Do you still charge by the hour?

 

BY RICHARD P. DiTOMA, L.M.P.,

contributing writer

 

“How much do you charge per hour?” was the title of my first editorial for Phc News. That was nine years ago. And, the spring/summer of 2009 marks the beginning of Phc News’ tenth year. I am proud to be one of its contributing editors.

John Mesenbrink, chief editor, asked me how I thought things had changed over the last decade. With that in mind, I looked up that first article, which was aimed at contractors who charged for their services based on a time & material pricing method.

 

When I wrote the article, I wanted to show time & material contractors that they had another choice to implement regarding their selling prices. That choice could alleviate arguments over surprise bills after a service was performed, while allowing good contractors to become more profitable in the delivery of excellence to their clientele. That alternative was, and is, the contract pricing method. This method is commonly, and in my opinion erroneously, referred to as flat rate pricing.

 

The term “flat rate,” with regard to the prices contractors charge, is, at least if not more than, a quarter of a century old. The reason I claim that the words “flat rate” are wrong is simple to understand. The word “rate” gives the misperception that some amount of money (the rate) will be applied to some other factor. In the contracting business that other factor is the “time” spent performing the service. Therein is the problem — the choice of words regarding a pricing method whose strength is the fact that the consumer is quoted the price before the service begins.

 

A contract price does not change for the consumer if the contractor spends more or less time than he/she estimated to perform the agreed service. The quoted price remains constant. For this reason, it is imperative that contractors know the average true cost they will incur to perform a task before quoting a price for that service.

 

For years, contractors have argued over the pros and cons of time & material pricing versus contract pricing. Nine years ago, the majority of contractors still used the time & material pricing method for most of the services performed for their clientele. Yet, since the beginning of our noble industry, all contractors have probably quoted prices for certain tasks before commencing those tasks. In today’s industry, most contractors quote a price for water heater replacements; boiler & furnace replacements; A/C condenser replacements, etc., before doing the job. That means that even the die-hard time & material contractors are not 100% behind time & material pricing.

 

Contractors who have come to see the light and logic of quoting prices to their clientele before commencing service jump on the contract pricing (“flat rate”) express. They realize that good contractors who deliver excellence to consumers deserve proper compensation for the delivery of that excellence and the risks they incur in the delivery. They also realize that their reward was not attainable charging by the hour because consumers would just call every contractor in the book and ask “How much do you charge per hour?” Then, they would select the lowest hourly rate. That means that good T & M contractors would have to keep their rates close to the rates of bad T & M contractors. That hardly seems fair since the good ones could probably do a better job in less time than a bad contractor could do a mediocre job.

 

Many consumers think with their wallets rather than their brains. They believe that since all people are created equal, all contractors are the same; ergo, the cheapest one is as good as the most expensive one. Obviously, any consumer with a modicum of intelligence should recognize the fact that all contractors are not created equal. That’s why products and services are often referred to as “good,” “better,” “best.” Thus, the rate per hour shouldn’t be as important to the consumer as the ability and intent of the contractor to deliver excellence.                                                                                                                         

 

Whenever speaking to consumers on this issue, I inform them that contractors should be chosen the same way they would choose their doctors and their lawyers. If they select either of those professions based on cost rather than excellence they may come to meet their maker before their time, or, wind up with a reservation at the gray bar hotel.

Today, many more contractors exclusively use the contract pricing method than they did years ago. That alone answers John’s inquiry about change in the industry. The reason these contractors choose the contract pricing method over the time & material method is simple. Let’s compare the main issues of both pricing methods.

 

Issue 1: The time and materials used

 

With Time & Material Pricing Method

 

1. a) Consumers are constantly looking over your tech’s shoulder adding to your tech’s stress. This gives the consumer the ability to argue over the time used to calculate the bill. The consumer may want the time lowered to compensate for your tech blowing his/her nose or scratching his/her head. This is bad for employee morale.

b) At the end of the job, the consumer might question the time and/or material used to compute the bill.

c) If tech is having an bad day, the consumer pays for inefficiency. This is bad for customer retention.

d) Contractors may not give the consumer the option of replacing rather than repairing.

 

With Contract Pricing Method

1. There is no legitimate reason to question the time & material used to perform the task after the job is done. The consumer is given the price of repairs and replacements before authorizing the work to be done. Then, the consumer decides whether to proceed with repair or replacement. The price doesn’t change after the work is done.

