The case for flat-rate pricing for service and repair work

Editor’s note: this article is from south of the border and was originally written for, mostly, plumbing and heating contractors (PHCs). But this is a thought-provoking article for all types of residential contractors in Canada doing repair and service work.  The Nexstar Network is a member-owned organization (based in Little Canada, Minnesota) that helps service contractors to develop and share better business practices. Reach them at www.nexstarnetwork.com or 651-426-2000.

By Frank Blau,

Founder, Nexstar Network

Contractors often ask me what’s the best method to use to invoice time and material work, extras or service / repair work. It seems that many PHC contractors experience difficulty with clients regarding this matter.

Most citizens shop at the local supermarket weekly and sometimes bi-weekly. As a result of these frequent visits, they become wise and prudent shoppers who are familiar with the market price of a pound of hamburger, a bag of sugar and a loaf of bread.

However, not many citizens patronize a PHC contractor more than once a year, usually less than that. As a result John Q. Public doesn’t have the slightest idea of the market price for our goods and services because he simply does not purchase our wares as frequently as he does food, clothing or a “Big Mac.”

“The Enemy Is Us”: Because of this infrequency, a contractor is looking for trouble when he gives a bill to a homeowner that highlights the selling price of labor.

People go into shock because they relate hourly charges to what they earn. Keep in mind that the average homeowner probably makes around $10 an hour. When he see a plumber spending 15 minutes on a repair and charging $35 for the labor, he quickly computes it out to $140 an hour, and all hell breaks
loose!

The average person does not stop to reason that the guy doing the repair is getting paid only a small fraction of the billing amount, that some of it goes for support personnel and overhead, that he might have traveled a half-hour to get to the job, that the vehicle and equipment he uses cost tens of thousands of dollars. All the average homeowner think is, “Those damned plumbers make $140 an hour.”

Outrageous! Only my son the lawyer is entitled to charge that much!!

But don’t blame J. Q. Public. Contractors create a lot of needless problems for themselves by doing foolish things such as:

1) They give customers only a vague idea of what a service might cost. Instead they quote “T & M” by breaking out an hourly charge for labor plus materials. So the customer sees a labor rate of $75/hour, and when the job turns out to take two hours, screams bloody murder that you’re charging double what you quoted.

2) They fail to get a signature from the customer authorizing the contractor to proceed with a job.

3) They fail to get a signature from the customer attesting to the fact that the job was performed satisfactorily, including the price.

4) They fail to make clear the means of payment, i.e. “cash, Master Card or Visa,” and terms, i.e. “upon completion of work.”

As the cartoon character says, “We have met the enemy, and he is us!”

Do Unto Others

All of us are consumers just like our customers. When we purchase materials, labor, office equipment, vehicles, etc., we want to know what the “bottom line” is before we make a decision to spend our hard-earned dollars.

I’ve purchased millions of dollars worth of PHC materials during 29 years of my business career, and have yet to see an invoice presented to me from a wholesaler or manufacturer showing a breakdown of the labor, material and overhead that went into producing those goods. I’ve never demanded one, and have never heard of any of my friendly competitors asking for one. Nor have I heard of any wholesaler demanding a cost breakdown from his source of supply.

And how many consumers have you ever heard ask for a detailed breakdown of labor and material costs when they’re making a deal for a TV set, an automobile, stereo components or a Big Mac? Consumers just don’t think that way when they purchase most products – except for PHC services.

Why? I think the answer is, we’ve trained them that way. For generations we’ve been shooting ourselves in our feet. It’s time we started to smarten up.

PHC contractors deal with the same components of labor, material, and overhead as do American Standard, Kohler, Rheem, Masco and all other companies who make the things we buy. They major difference is that their products are assembled in factories while we assemble ours in the buyer’s home or workplace.

Silly Tradition

In new construction and major remodeling, we usually quote a lump sum bid for the entire job without delineating labor and materials. We become manufacturers in a sense.

Why should it be any different in the service and repair marketplace?

The only answer that comes to mind is “that’s the way it’s always been done.” Whatever logic there once was to the practice – if there ever was any – has long since been obscured by the passage of time. The only effect “T & M” invoicing has anymore is entirely negative. It spoils our image in the eyes of the public.

When consulting with contractor clients, I point out that flat rate, total menu pricing is the only way to go. Giant service providers such as Sears, Montgomery Ward, General Electric, auto body shops, TV repair firms and most other service industries have used this method of pricing for years.

To prove my point, often I call the local Sears service department with my client eavesdropping on an extension phone. I pretend that my refrigerator is not operating properly and would like know what is it’s going to cost to repair it.

