Pricing projects can be challenging. Contractors and service technicians get work with low bids. But, choosing the wrong pricing method can cause lost time and income.
For most projects, contractors and technicians have two choices: a flat rate or an hourly rate. Flat rate pricing includes the cost of the entire project. Hourly rates divide pay into time units. But, the price tag for the whole job can vary.
The choice of pay rate affects customers and contractors. Also, it can impact workers and work quality.
There isn’t one right answer in the fixed rate vs. hourly rate debate. You need to consider each job on its own. The details and risks can help you find the best pricing strategy. Each customer’s expectations can also affect how you bid.
This article will look at flat and hourly price rates. We will detail how to calculate each. Then, we will weigh the pros and cons. By the end, you will have the insight to choose the best pricing approach.
What Is Flat Rate Pricing?
A flat rate system is also known as fixed pricing. The service provider bids a price for the job. Once accepted, the price does not change. Usually, the customer pays the bill when the job is done.
The price cannot change during the work. The service provider can’t charge more. If there are problems, they pay for it out of their pockets. They do not pass the extra costs on to the customer.
Flat rate pay benefits customers in many cases. It lets them see the total price, and they won’t get surprise charges at the end of the project.
Contractors and service technicians can attract more customers with set pricing. But, in some cases, they take on more risk.
Here are examples of when fixed pricing is a good idea.
Landscapers can easily see the size of the project. Also, unforeseen problems are rare in landscaping. So, fixed pricing is not as risky.
Inspectors do not make any repairs. And they do not use equipment or materials. Some inspections may require extra work. But inspectors only lose time, not money.
Pros know how long it takes to connect a new appliance. Also, they can see any potential problems upfront. For example, they can notice the need for extra electrical work. Then, they can include that in the price.
Door and window installation
The steps of these jobs are straightforward. Installers remove the old windows and attach the new ones.
Specialized contractors like roofers understand their work. Most jobs are similar. Also, any extra repair needs are obvious from a visual inspection.
Flat prices can sometimes be flexible. The job might require extra work. In these cases, the worker may add a flat rate to the cost.
For example, a window installer may find rotten or damaged frames. They will need to install new frames before adding windows. They can add a fixed rate for window frame repair to the project.
What Is Hourly Pricing?
Hourly pricing involves a set rate per hour. The service provider quotes pay based on time unit, but they do not offer a price for the finished project. The cost for the job is the number of hours times the hourly rate.
The hourly fee does not change. But, the overall cost for the project can change if you work more hours. Sometimes, a company or service provider estimates the number of hours for a project, but the estimate is not an agreement. It is usually only a guideline.
Hourly pricing is common for ongoing projects. Also, jobs with changing scope or goals are often hourly pay.
Here are some of the most common examples of jobs using hourly pricing.
Construction Contractors and Subcontractors
Their projects often have different stages and unclear working conditions. Hourly rates provide fair pay for construction workers regardless of project length or changes to job requirements.
With maintenance jobs, pros can’t define problems or repairs beforehand. Hourly maintenance services benefit customers, too. They do not have to pay unless the workers are actually performing repairs.
On-Demand Service Providers
IT support personnel, for example, use an hourly rate pay system. They are unaware of the extent of work necessary for each project.
In consulting jobs, the client’s needs often aren’t clear at the start. Hourly pay can accommodate additional work if needed. Legal experts charge by the hour for a similar reason.
Temporary and Freelance Workers
Each temp or contract job has different details and requirements. So, these workers charge by the hour to avoid underpayment. Also, clients can benefit from this arrangement. They do not have to worry about overpaying if the job is easier than expected.
An hourly rate pay system works when the scope of the project isn’t clear. Also, it gives flexibility for ongoing work. The client or worker could change the job details. But, they would not have to make a new agreement to account for the change.
How to Calculate Pricing
Price calculations for hourly rates are different than for flat rates. Contractors and service providers need to understand both.
Accurate calculations are important for budgeting and profits. Contractors must explain flat or hourly rates to clients. They can do so by explaining the equations behind their price quote.
