Here’s an email message I once received.  It is typical of the many requests sent my way frequently.

“Dear Mr. Blau, I am going into business for myself, and need to know how to figure out my hourly rate.  I am a frequent reader of Ellen Rohr’s blog, and she recommended I purchase your Business of Contracting Kit.  Will your kit instruct me on exactly how to figure an accurate hourly rate and a selling price?  I plan to go with flat rates as soon as I can afford to purchase your Business of Contracting Kit.”

Imagine going into business without enough capital even to purchase some basic instructional books.  This statement tells a lot about our industry.  It is open to anyone with a plumbing license- or even without one- and mechanical skills.  And this is the source of our biggest problem.  People enter the field without knowing a thing about business economics.  They are playing a big guessing game with their prices and end up buying themselves most jobs.

Give this aspiring young contractor credit.  He understands what he doesn’t know and is willing to ask for help.  I contacted him with answers to his questions, and urged him to beg, borrow or steal money (just kidding about the latter) to purchase the instructional tools to start out on the right foot.

Direct Costs: Many contractors get scared away from flat rate pricing because they think they’ll be unable to account for unseen circumstances.  But a good system will accommodate different scenarios by varying the labor hours.  If, for instance, an installation is in a tight or hard to reach space, you would factor in more time to complete the job.  In any case, flat rate prices are averages. If your best service technicians are able to perform a given installation in an hour while the rest of your crew takes an hour and a half, you should calculate it as taking an hour and a quarter.  On some jobs you’ll make more than others- but it averages out.

Let’s go through a typical flat rate price from one of our client’s flat rate books.  Our example will be the sale and installation of a Gerber Ultra-Flush water closet.  Keep in mind your price for the exact same job probably would be different than theirs.

First, let’s start with the known- materials and labor- also known as direct costs.  The contractor knows exactly how much he pays for the material used, which in this case is $210, including trim and consumables.  He also knows his labor cost, encompassing both wages and benefits on an hourly basis.  This comes to $37.50 per hour.

Now we have to figure how much time it takes to install that Gerber toilet.  Your billing history is the best guide.  Simply take your old time and material bills, isolate how much time you billed for various jobs, and average them out.  Granted, it’s a time-consuming job.  Many contractors will take a shortcut and simply estimate how much time it will take for this or that job based on their long experience.  This is not as risky as is sounds.  Any plumber who’s been around awhile can pretty accurately figure how long it will take to accomplish the common repair and installation jobs they encounter.  Remember, here’s where those averages come into play.  Also, you need to recalculate your flat rates at least once a year- I recommend twice- to fine-tune for accuracy and because your costs of doing business change.  Subscribing to a flat rate service will make this task much more efficient than doing it on your own.

In this case, the contractor built 1.75 billable hours into the price of installing a Gerber Ultra- Flush.  So his hourly labor cost of $37.50 per hour x 1.75 =$65.63 in labor costs that must be added to the $210 material price for this job.

There are two more known costs that must be factored into this flat rate price.  One is a permit fee required in this contractor’s area for toilet installations, totaling $35.  We all know the vast majority of contractors ignore permit requirements for routine jobs.  I applaud this contractor for doing things by the book.

The final known cost is a commission paid to service technicians totaling 10 percent of the material cost.  This serves as an incentive for them to sell more products.  Here, 10 percent of the $210 material selling price comes to $21.

So far, the partial flat rate price encompasses: $210 (materials) + $65.63 (labor) + $35 (permit) + $21 (commission) =$331.63.

Into The Unknown: Now we have to factor in two unknown costs that are essential if you are to operate as a profitable business.  One is over-head, also known as indirect cost, and the other profit.

Flat rate pricing is just as much a guessing game as time and material billing, unless you know your dollar-per-billable-hour of overhead.  I won’t go into detail here because I’ve done so in several past columns, as well as in my Business of Contracting Kit.   Suffice to say that it requires you add up all your overhead costs over the course of a year, and divide that total by the total number of billable hours you are able to sell.  Keep in mind that while the average technician puts in an eight-hour day, typically only five or six of those hours are billable.  The hourly wages and fringes you pay your technicians while they are loading trucks, driving to and from jobs or sitting around drinking coffee, are part of your overhead.  So are the administrative salaries you pay to yourself and all other office personnel, along with rent, utilities, advertising, etc.

This contractor’s dollar per billable hour overhead currently stands at $120 an hour.  I know this astonishes many of you.  Most of the people in this industry charge less than half that amount for total hourly labor billing.  All I can say is virtually every contractor I’ve ever known who charges the “going rate” is unsuccessful by many standards.

So added to the $331.63 in known flat rate costs, we must include 1.75 (billable hours) x $120 (hourly overhead) = $210 in overhead for this particular job.  $331.63 + $210 = $541.63.  This is the contractor’s total job cost, or break-even point, for that toilet installation.

Now we must factor in the final element- profit.  His profit goal is 25 percent.  Most of you are thinking all we need to do is multiply $541.63 x .25, and add the result to get a selling price of $677.04.  If so, you are guilty of stinkin’ thinkin’!

To obtain 25 percent profit on this or any other job, we must calculate the profit as a percentage of the final selling price, not the job cost.  Since we do not know it yet, we must derive it mathematically by dividing the job cost, $541.63 by 75 percent (.75).  If you have a calculator handy you’ll quickly determine that this results in a selling price of $722.17.  This is what our client charges to install a Gerber Ultra- Flush water closet.

Good Value: Again, your price may differ because of a different cost structure and perhaps a willingness to settle for a smaller profit percentage.  I don’t really care how much you charge, as long as you earn a decent living for yourself and your faithful associates, cover all your costs and make a good profit.

Unfortunately, the vast majority of service and repair contractors in this industry do none of this.  As a result, they lower consumer expectations of what is a “reasonable” price to pay for plumbing and heating services, which hurts all of us.  In fact, I’m sure many of you reading this column will say that $722.17 is way too much to charge for a toilet installation.

Is it?  In response, I say, you are the one who doesn’t understand value.  Consider this contractor is providing an indispensable product, one of the best of its kind on the market, and guaranteeing it will work.  This will probably be the last toilet the homeowner needs for at least 20 years or probably more, unless the homeowner decides to replace it for cosmetic reasons.

How much do you think that homeowner will pay for a new carpet or a new sofa or lounge chair?  Try to obtain those goods for less than $722.  And do you think they will last 20 years in any decent condition?  How much do you think homeowners invest each year in landscaping?

So hold your poison pen letters.  Instead, take a moment to do some soul-searching.  Ask yourself whether the goods and services you provide are really worth so much less that all the other expenditures a homeowner shells out for household items.  It’s time to hold your professional head up high, and stop thinking like a slug.

How To Create A Flat Rate Price