A Behind-The-Scenes Look At Service Rates

December 7, 2002
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Editor’s Note: This is the second installment of a four-part series on The News’ 2002 survey of contractor readers concerning their companies’ salary and service rates. This installment examines contractors’ pricing methods and service rates.

Ever wonder how much the competition charges for a service call? HVACR contractors from around the country recently reported their service rates to The News in an anonymous market survey. The goals of the “2002 Salary and Service Rates Editorial Study” included finding out whether contractors used a flat-rate pricing system or charged customers by calculating time and materials costs. The survey also sought to determine the prices contractors charged for service calls. A questionnaire was sent to a random sample of 1,500 active News subscribers, and the response rate was 36%. Once the results were tabulated, The News also contacted several contractors who were not involved in the survey to provide their perspective on the questions and the results of the survey.

Figure 1. Basic charge-out service rate per hour (339 respondents).

PRICING METHODOLOGY

Which is more popular — flat rate or time and materials? One-third of the respondents to the survey favored flat-rate pricing, while two-thirds said they did not use a flat-rate system. Out of the 33% of respondents using flat rate, a majority (56%) used a system created by their own company, while 34% used a standard “national” flat rate price book.

When asked which pricing method his company prefers, Tom Hawkins of Hawkins A/C & Refrigeration, Abilene, TX, replied, “We use flat rate on all collect residential calls, and we use T&M [time and materials] on all charge customers, both residential and commercial. The learning curve for the flat-rate system is very hard. It takes time to get the techs to understand all the parts of the work as to how to price.”

“We charge flat rate for both commercial and residential,” said Mike Gardner, of Mediterranean Heating and Air Conditioning, Canoga Park, CA. “Using flat rate, the hourly rate doesn’t affect the cost of repairs very much. On a 1/2-hp condenser fan replacement, for instance, a change in rate from $120 to $200 (almost 70% more) may change the total cost of the job from $380 to $460.

“Twenty percent more is generally pretty cheap to go from average to the best. Most shopping is done on the trip charge. Rarely does a customer have a tech out to diagnose the problem and have the work done by someone else.”

Ray Isaac of Isaac Heating & A/C, Rochester, NY, said his company was one of the first to implement the Callahan-Roach flat-rate pricing system. “It was the best decision we ever made,” he said. “We have one of the highest net profit percentages of any service company.”

Alan J. Guzik of Energy Management Specialists Inc., Cleveland, OH, said, “We don’t use a flat-rate system. It is not generally accepted in the commercial/ industrial market. Our billings are time and material and/or quoted.”

Figure 2. How charge-out service rate compares to others in the community/area (340 respondents).

CHARGE-OUT RATES

Those who responded that they did not use flat-rate pricing were asked, “What is your firm’s basic charge-out service rate per hour?” The most common answer was between $60 and $69 (29%). Some respondents said they charge less than $40 per hour (4%), while on the opposite end of the scale, 2% of respondents said they charge $100 or more per hour. (See Figure 1.)

When asked how their rates compared to those of other companies in their region, 70% said they were “about the same/average.” (See Figure 2.)

Jim Grady of Grady Mechanical, Orlando, FL, reported that he is in the middle of the pack in his area. “I am 80% commercial,” he said. “Our service rate for commercial is $60 per hour, with a $20 trip charge.”

“We charge $132 per hour residential and $145 for commercial,” said Rick Busby of Busby’s Inc., Augusta, GA. “We are the high-price leader in our market. We sell quality and customer service. Our prices are based on what we need to charge for our services and what we feel we are worth. We have legitimate competitors in our market at one third of our rate.”

Kim DiBenedetto of GSI Heating & Air Conditioning, San Jose, CA, said the company only does residential service and charges $95 an hour.

Isaac noted, “We have higher-priced guys who need more training and have more expensive equipment on the commercial side, yet we charge less for it because we’ve got guys in our area charging $40 an hour for their in-building service rate.”

Hawkins said his company’s reputation and location are key factors in determining his $59 an hour residential rate. “We have set our prices based on cost of labor, fringes, and local area competition,” he said. “We are always the highest but not out of bounds.

“Abilene is a city of 108,000, so you can tell we don’t have the big city problems with driving times, dead labor times, etc., that affect our rates. Our techs are able to charge out eight hours to production on every eight-hour day.

“Hawkins Air Conditioning has been in the service business for 27 years now in the same location. The name really builds business when quality service is what you provide.”

Figure 3. Frequency/reason for raising the basic charge-out service rate (339 respondents).

REASONS FOR RAISING RATES

When asked how often they raised their hourly rates, the majority of respondents (56%) answered, “When the price of supplies, salaries, etc., seem to demand it.” Twenty-nine percent of those charging by the hour automatically raised their rates once a year. (See Figure 3.)

“We review our charge-out rates once per year,” Grady said. “It is done on a cost basis instead of market basis. We try not to raise rates every year. I have been at $60 for three years now.

“Our customers are now more sensitive to price increases after the market has taken a hit and everyone is watching every penny. It is extremely important for us to deliver value every time we are in front of our customers.”

Gardner, who charges $180 an hour for repair work, cited other concerns that affect rates. “Generally, we review our rates annually unless something changes our costs significantly, like the increase in insurance this year,” he said. “The market influences our diagnostic charge much more than our hourly rate on repairs. Our maintenance rate is set primarily based on how effectively our telemarketing can close. We want to maintain the highest maintenance charge rate possible and have our telemarketers set one appointment every 1-1/2 hours.

“I’m sure in most markets everyone wants the lowest price possible. However, my guess is that most people understand that professional service at a higher price costs them less since they don’t have to wait around for a tech multiple times nor pay for the wrong work to be done. There is also the fear that they may get ripped off by companies knowingly selling items they don’t need.”

Danny Moldenhauer of M & M Mechanical, Newington, VA, said there are reasons besides insurance rates for changing prices. “Our charge-out rate is based on our service,” he said. “Our rates generally change once a year based on inflation, insurance, and pay increases.”

Guzik said that regular reviews of healthcare costs affect his company’s rates.

“The major driver of our labor rates is the high cost of healthcare,” he said. “The current cost of a family plan is $5.09 per hour. In our experience, labor rates are competitive only on large multi-location PM agreements. We review our labor rates at the beginning of the heating season and again at the beginning of the cooling season.”

Next Week: The News looks at business practices, training, and equipment.

For information on obtaining a complete copy of the “2002 Salary and Service Rates Editorial Study,” visit www.achrnews.com (website) and click on “Market Research.”

Publication date: 12/09/2002

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