Learning by example
Use this typical service scenario as an example. A technician goes to a home to tend to a noisy pump. Upon arrival, he or she discovers the motor bearings are bad, but also finds the burners on the heater need cleaning and the time clock mechanism has rusted to the point where the pump runs continuously.
In a time and material scenario, the technician goes to the house, changes the pump and continues to his or her next service call. At $75 per hour, the contractor bills $304 for the motor and $75 in labour costs, for a grand invoice total of $379. This will yield an approximate gross margin of 53.3 per cent. For most service companies, this only approaches break-even levels (see Figure 1).
In a flat-rate scenario, the technician charges the customer a diagnostic fee, takes the time to carefully analyze the entire pool and spa system and then makes recommendations for all repairs. The typical result is a more thorough, professional visit, which gives the customer repair options based on the diagnostic. With the addition of the dirty burners and time clock mechanism, the repair is larger—the new repairs are added to the original reason for the call, the faulty motor.
As a result, the cost of the call rises to $786, based upon $100 per hour (this rate, of course, is predetermined by the company and not shared with the customer). The revised fee includes $391 for the motor, $100 for burner cleaning and $246 for the time clock mechanism, plus $49 for the diagnostic. The repair now yields a margin of 63.65 per cent. Now, the service company actually makes a profit; in fact, for most companies, this would yield a perfectly reasonable net operating profit of 10 to 15 per cent.
Of course, costs can vary from business to business. In these cases, service companies can simply modify the parts markups or labour rates to more closely match the respective market.
A customer-friendly approach
This all sounds like good news—but how will the customer react? The good news for service providers is that, in general, the customer prefers the flat-rate scenario. Not only does it give them the option to accept or decline repairs before the job is started, it also allows them to be made fully aware of all costs involved before committing to payment. Compared to the open-ended approach time and material contractors use to charge customers, many find the flat-rate system preferable.
Mike Hajduk is president of Callahan Roach Business Solutions, a provider of training, consulting and flat-rate pricing services to the service trades. He can be reached at email@example.com.