Here is a look at calculating pricing for flat and hourly rates
How to Calculate Flat Rate Pricing
All projects have different costs. For example, construction projects have materials and labor. Also, you might count gas and repairs for machinery. A flat rate pay system requires adding all these parts together.
Contractors often charge a flat rate. But laborers may want an hourly wage. The contractor needs to turn the hourly rate into a flat rate. They estimate the time needed for the project. Then, they multiply it by the hourly rate to get the cost.
Here is a look at the steps necessary to calculate a flat rate:
Outline different needs.
You will need materials, specialists, laborers, and tools to complete your work. Figure out the amounts for each of these areas.
For example, a construction contractor can measure the project area. Then, they can estimate the amount of cement or wood needed for the project.
Assign dollar amounts.
Look at current market rates or past costs. Then, you can figure out the cost for each part of the project. You repeat this step for each material type. Don’t forget to make calculations for laborer and subcontractor wages.
Add amounts together.
This sum gives you the basic cost of the project. You need to include all materials, labor, and other costs, and one missed expense could hurt your profits for the project.
Account for unexpected costs.
Flat rates are risky for contractors or providers. But you can add a percentage to the final price to compensate for some of these risks. With this extra profit margin, you can still make money on the project if something goes wrong.
Add other costs.
The last step is to find and add other costs. In construction, these costs could include permits or inspections. Also, you can factor in your overhead, like insurance costs and administrative and legal expenses.
In some industries, it’s normal to negotiate a flat rate. A contractor may provide a bid. Then, the client can ask for a lower price. The two may go back and forth several times. In the end, they may agree on a final price.
How to Calculate Hourly Rate
Hourly rate calculations include the desired wage. But, the equation often includes other expenses, too. For instance, transportation or delivery jobs should include the cost of fuel.
Here are the steps to calculate hourly wages:
Define the work.
Do the hours include travel to the job site? Or do they begin when the work actually starts? This step helps avoid billing confusion later.
Decide on the hourly wage.
This step can involve looking at past projects and using the same rate. Or you could find average rates for your specialty in the local area.
Add additional expenses.
You can include taxes, materials, and other costs in the hourly rate.
Add a profit margin.
Companies using subcontractors can add a profit margin. They will earn this amount per hour after paying their workers.
You can estimate the number of hours needed for the project if possible. This figure can help you find overall profits but won’t be useful for on-demand services or ongoing jobs.
Choosing Between Flat Rate Pricing and Hourly Pricing
You need to weigh the benefits and drawbacks of pricing choices. Then, you can decide which one is best for your project.
Pros and Cons of Flat Rate Pricing
Flat rate pricing has specific benefits and drawbacks.
The pros of fixed rate pricing include:
Clients prefer fixed rates.
It’s easier for customers to budget for flat rate pricing. There won’t be any surprise costs. If you charge fixed rates, you may attract more customers.
It’s easier to make decisions.
The price gives you strong guidelines, and you can easily decide what to include and what is unnecessary.
You get rewarded for efficiency.
You can reduce costs by improving workflow. Above-average productivity can help you do the job for less money, increasing profits.
These advantages can be attractive. But you should also consider the drawbacks. In some industries, they may cancel out the benefits.
The cons of flat rates include:
Unexpected costs are a big risk.
Costs like additional materials or labor can eat profits. With flat rates, the client passes these risks to you.
You can’t make major changes.
Large project changes will require a new contract and new calculations. Flat rates do not give you any flexibility for such changes. Therefore, the client loses the option to request changes to the project goals.
There is no room for error.
Your estimates need to be very accurate. Because of this, each job bid takes more time, and you may end up bidding for fewer jobs.
You need to consider these flat rate drawbacks. Then, you can decide if they outweigh the benefits.
Pros and Cons of Hourly Rate Pricing
Hourly rate pricing brings its own set of good and bad qualities.
Here are the pros of hourly pay jobs:
You always get fair pay for time spent.
