Written by small-business expert and author, Michael Stone.
There are two schools of thought on pricing service work. Time and material (T&M) pricing or upfront (flat rate) pricing. They both have advantages and disadvantages.
Time and material pricing, as the name suggests, means you charge the customer for the actual hours and actual material costs incurred to do the work. Sometimes a rough estimate is given to the customer, but whatever the costs are, that’s what the customer is asked to pay. The final price of the project is known once the project is complete.
In time and material pricing, you’ll charge an hourly rate for labor. The hourly rate is established by considering the cost of labor plus the overhead and profit needs for the business. Materials are charged at either their cost or at their cost plus a markup. If there is a markup on the material cost, the labor rate can be lower because the markup on material helps recover some of the overhead and profit.
When working with a customer, time and material pricing is pretty straightforward. Once you explain how you will price the project and give them a rough estimate of how long it will take and/or how much it will cost, you’re good to go. Complete the job, and it’s time to get paid.
Of course, it’s not always that easy. Techs need to keep a written record of the time spent on everything they do as it applies to that particular job. This is a major complaint given by company owners about techs; they don’t keep a good paper trail of the job and end up guessing at the amount of time and/or materials used. Sometimes the tech wants to be nice to the customer and will throw in things that they forget to include in the final bill. This leads to jobs being undercharged.
The Right Time For Time & Material
I’ve advocated for years that T&M should only be used on jobs that are $2,500 or lower. The reason is that your customer knows they will be charged for every hour on the job. If the job is large enough, it’s worth their time to be watching and questioning everything the tech is doing to make sure it’s productive. It’s called bird-dogging. “Why does he have to go out to his truck so much? How can he spend so much time in the bathroom?” If your tech wasn’t working efficiently enough in the eyes of the customer, you might end up with an argument when it’s time to collect payment. You also stand to lose future business and referrals from this customer.
When you can establish the total price for the work to be done upfront, you eliminate the customer bird-dogging your tech to be sure that no time is being wasted. This is where upfront pricing has a decided advantage over T&M.
The Lowdown On Upfront Pricing
In upfront pricing, you estimate the cost involved in the project and quote a fixed price to the customer to do the work. Sometimes the price is determined by looking at a national average or at a rate book. Sometimes it’s determined by the technician on the spot. If the job takes more time than expected, you might lose money on the project. If it takes less time, or fewer materials than estimated, you’ll come out ahead. Either way, the customer knows before the project begins exactly how much they will owe when the project is complete.
When the tech gives a total price beforehand, customers have the security of knowing what their final bill will be. Upfront pricing systems are very similar to a lump sum or fixed price contract in that you are talking about the job to be done and not how long it will take. Your focus is on solving the customer’s problem. That can make it easier to close the sale.
The goal for the tech is to charge a fair price, get the okay and get to work. A fair price means you’re able to cover your job cost and overhead expenses and make a fair profit while not overpricing the work to your customer. When presenting the upfront price to a home or building owner, the total service call cost should be given, not parts and labor. This allows the home or building owner to put their attention on the overall value of the repair or new installation and not focus on the price per hour.
With upfront pricing, it’s easy for the tech, at the end of the service call, to provide an invoice to the customer and take a check or a credit card payment. This eliminates the need for the service tech to prepare a T&M ticket, send it to the office, prepare an invoice, mail it to the customer and then wait for the customer to pay it. Billing disputes will almost always be eliminated because the customer has the opportunity to clear up questions about the invoice with the tech while they are on the job site.
There are also downsides to upfront pricing. You can’t throw a brand-new service tech out into the field without getting some jobs priced incorrectly. It takes experience to correctly diagnose the problem. If your technician prices jobs too low, you’ll end up losing money. If they price jobs too high, you might lose sales and/or referrals. In other words, with upfront pricing, there is no guarantee that you’ll make a profit on the job. It’s based on the premise that overall, you’ll make a profit on the jobs you do. Creating an upfront pricing system is not a one-time thing. Your job costing must be accurate, and you must continually update your pricing information.
The Deciding Factor
The main reason that you are in business is to provide a service and make a profit doing it. Whichever method you choose, remember that you aren’t a bank, so don’t try to finance someone else’s project. Do what you need to do to make sure you get paid so you can focus on your business, not on your accounts receivable.
Michael Stone, author of “Markup & Profit: A Contractor’s Guide, Revisited,” “Profitable Sales, A Contractor’s Guide,” and the DVD class Profitable Estimating, has more than five decades of experience in the building and remodeling industry. Stone offers business management assistance to construction-related companies in the U.S. and Canada with books and training programs available on his website, as well as coaching and consulting services. He can be found on the web at www.markupandprofit.com and can be reached by email at email@example.com or by phone at 1-888-944-0044.