Flat Rate vs. T&M

Time & Materials

A Fair Path to Healthy Profits

by Kevin V. O'Neill

For many years, every HVAC business seminar that I attended preached that I shouldn't base my rates on what my competitors are charging. The low-price competitors, the seminar instructors said, don't know their costs of doing business, and if I tried to match them, I'd go broke. The lesson I learned was to set my hourly rate according to my costs and my desired profit.

I took it to heart. When I started my own company, I made it a priority to accurately determine how much I would charge per hour. I set up a spreadsheet on my computer that included estimates of all of my fixed costs, variable costs, projected sales, projected labor costs, and hours and percent of chargeable hours. Then I entered formulas to calculate my overhead.

I put my desired percentage of net pre-tax profit into the spreadsheet. Then, I set the spreadsheet to run the calculations to determine my hourly rate. According to my spreadsheet, my accountant, my partner, and my bottom line, I did a good job. We've been in business for more than three years, and are still charging enough to make a healthy profit.

In addition, my partner and I buy more diagnostic tools and attend more training classes than most of our competitors. We pay all of our bills on time, and even take discounts when they're offered. In other words, we're not just scraping by.

A time-and materials (T&M) pricing system works for us. It allows us to focus on our business, and our desired net profits. A properly researched T&M system allows a company to make a healthy profit, take good care of its customers, and pay a healthy wage to its employees. There's nothing wrong with that.

Recently, however, I've been hearing at seminars that T&M is a bad idea. The new advice is to set my hourly rate at what my highest priced competitors are charging, and then hide that price by using a flat rate system.

As I've worked at companies that use flat rate, I feel I can honestly point out some shortcomings of flat rate systems.

The first thing is how big most flat rate systems seem to grow. It's cumbersome and unreasonable to have every possible variation of every job listed separately in a book. And it makes it confusing to everyone.

Some flat rate systems allow the tech to pick the labor rate. I saw one book with five pricing columns for every job. If a tech doesn't like a particular customer, he or she could really "stick it to 'em." This could lead to a customer declining the job because it costs too much, and you've lost that customer forever.

It's too easy to abuse a flat rate pricing system. Some contractors feel that every time that they want a new car, a bigger house, or a new toy, they can just print a new flat rate book based on a higher labor rate. This attitude can bring about sloppy business practices.

There's also a limit to how far you can go with that business model. In time, you'll have to spend a lot of money on advertising to bring in new customers to replace the customers that you lost because your prices were too high. (How do you pay for that? I guess you just print a new flat rate book.)

One dangerous technique used by many flat rate systems to increase sales is to put technicians on commission. The more products they sell, the more money they make. I don't think we should have to bribe technicians into doing a good job. If the customer really needs a new part or a new unit, the tech should recommend it or replace it as needed. If we tech techs that it is OK — or even desirable — to sell things that may not be needed, they may start to feel that lying and cheating are OK. If techs feel that it's OK to cheat customers, they'll soon feel that it's OK to cheat their employer, as well.

A flat rate pricing system makes it seem as if every contractor is just like every other contractor. That's not the case. You should charge what you need to in order to make an honest, healthy profit at your business. If you're ashamed of your hourly rate, there's something wrong.

Charging higher prices is not the only way to higher profits. Try increasing the number of services you offer, or improving the quality of your work above that of your competitors. Try controlling your costs as well. You'll find that you can improve your profitability without overcharging your customers.

You shouldn't be so worried about what you charge that you have to hide your rates with tricks like flat rate pricing. Do good, honest work; charge fair, honest prices; and make honest, healthy profits. Your business will run smoothly, your customers will love you, and you'll sleep well at night.

Flat Rate

The Best Business Decision We Ever Made

by Michael E. Curtis

Why are we proponents of flat rate pricing at Artic Air? It all started in 1997, when my partner (and brother) Jeff and I met a consultant who spoke to a group of contractors about flat rate pricing. We had always priced time and materials (T&M), but it just didn't seem to be getting us anywhere.

I had seen articles singing the praises of flat rate, and had always thought, "Obviously the person who came up with this idea doesn't live in my very poor rural world. They come from one of those big cities where there are enough people to go around eight or 10 times. You can stand on a street corner all day long and never see anyone you knew. Here, in my area, I see 10 people I know every 10 minutes."

So, while the consultant we saw in 1997 impressed us with the benefits of flat rate, it took us a while to buy in.

We finally caught the vision in 1999. We printed our first price book and found that it made our lives remarkably simple.

There are several points that finally sold us on flat rate, and many that keep us there. These include:

• Standardized pricing. Everybody pays the same. This didn't happen before; each technician was responsible for his or her invoice. There was often a very distinct difference between any two technicians' invoices for the same type of repair work.

• Hourly rate is never discussed. With flat rate, you determine what your real labor rate is, and the flat rate includes this into the pricing. The individual time for each job offered is based on an average time.

• Diagnostic fee. When the client calls in and asks the hourly rate, we respond, "Our diagnostic fee is $ 74 (our regular customers already know this), and we will come out and run a complete diagnosis on your system. We will determine the problems and give you a complete price for the repair before we make the repair. Does this sound fair?" The customer is happy to know what the technician will be charging from the minute he arrives.

• There's never a hidden charge with flat rate. The hourly rate, the cost of the part, tax, any ancillary items, screws, wire, nuts etc. are all part of the cost. Flat rate allows you to incorporate hourly rate and parts into a scenario that takes all costs in account, automatically.

• Flat rate has motivated us to create a planned maintenance program. Through the maintenance agreements we're able to offer our clients a standard rate and a value rate. We have been able to grow our customer maintenance program to 1,200 clients, and it's still growing. The maintenance program allows us the opportunity to respond to maintenance customers first. When a maintenance customer's unit breaks down, they save an additional 15% (value rate) on the total repair. They see the value.

• When clients know the repair cost beforehand, they don't look over our tech's shoulder, asking how much longer the job is going to take. They have peace of mind, and leave our techs alone to do a quality job.

We must plan for profit, and flat rate allows us to do this. If you're using T&M, and someone asks you, "How much is your hourly rate?" they'll gasp if you tell them it's $60 or higher. They'd faint if they knew that, when properly calculated, your labor rate should be higher than $100/hr. (ours is).

Your technicians don't need to know your hourly rate. Your name is on the company papers; you decide what you should charge.

Granted, each market area is different You must calculate your labor rate effectively and charge what's right for your company to make a profit on service. Just keep in mind that the sales department shouldn't carry the service department. Yet ours did for more than 20 years, when we were using T&M.

Our father, the company's founder, told my brother and I when we first started talking about flat rate, "Boys, you can't charge that much. People can't afford to pay that." Two years after we went with flat rate, he said, "I sure wish y'all had started that sooner."

But flat rate isn't about getting your father to admit that he was wrong — it's about doing the right thing for you.

Changing from time and material to flat rate is like driving a car with an old, balky stick shift, and then switching to one with an automatic transmission and cruise control. We run smoothly now, every day.

Switching to flat rate was the best business decisions we ever made. That consultant who talked to us about it back in 1997 told us, "You can't afford not to use flat rate." He was right.