Flat-rate and hourly billing each have their proponents, but only you can decide what’s right for your business.
Want to see a fight between fellow operators in the pipe cleaning and maintenance businesses? Start a rhetorical cage match that pits flat-rate billing against charging by the hour.
Some contractors swear by flat-rate pricing: It’s predictable, it lets you tell the customer up front what the job will cost, and it gives you and your crews an incentive to work efficiently.
Others insist that by the hour — or some other time increment — is the only way to bill. It fairly recoups your real costs and ensures consistent profits (assuming a rationally structured rate, of course).
And each approach has fans only too happy to tell you why their method is fairer to everyone.
“Flat-rate pricing is better for the company and for the customer,” says Brandon Simpson, owner of Simpson Plumbing in Tracy, California.
Jeff Paquet, owner/operator of Gas Man, an HVAC contractor in Ottawa, Canada, disagrees: “While flat-fee pricing seems ideal on the surface, it can actually lead to sloppy work from the contractor to get the job done as quickly as possible,” he says.
Hourly billing boosters
“In the service business, pricing comes from years of experience and hard lessons learned,” says Mark Vice, co-owner of Fayette Drain and Sewer in Fayette, Alabama. “From my experience, 80 to 90 percent of people want to know, ‘What is this going to cost me when you are finished?’”
That doesn’t automatically dictate flat-rate pricing, though. “I like to quote jobs by the day or half a day, and if equipment is needed or not,” Vice says — in short, an hourly system, although in four- or eight-hour increments.
That’s the best way to capture fixed costs, he contends, especially for labor. “At the end of the day, my employees need eight hours, and I have to pay them.”
Adds Paquet: “As long as you have confidence in the ethics of the contractor, the hourly rate is generally the best option to ensure the work is done properly with attention to detail.”
Jason Roberts represents My Handyman Services, a broker for home improvement trades, including plumbing, in London, England. It bills all its work by the half-hour — a one-hour minimum and then half-hour increments after that, and posts its rates on its website.
“The issue with charging per job is that sometimes even if the job is complicated, the handyman may complete the task, let’s say, in one hour,” says Roberts. “Some clients might say, ‘He charged me so much and he was here only one hour!’”
Customers billed by the job “believe that they have done you a favor by giving you some work,” he finds — so they’ll push for return favors in the form of free add-ons: “While you are here could please fix this pipe as well?”
Bill Sanders has some pretty strong words on the other side of the debate.
“Hourly billing is fundamentally unethical,” argues Sanders, a San Francisco business consultant whose clients include plumbing contractors. “It puts the customer and the contractor at odds before the job even starts,” he says, because an hourly paid contractor “is incentivized to stay longer.” Flat rates allow customers to decide on their investment up front and “realigns the interest of both parties.”
One Sanders client, a plumber, scored higher profitability and market penetration after implementing flat-rate pricing (before Sanders began working with the firm).
Flat-rate billers contend customers like it. “It helps them control their costs,” says Simpson. Prices can’t balloon, “especially if you’ve got an experienced plumber who can spot the potential stumbling blocks before the job starts.” If the job runs longer than expected, “customers won’t be watching the clock because they know their own costs won’t rise.”
Strategically deploying your personnel can boost profits. “If the book gives a plumber four hours to complete a job, but a more experienced plumber can get it done in half the time, it essentially packages a higher hourly rate into the flat price,” Simpson continues. Of course, he points out, that means you want to be sure your employees are well-trained.
While Vice of Fayette Drain and Sewer leans toward time-based pricing, his service crews are different. “We have flat rates for drain clogs, residential water leaks and septic cleaning,” he notes.
Of course, flat-rate service jobs can turn into larger hourly projects. “My service guys bring in a lot of bigger jobs for my other crews,” Vice points out. “A simple sewer line cleaning could turn into a complete replacement. At that point, for the most part, we quote the replacement” as a time-based job.
Simpson acknowledges that a flat-rate job finished quickly can translate into a steep hourly rate and trigger customer complaints. But he contends that’s rare. “On the other hand, if you bill by the hour and the job takes longer than expected, your chances of receiving complaints increase quickly.”
Sanders points out that contractors like plumbers, drain cleaners, HVAC repair services and others are there to fix a problem — bringing a “head,” not simply a set of “hands,” to the job. Besides the simple labor and parts put into the job, the flat-rate bill should appropriately reflect the expertise and the investment in continued training.
For Vice, the question of flat vs. hourly really leads to deeper considerations.
“I spend a lot of time doing quotes and looking at jobs,” he says. “I have learned that you don’t get every job you quote, so you don’t need to cut yourself short just to be cheapest.” He also wants to avoid race-to-the-bottom competitive bidding.
“As a service company, I do not like to bid jobs, because if you are just looking for the cheapest price, that is not going to be me,” he says. He prefers to sell reliability and local presence. “I look at potential problems in the future, because I will be the one who services it years to come.”
Your best option
Vice has clearly poured time and energy into figuring out what system works best, which is why he’s opted for a hybrid. “I wish I had a flat-rate system that worked for all situations,” he admits. “It would make my life easier, but figuring that system out and implementing it, I think would be a miracle within itself.”
Regardless of how you feel about pricing structure, study it closely. Then, whichever direction you go, you’ll go there with more confidence in your choice.