Tough question: How do you price a job?

May 15, 2000
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The following answers provided by our contractor consultants may not make everyone millionaires, but they give valuable insight into the hows and whys of pricing — and how it ultimately affects the bottom line. (By the way, there has been one more change to the panel: Roger Grochmal of Atlas Air/ClimateCare in Mississauga, ON, Canada, has joined our consulting ranks.)

Here is what we asked:

Some insights

Steve Miles said he likes to educate his customers ahead of time and reduce complaints later — that’s why he uses flat-rate pricing.

“All work is quoted up front for approval before any repair or installation is made,” he said. “I think that flat rate educates the customer as to exactly how much the repair or installation will cost before any work is done, giving them a choice to proceed with the work or not.

“Flat-rate pricing is fair and consistent. It’s based on averages and everyone is charged the same for a repair. The scariest thing that a customer could ever hear would be, ‘It’s a $25 dollar service call and $12.50 for every 15 minutes after that, plus parts.’ Tick, tick, tick — cha-ching, cha-ching, cha-ching.”

Tom D’Agostino said that both flat rate and hourly have merits and one should not necessarily dominate the other.

“Just as every market is different, so should the pricing be for each contractor,” he said. “I use hourly pricing when I cannot flat-rate price a job and I use flat-rate pricing every chance I can for construction projects.

“From a purely business point of view, I prefer to give my customers a fixed price rather than performing the work on a time and material basis.

“Most small companies have a finite number of billable hours available. The only way to maximize the profit dollars given the number of hours that can be worked is to flat-rate price as many projects as you can.”

Jeff Stewart said that a properly trained technician is an important ingredient to flat-rate pricing, his preferred method.

“It is key that your technicians be trained in proper flat-rate calculations,” he explained. “If this is a problem, you can purchase the systems from a variety of companies.

“We elect to manage that information in-house and provide our technicians the tools to calculate it themselves.

“Let’s face it, we are contractors. Let’s price our jobs as contractors should — one flat price. When was the last time you had a patio addition priced as time and material, or any contracted job at your home? Very unlikely, unless it was your brother-in-law.”

Hourly preference

Mary Marble has a different point of view. She has always used the hourly method and found that to be the most effective.

Being in the commercial-industrial market gives her a little different perspective than other panel members.

“It’s a tough question because are we talking about servicing or replacing a compressor or are we talking about a construction job that replaces a complete boiler room? In either case, we use estimated hours based upon past history.

“One thing we have found out is that it’s very difficult to get a firm hourly estimate from the service techs, and when we do get one, it is usually light.

“In the past we have looked at flat-rate pricing and found one or two programs available, but we’ve elected to stay with the hourly method.”

She continued: “One of the pitfalls in using an hourly method is that you must be able to develop a strong history to refer your estimates to. But we can’t say that one is better than the other because we have never used flat rate.”

Flat intentions

Roger Grochmal said that he intends to move to all flat-rate pricing next year. He has used a mix of time and material and flat rate in the past.

“The driving motivator for us is to improve our gross margins,” he said. “Service pricing in the Toronto market has been firming up with the increased presence of utility service companies and Lennox dealers.

“We expect very little price resistance from our customers [due to increased competition].

“An advantage of flat rate is that it reduces the load on the office staff to price jobs on an immediate demand basis while the mechanic is in the home. This is particularly important in busy times.

“Homeowners give good credibility to prices that are printed in a book as compared to those that are fabricated out of thin air.”

Tom Lawson likes flat-rate pricing because it leaves no open ends for the customers.

“The price is the same for the customers, whether it takes the technician one hour or three hours,” he said. “It enables the technicians to give prices in the field without calculating them themselves.

“Customers like to see that their investment will be calculated from a typed, professional equipment list.”

A profit by any other name

Bob Dobrowski has a very simple philosophy: Get the highest price you can.

“Price it as high as you can and then mark it up from there,” he said. “But then, too many of us have a tendency to lower the result because we are too concerned with what our competition is doing.

“We use flat-rate pricing for residential-light commercial work and hourly for commercial work. If structured correctly, flat-rate pricing is the way to go.

“We should also cover what we do and do not charge for. For example, which of the following do you price in your jobs and mark up: miscellaneous supplies like rags, wire nuts, grease, etc.; vacuum pump and oil charge; weld charge; environmental charge; refrigerant recovery machine. It is important to charge for all actual costs incurred.”

Harry Friedman said that everyone “sings from the same page” when flat-rate pricing is used.

“The flat-rate price schedule has many advantages over the traditional time and materials type of pricing,” he added. “The biggest advantage is that it is more profitable. The flat-rate system eliminates much of the human error of figuring jobs.

“As long as the company knows their market and can determine their true ‘street cost’ of operating the service department, they can plug in desired margins and consistently expect to achieve those results.”

Budgetary and final

Bill Flynn uses two types of pricing for his estimates — budgetary and final.

“Budgetary estimates are created to help customers plan for a project and are developed using rules of thumb and historical benchmark data,” he said. “Budgetary estimates are quick and useful in helping customers determine the feasibility of a project.

“Final estimates are created when a customer has committed to the project and are developed before submitting a formal contract document. Final estimates are detailed, cost-based estimates and can be time-consuming to develop.”

Jeff Somers tries to steer customers away from time-and-material work because it is often what customers want.

“Time-and-material work is probably the most undesirable as most customers want this type of work,” he added. “For example, property managers and large industrials purchase on labor rate and parts mark-up only, and want to negotiate your charges.

“This actually adds additional costs to the contractor as it takes time and additional administrative work and usually the invoices are disputed in the long run.

“Flat-rate, quoted, and technician-estimated work is the most preferable; it allows for maximum gross margins when priced correctly.

“We prefer to sell value-added service and price it accordingly.”

Scott Getzschman believes in flat-rate pricing — all the way.

“Flat-rate pricing makes the service technician actually communicate with the customer,” he said. “They [customers] have the opportunity to accept or decline the invoice before the work is started.

“We make sure to give a full sales presentation. If we can’t give a presentation, no prices are left for the customer to show to our competition.

“We want to make sure the homeowner has the opportunity to have all the options laid out in front and that all of the sales force is on the same page — quoting the same price.”

Dave Dombrowski said his company makes sure the best interests of the customers are addressed first, whether they are being quoted using flat-rate pricing or another method.

“If a job is straightforward with few variables, we use flat-rate pricing from a formal illustrated price book,” he added. “This works best for service where little fabrication is involved.

“Flat-rate pricing also eliminates the issue of individual technician performance.”

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