The Flat Rate Debate
Contractors Discuss Which Pricing Strategies Work for Them
Most customers prefer to know the exact price of a product or service before they buy it, which is why contractors often use a flat rate pricing strategy. They argue that many industries have already moved to the flat rate model, and customers are used to paying one price for everything from cell phone service to shipping packages. In addition, contractors say a flat rate approach makes it easier to close sales because it is not necessary to calculate the price of labor and materials on every job.
Others prefer the time and materials (T&M) approach, which usually involves charging a standard hourly fee for labor, along with the cost of any materials or equipment used for the job, plus a markup to cover overhead and profits. Contractors using this method say it is more transparent and fair, as customers can see exactly how much time was spent on the job and how much the parts cost.
There are pros and cons to both pricing strategies, which is why many contractors have determined a combination of the two makes the most sense.
Choosing a Strategy
Easing customer concern is one of the reasons why Dave Kyle, general manager, Trademasters Services, Lorton, Virginia, started offering flat rate pricing more than a decade ago. “Clients are generally anxious and worried when there is a major problem with their comfort system. It is reassuring to them when we can quote a price to diagnose the problem, then give them a price for the repair they can approve before we proceed.”
Kyle has used three different flat rate systems over the years. His current system is integrated into the company’s mobile dispatch software, allowing technicians to show clients the pricing page in the digital pricing book, make a selection, then upload the repair description and price directly to the service ticket. “The flat rate system has some limitations, and it can’t possibly cover all repairs we encounter, which is why we price those jobs individually.”
Travis Smith, president, Sky Heating & Air Conditioning, Portland, Oregon, utilizes Adtek software and has relied on flat rate pricing for installations for at least 10 years, but he only started using flat rate pricing for service calls about three years ago. “Flat rate pricing keeps it easy for our service techs and salespeople to figure pricing on a job. We can close a sale instead of having to compute the pricing and then bring it back to the customer later.”
For service calls, Smith uses a flat rate sheet for common repairs, such as hot surface ignitors, but for replacement work, he uses a modified form of flat rate. In the latter case, equipment is listed at a certain price, but the costs can go up if, for example, more electrical work is needed or if it the installation ends up being more difficult than anticipated. Conversely, the price can go down if the existing electrical service is sufficient, and/or it is easy to install. “This helps keep our prices consistent and competitive. We also occasionally bill on time and materials if it’s ductwork or something like a gas or refrigerant leak, which cannot be estimated until the leak is found.”
D. Brian Baker, president, Custom Vac Limited, Winnipeg, Manitoba, Canada, only uses T&M pricing along with preferred client rates. “Only we know our business and our marketplace, and using time and materials is based on our operation and expenses. The advantage is, we price based on what we need to do to stay in business and not on what someone tells us we should or should not charge.”
While Roger Grochmal, CEO, AtlasCare, Oakville, Ontario, Canada, uses flat rate pricing software from Davis Business Systems for most service calls, he has found that some repairs lend themselves better to a T&M approach. “We have been using flat rate for service calls for more than 15 years because customers like to know what a repair will cost before giving their approval. Our technicians like it, too, because it lets them off the hook to defend prices, especially when they are not sure how long it will take to finish a repair.”
However, there are also disadvantages to using flat rate pricing, noted Grochmal, as the model results in pricing that is higher than what a customer can find at the local big-box hardware store. “Another challenge we face is that prices for parts are all over the Internet, which causes a lot of conversations to occur.”
Butch Welsch, president, Welsch Heating and Cooling Co., St. Louis, switched to flat rate pricing about 10 years ago and has been part of many of those conversations, as well. “Customers like flat rate pricing, but it also benefits the contractor because it combines the price of parts and labor. We have found that combining the parts and labor reduces the number of aggravated calls that come in after a customer finds a part for a lower price on the Internet.”
For those facing this situation, Welsch noted it is important to be prepared to explain that, regardless of the price a customer might find on the Internet, contractors have a lot of additional costs directly associated with having that part. “These include picking up the part; inventorying many parts on our service vehicles and perhaps in the shop; and providing a warranty on that part, which includes picking it up, replacing the defective part with the new part, and returning the old part to get our money. All of these things cost money.”
Matt Bergstrom, president, Thornton and Grooms, Farmington Hills, Michigan, switched to flat rate pricing for one reason: “We always felt like we were being rushed when we were on time and materials,” he said. “Flat rate has allowed us to slow down and provide full-service solutions to each customer.” That being said, he is open to using a different pricing method if it creates better results.
Finding a different pricing method is what Bill Brown, president, Paramount Heating and Air Conditioning, Columbus, Ohio, did when he switched to The New Flat Rate pricing system, which works like a menu board at a fast food restaurant, allowing customers to upsell themselves with little or no input from the technician.
“What I like about this strategy is that it mimics the way we shop when we go to the store,” said Brown. “Using an iPad, technicians show customers a menu of options, so it’s easy for them to decide the level of service that fits their needs and budgets. Our technicians like how the system describes the services based on what the parts do, because it makes it easier for the customer to understand what we are talking about. For example, instead of using the word ‘capacitor,’ which is meaningless to customers, we use the term ‘voltage absorption system.’”
While flat rate pricing is often used in the residential market, it does not translate as well to commercial work, said Ken Misiewicz, president and CEO, Pleune Service Co., Grand Rapids, Michigan, which is why he uses Quote Express software to offer several variations of T&M pricing for his clients, including:
• Service contracts that usually include labor and basic maintenance parts (filters/belts);
• T&M service and quoted repairs; and
• Projects that are usually quoted but are sometimes quoted not-to-exceed (NTE) or are done T&M.
“In commercial projects, quoting work with a written scope — or per plan and spec — is pretty much the industry norm, and there are not a lot of other workable options,” said Misiewicz. “To have a fixed-price preventive maintenance contract with quoted or T&M repairs, at the customer’s discretion, seems to be the right fit for most customers. It gives them options.”
Following a similar pricing strategy is Greg Crumpton, president and founder, AirTight Mechanical Inc., Charlotte, North Carolina, who also works primarily in the commercial and industrial markets. “We use a combination of time and materials, time and materials with NTE, and turnkey proposals. We have always employed this style of pricing, and it seems to be a given for the areas we’re involved in, which are commercial, mission critical, and industrial, with the major emphasis being preventive maintenance agreements, service, and repair.”
Choosing which pricing strategy to use is a personal decision for contractors, often driven by factors including which markets they serve and what customers demand. Regardless of the type of pricing system utilized, it is important to take the time to look at all options available and then choose the method and associated software that makes sense for that particular business. As Kyle noted, “There are many great products out there, and it is important to preview them, get feedback from current users, and make a decision on what will work best for you.”
Publication date: 7/7/2014