I am not a big fan of flat rate pricing; however, it does have its place. In this article I will walk you through the pros and cons of both flat rate pricing and detailed estimates.
You will be able to compare the work you do to these two options to determine which type of pricing best suits your business. For larger businesses, with multiple companies, you may find a combination of the two is most suitable.
Flat Rate Pricing
- A price list allows you to easily price work over the phone and book it in swiftly.
- Communicating the prices to your client is quick and simple.
- Easy to schedule and manage.
- Once you get the pricing right your profit margin should be consistent and reliable.
- A quick sale equals a quick billing cycle. Many flat rate businesses receive payment immediately upon completion of the job.
- The team knows what to expect and what is expected of them from the job.
- Easy to scale – Once your cost and prices are established, it is easy to scale your business up with a healthy profit margin by increasing sales of this flat rate work.
- Competing on price – It is extremely easy to be price checked for the same work. To counter this, make sure your Point Of Difference is well established to ensure you are not competing solely on price.
- No allowance for site condition – Fixed pricing makes no allowance for access or any other site specific conditions that may increase the cost of doing the job, and these can cost you a lot of time and money.
- Disgruntled Clients – When a job is more complicated than the standard call-out, forcing you to charge the client for more than they were quoted over the phone, they can quickly become disappointed because they were expecting one price, and are now having to pay more. Unhappy clients tend to be noisier than happy clients, so they can quickly damage your reputation.
Best Suited to:
- Simple jobs that are performed regularly on repeat. Jobs that have zero (or almost zero) complications.
- Standard installation project, for example installation of a new appliance.
- Regular maintenance jobs, for example changing tap washers or 4-hour garden maintenance.
- Small repair jobs, for example fixing a broken cistern or chopping down a tree (this example would require questioning the client on the size of the tree and access to ascertain the extent of the work)
Flat rate pricing is best suited to very simple service call-out and maintenance jobs. You can strike a good balance when you couple flat rate pricing with cost plus pricing, giving the client a good understanding of price while keeping the option open to charge more as required.
To make money with flat rate pricing you must work extremely hard at getting your rates right. You need to strike a balance between being competitive and making a good profit margin. Establishing a strong ‘point of difference’ will help you set yourself apart from the competition, pulling you away from competing directly on price (you do not want to be in that situation – it is a quick and dangerous race to the bottom).
You should also focus strongly on systemising your business so that all elements, from sales to completion, are systemised for maximum profit and efficiency. A well systemised business is full of happy, stress-free staff who know what to expect and what is expected of them. Contrary to popular opinion, a systemised business is the better one to work in.
- More accurate – For complex projects it is much easier to work out a more accurate cost (it will never be exact… it’s called ‘estimating’ for a reason!) of the works.
- Aids project management – Communication between the office and the field is easier with a detailed estimate. With a detailed breakdown of cost allocations, the project management team are more able to stick to the budget because they can see how much they’ve got to spend on each item.
- Access – You are able to consider and adjust the price for the site conditions, making your price more competitive.
- Adjusting for access will also give the project management team a greater chance of sticking to the budget.
- Show efficiencies – With a detailed estimate you are able to compare the field data to the estimate, showing efficiencies and inefficiencies. The estimator can use this information to improve pricing and the field team can use this information to improve onsite practices.
- Very time consuming – The right tools will help you reduce the workload:
- Rates – Build up a library of rates that you can quickly manipulate to fit the project. This allows you to price detailed work quickly.
- Resources library – build up a library of material, labour, subcontractor, and plant prices so that you can quickly add them to the price.
- PDF Reader – If you read and measure plans all day then you need to invest in a good PDF Reader. Adobe Pro, Bluebeam and Planswift are the most popular. Find one that allows you to measure permitter, area and volume at the same time, and works on your computer. It’s also important to get one that can measure curves and odd shapes, as well as quickly measure standard shapes.
- Estimating software – Don’t use excel! I’ve heard too many stories of big pricing disasters from a broken formula in an excel spreadsheet.
It is well worth investing in good estimating software. All good estimating packages will allow you to build up your rates, while letting you manipulate those rates in the individual project. They’ll have an inbuilt library system you can add your prices to and should allow you to monitor the age and update those prices over time.
- Increase the sales process – The shorter the sales process the less chance you have of losing the sale. It is almost impossible to give a detailed estimate on the spot, or within 24 hours, which greatly increases the time between enquiry and sale. In some circumstances, for example commercial projects, this time is not an issue, however in residential the shorter the time the greater the chance you will have of winning the work.
Best Suited to:
- Complex projects with multiple tasks.
- Jobs with unknowns – These can sometimes be done as cost plus, for example earthworks should always be done as cost plus.
- Projects with difficult site conditions.
- When you are working with multiple trades (it is often a good idea to do these as cost plus, too).
While detailed estimating is time consuming, the benefits are vast. If you do complex projects (jobs that take more than a couple of days and include more than a couple of simple tasks), it is well worth investing in a good estimating package and spending the time to price projects accurately. And by accurately, I mean to the nearest box of screws!
Once you are set up to bash out a detailed estimate you can give the field staff a budget they can stick to. The field staff can now tell you where you are pricing too high or too low, you now have the tools to improve your pricing. Improved pricing = a greater win rate and predictable profit margin! Detailed estimates are best suited to complex projects with multiple tasks and/ or difficult site conditions, while fixed rate pricing is suited to simple service call outs and maintenance jobs. Cost plus is a good and safe alternative to both, however, be aware that it is hard to make a good profit margin with cost plus pricing.