Flat rate vs. time and materials

Most service companies price a job one of two ways. Flat-rate pricing gives the customer one fixed price before the work starts. Time and materials charges for the hours worked plus the parts used. Neither is better in general. They differ in who carries the risk of a job running long.

When flat rate fits

• The job is one you do often, so you know how long it takes and what it needs: a water heater swap, a drain clearing, a thermostat install.
• The customer wants to know the cost before saying yes, and compares quotes.
• Your crew is fast. Under flat rate, finishing early is your profit.

When time and materials fits

• The scope is unknown until you open it up: diagnostics, remodel work behind walls, troubleshooting an intermittent fault.
• The job is large and changes as it goes.
• You can't price the unknowns without padding the quote so much that you lose the job.

Who carries the risk

Under flat rate you do. If the job takes twice as long, the price stays the same. Under time and materials the customer does: the bill grows with the hours. Some customers dislike an open-ended bill, and some owners dislike the work of tracking every hour and every part.

One job, priced both ways

Take replacing a garbage disposal. Say the disposal and fittings cost you $140. Say your technician's burdened rate is $55 an hour and your overhead works out to $30 per billable hour. Say you aim for a 35% margin. You expect the job to take 1.5 hours.

Now compare what happens when the job runs long. A corroded drain connection turns 1.5 hours into 3.

This assumes a $120 billed labor rate and a 25% markup on parts. On the 1.5-hour version, T&M comes to $355 and flat rate to $410, so the customer pays more under flat rate when the job goes smoothly and less when it doesn't. That trade is the point of flat rate: the customer buys certainty, and you are paid for the risk you take on.

How a price book makes flat rate workable

Flat rate only works if the price is the same every time you quote the job, and if it was built from real costs. A price book is a list of the jobs and parts you sell, each with a set price (and, if you track it, a cost), so a quote starts from numbers you already decided on rather than a guess made in the driveway. Read the definition of a price book and see how the other terms fit: flat-rate pricing and time and materials.

Check your own numbers

Use the labor rate calculator to work out the hourly rate behind your prices, and the job profit calculator to see what a finished job actually earned. If flat-rate jobs keep landing near your cost, the usual culprit is the hours estimate, not the margin.