You get paid for time spent on the project. If it takes longer than expected, you still get full compensation. And, you never work for less than the hourly rate.
Hourly rates give more flexibility.
You or the customer can easily change the project. It can increase in scope. Or, you can add new goals. You will still get paid a fair amount after these changes.
You get a more stable income.
Hourly rates provide guaranteed pay in all circumstances. You won’t risk not getting paid due to cost overruns.
These benefits are obvious in certain industries. They are most obvious in less predictable sectors.
Here are the cons of hourly rate pay structures:
Tracking hours is complicated.
Logging hours may require special software or timers. Also, clients may want to see the data frequently.
You may not get enough hours.
Hours can fluctuate. You may not need to work a lot on some projects. In some cases, this problem can limit income. Or it could force you to work multiple jobs simultaneously.
There is a potential for disputes.
You and the customer may disagree about the work needed. For example, they may object to hours worked on some parts of the project.
These drawbacks can help you answer the flat rate vs. hourly rate question. The option with the most pros and fewest cons is usually the best for the given job.
Tips for Implementing the Chosen Pricing Model
After you weigh the pros and cons, you can choose a pricing model. Once you’ve done that, you need to implement it.
Here are five tips for using your pricing method:
1. Clearly Define Project Goals.
A clear framework can help with both pricing models. The customer should define expectations and goals. Then, you can calculate costs and estimate hours.
The clearer this information, the more accurate your estimate.
This info can help you define the project scope. A clear scope can guide you throughout the project. You can ensure all work moves toward the goals. Also, you can assess any additional requests from the customer.
In flat rate pricing models, they may ask for additional work. You need to decide if this request fits within the original scope. If not, you can argue that it is not covered under the payment agreement.
It is best to put the goals and scope in writing. You can refer to this document if there are legal disputes.
Understand Your Costs.
Costs can vary by industry and specialty. They can also change according to market conditions. For example, prices for wood or cement can change based on supply and demand.
You need to consider every expense for the project. These can include repair, transportation, and fuel costs. You might also need additional insurance for liability or injury.
Profit margins on projects can often be tight. Missed expenses can eat some or all of these gains.
The National Association of Home Builders puts net profits at around 7% in construction. Cost overruns of 3.5% can cut profits in half. But, careful planning can put profits at 7% or higher.
In some cases, you may be able to post prices publicly. For instance, HVAC installers with set costs may publish prices online to market services.
Communicate with Workers and Subcontractors.
In many sectors, subcontractors perform specific tasks. Some of these people may want to be flat rate workers. Others could prefer hourly wages. Some may change their payment plans based on the project details.
Always get input from these pros. They know the materials and timeframe for their part in the project. They may also notice problems that might increase cost or time. Their insights can help with more accurate pricing.
You can also decide if you want hourly or flat rate employees. Discuss the pricing options with workers.
Research the local labor market. Then, you can get insights into average wages and payment methods.
Check In with Clients Often.
Both pricing models can cause conflict with clients. They may feel hourly projects are taking too long. Also, they might feel flat rate contractors do not include necessary work.
You can avoid this by updating customers frequently. For example, you can conform hourly rate work plans weekly to avoid misunderstandings.
Also, these interactions allow you to remind the client of the project scope and goals. This will help avoid so-called scope creep. The term refers to extra work the client asks for after the project starts.
Focus on Continuous Improvement.
You can increase profits by making process improvements. Look for ways to lower costs or improve efficiency.
With flat rate pricing, you can find ways to do work cheaper or faster. Find ways to provide more value to customers with hourly rates. This improvement can allow you to charge higher hourly rates.
You might consider negotiating with materials suppliers to lower costs. Or invest in new equipment to get jobs done faster.
Overall, look into any improvement that lowers costs or decreases time to complete a job.
Consider the details and needs of each job. Weighing risks and potential challenges can inform your choice. After considering these factors, you can choose the best pricing strategy more easily.
The right choice will benefit both customers and service providers. And they can get the assurances and flexibility necessary to plan the job and create a budget.