 

Issue 2: The rate charges per hour

 

With Time & Material Pricing Method

 

2. a) Contractor must quote rate over phone before going to the job site.

b) This causes contractors to quote low rates, often below their cost, in order to compete with other T & M contractors who aren’t smart enough to know their true cost, or aren’t as proficient as a good contractor.

c) Proficient techs that do the work faster spend less time than inefficient techs. Therefore, since the rate is kept close to those contractors who are not as good, proficient techs bring in less money for better workmanship than inefficient techs that are not as good.

d) Less than proficient techs make for more costly callbacks and less satisfied clients.

 

With Contract Pricing Method

 

2. a) No need to quote rate over phone. Each task is individual unto itself and should be seen before a price is quoted.

b) Contractor is not compelled to quote low hourly rate which is probably below his/her true cost.

c) Contractor has the opportunity to quote a selling price, which will allow him/her to recover all costs for the task and make a profit.

d) Proficient contractors who deliver excellence can earn the reward they deserve.

 

Issue 3: The surprise bill and materials used

 

With Time & Material Pricing Method

 

3. a) Since the consumer doesn’t know the price before authorizing the work to be done, and the price is often higher than the consumer thought it would be, arguments that take up more valuable time and animosity rear their ugly heads.

b) Contractor may be forced to lower bill in order to get paid some money.

c) Since the rate was probably below contractor’s cost, more money is lost.

d) Consumer has a bad feeling about the contractor.

 

With Contract Pricing Method

 

3. There is no surprise bill. Therefore, there is no legitimate problem about the price. The consumer received upon which the consumer agreed.

 

Contractors who still do not believe in the merits of contract pricing over time and material pricing should ask themselves the following question: “Would I buy food, clothing, housing, car, etc., based on the time and material used to make the item without knowing the price I would have to pay before making the purchase?”

 

I’ll bet dollars to donuts that you would not want to pay for any of those items on the time & material basis when a method that gives you, as a consumer, the price before you decide to make your purchase exists.

 

Using a time & material pricing method is archaic. You don’t put your tools in a covered wagon pulled by horse. Years ago that’s how things were done. But, now we have motorized vehicles. Changing from time and material is as easy as using a truck over a horse and wagon. And, it makes more sense (cents). Contract pricing makes for more satisfied clients. It also gives contractors the opportunity to be more profitable while reducing stress and frustration.

 

For those contractors who use the contract pricing method, keep preaching the benefits of contract pricing to your colleagues and clientele. There are many more of you than there were years ago. For those who want to continue to deny reality while using a horse and wagon method, think about the costs you incur stabling, grooming and feeding that horse. Contemplate the lost time you spend driving your much slower wagon while the contractor using a truck flies by and does more calls because he/she gets to those calls faster. Think about the profitable benefits of contract pricing as you try to justify your horse and wagon method.

 

For those of you who are not happy with the results you are getting from your monetary and sweat equity investments in your business, and who want to change, give me a call at 845-639-5050. In as little 30 to 60 days, depending on your learning pace, I can lead you into the 21st century confidentially, quickly, painlessly, profitably and completely with your own price guides. And, we can do it over the phone with a few conversations.

 

In order to show John change in the industry after 10 years of this exceptional publication, I would like to anonymously chronicle the progress of some contractors from the beginning of their change from T & M pricing to Contract Pricing in the upcoming issues. Obviously, each contractor would have to be using the contractor pricing method properly. If the contactors didn’t implement the method correctly the comparison would be flawed.

 

It wouldn’t take much time and just a few phone calls. It could improve the industry as a whole for contractors and consumers as well as your own business. By comparing the dollars you bring in with contract pricing in the upcoming months with the revenue you brought in using the time & material pricing method the previous year for the same time period readers could see the results. Then, they could make up their own minds based on facts rather than ignorance and fear. In addition to those dollar amounts, it would be helpful to know whether the amount of work done for each time period was the same, more or less.

 

This is also open to contractors I have already helped. You know the benefit you’ve received from the change. Help others help themselves.

 

Please consider this project. Remember, participants who contribute this information would remain anonymous unless any individual wanted to be known. Your involvement would be invaluable to the industry. You could help to make the industry better for consumers, contractors, creditors, employees and your families.