Typically, the response I get is along the lines of, “Our trip charge (or ‘service fee’) is $35. This covers the cost of traveling to your residence and allows the service technician time to diagnose the problem. He will then offer various recommendations and advise you what the total charges will be.”

On these calls I try my darnedest to pry information about hourly labor charges but with no success. They very cleverly avoid any reference to the words “labor and materials.” Since I’m probably the only one who ever asks, the employees I talk to may not even know.

In other words, these big companies have trained the consumer to accept their way of pricing service work. We should do the same.

Competitive Ploy

I first got into flat rate pricing as a defensive reaction.

My company made a transition from new construction to service, replacement and major remodeling in 1972. Then as now, most of competitors did little
more than half-assed guessing to come up with their selling price. Since I was one of the few people in my market who knew what it cost to operate my
business and what kind of selling prices I needed to be profitable, my prices were a lot higher.

It was tough competing at first. I got many complaints about overcharges. I charged about as much for a job materials as everyone else, but consumers
could see that my hourly labor rate was a lot higher than what other PHC contractors charged.

Consequently, I made the decision to de-emphasize the selling price of my labor via flat rate pricing. Almost immediately, the complaints became a thing of the past. Cash flow also improved dramatically because of the ability to be paid on the job. We started to give the consumer exactly what he wanted – a quote for the total price of the job.

Blau’s Pricing System

Ultimately, I developed a comprehensive pricing system that takes into account every possible problem from simple repairs to major replacements of water heaters, kitchen sinks, whirlpool bathtubs, garbage disposers, lavatories, water closets, laundry tubs, furnaces, boilers, and every other PHC appurtenance imaginable. Like Sears, TV technicians and most other intelligent service businesses, we add a service fee in addition to the flat rate price.

These selling prices include material, labor, dollar-per-hour overhead applied entirely on man hours, and net profit goals of 20-40% of selling price, depending on the type of service provided. The higher net profit usually is derived for the more technically complex heating and cooling services.

I developed these prices based on accurate recordkeeping over a long period of time, then figured out the average time for each different kind of job. For instance, after you do 75 kitchen faucet installations, you get a very accurate handle on the average time, and that’s what we charge for all kitchen faucet jobs. As with all averages, some individual jobs will take a lot longer and you’ll lose money on them, but others will be a snap and even more profitable than you figured. The key is to make sure that your flat rate price covers not only the average cost to you of doing a given type of work, but also contains a healthy net profit calculated not as a percentage
of that average cost, but of the selling price.

This method of pricing gives the consumer exactly what he is looking for, the opportunity to know what it’s going to before the job commences, and the chance to say yes or no to that price. This also makes it viable for our service techs to collect on the job. We don’t have to reply on their mathematical ability and personal honesty in order to come up with correct billing. One price, based on the type of job at hand, is all it takes.

Our company keeps a highly-detailed flat rate price book. The pages are the same, except the “office book” lists our costs while the “field book” does not. All of our field servicemen use the latter every day of the year. It’s one of the most important tools they work with.

The Resistance

I’ve taught this flat rate pricing method to several contractors around the country, all of whom report pleasant results. It’s difficult for me to comprehend any other method that achieves similar uniformity of pricing, quick payment and customer satisfaction.

Yet I have to acknowledge that there is a big obstacle to overcome based on the poor “training” consumers have received from our industry on what to expect in the way of billing. Until flat rate pricing becomes the industry standard – and realistically that would take a long time to bring about – there are bound to be some who will ask how much you charge “per hour.”

Moreover, there are certain jobs, especially in the commercial sector, that will only be contracted on a time and material basis. I’m often asked, “What’s the best way to deal with this situation?”

In my opinion, honesty is the best policy. Lay all your cards on the table. This means revealing all costs involved in the job to the buyer – net cost
of material, labor, fringe benefits, overhead, and with a clear understanding that you are entitled to make your customary profit on the work.

In other words, you go in the precise opposite direction of the flat rate pricing method. Instead of avoiding a cost breakdown, you make sure to
meticulously itemize each and every cost of doing business.

On a T & M invoice for extra work done on a commercial project, for example, I provide great detail on all my company’s costs of doing business, including some that 99% of contractors would overlook (association dues, education funds, etc.). And I’m not at all bashful about asking for our customary net profit.

We have used this format for many years with great success. In some instances where disputes have led to legal action, this format has held up in court. The judge sees that “all cards are on the table” concerning what we charge, and when that’s supported by signed documents from customers who agreed to pay that amount, it’s hard to lose.

Based upon nearly two decades of experience using flat rate pricing, and what contractors report to me who are doing the same, I honestly believe it
is a bona fide pathway to profits. Don’t be afraid to reinvent the wheel when it comes to pricing structure.