air Conditioner with 1st Pound of R410a Freon
Each Additional Pound of R410a Freon
Replace Typical Motor Blower (offers price range)
Replace Typical Hot Surface Ignitor (offers price range)
Replace Thermostat - Basic Non-Programmable
Finally, electrical work may not require the drainage supplies or fluids common in HVAC and plumbing, but that doesn’t mean there aren’t a lot of moving parts involved. In electrical work, the chief consideration is making sure you indicate what exactly is included in each service. If you install a fan, is the wall switch included? When you install a wall switch, is the wire included? Itemization is crucial to electrical flat-fee pricing.
TurboBid has provided this sample invoice for an electrical flat-rate project. Check out some excerpts below.
Install 52" White Indoor Ceiling Fan (Outlet box not included)
Install Cathedral Center Mount Fan Box: Up to 50' 14/2 Romex Cable
Install Decora Style Fan Light/Speed Control Switch (Switch box not included)
Are you ready to consider some flat rate services for your company? Talk to Housecall Pro about creating a price list for your HVAC, electrical, or plumbing business. You might be surprised at how much you love the ease and streamlined nature of flat rates after all.
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