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Contract Pricing Solves Problems, Improves Business Results

Last updated: 12-10-2020

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Contract Pricing Solves Problems, Improves Business Results

In days of old, when humans were cold, a need arose to discover fire. It’s a useful tool that comes with intrinsic danger. Not only could it serve to keep them warm and allow them to cook their food, but it also had the potential to harm them by death and destruction. However, with careful use of fire and safety protocol development, their lives improved. 

When they realized they needed a faster way to transport themselves and their property, they invented the wheel. But this, too, came with potential danger. Runaway wagons and carriages and, later, automobiles could harm people by death and destruction. With careful use of the wheel and developed safety protocols regarding their implementation, their lives became much improved and more efficient.

With the invention of the fulcrum, lever, pulley and other devices, humans who used these tools correctly learned to perform their tasks working smarter rather than harder. They improved their lifestyles by making their workload easier to accomplish while lessening their time working on any particular project.

Without fire, humans would have shivered in the cold while they ate raw food. This could’ve led to severe health problems for all humans. Without tools, humans would be making their jobs harder, more time consuming and less efficient.

The proper way to conduct business

You might be wondering what this has to do with running a plumbing, heating and cooling contracting business. As I ponder topics for my columns, I often rely on things said to me and questions asked of me by calls I receive from people involved in the industry. Before sitting down to write this column, a young woman starting in her family’s existing PHC contracting business contacted me. We spoke for a while regarding the company and my books, which offers solutions to contracting businesses' problems.

Then she asked the question that leads to the topic contained herein. She wanted to know if I thought all prices should be quoted upfront. In other words, do I recommend contract pricing (upfront pricing/flat rate pricing) over time and material pricing?

Her family business utilized both methods. In speaking to PHC contractors over the years, I have found that even contractors against upfront pricing use the upfront pricing method for certain tasks such as water heater, water closet, boiler, furnace and condenser replacements. Her business was no different. 

If you can quote upfront prices for replacement tasks, you can present consumers with upfront prices for any task. You just have to know how to do it safely, profitably and honestly. The way to accomplish this feat is to describe the terms, conditions and parameters pertaining to the proposed task in detail, with the price to perform that task. Therefore, it’s doable. 

Why would you quote prices before commencing any task? That’s the real question. The answer is because it is the proper way to conduct business. Think about it objectively. As a consumer, and all contractors are consumers, I’m sure you would prefer to know the price you must pay for any service or product before deciding to purchase it. You want to make certain you can afford to make the purchase and if you want to buy the item. 

Your customers are no different.

You are in the service business, just like a restaurant or new car dealership. As a consumer, you wouldn’t order a meal and eat it without knowing the cost you will incur before ordering the meal. It’s the reason restaurants use menus with prices. 

Similarly, you wouldn’t buy a new car without knowing the price first. It’s the reason new cars have price stickers on the window. Therefore, as a professional, you should tell your clients the cost of any task before they authorize you to perform the task.

From a client/business relationship, time and material pricing presents a dilemma and has the potential to be misunderstood by consumers. The definition of a contract is a meeting of the minds as to that which both parties have agreed. When consumers misunderstand your protocols, there may not be that meeting of the minds.

For example, because you are a professional, the consumer may think you will get the job done in five minutes and be willing to give you an hour to complete the task. When the task takes two, four, or six-plus hours, and you are charging an hourly rate, the customer is shocked after you calculate the price he must pay. 

Shock often leads to a heated discussion that leaves a bad taste in the consumer’s mouth. That bad taste can lead to the consumer not paying, a lawsuit or choosing another contracting firm the next time service is needed. It doesn’t help your business succeed or improve your lifestyle. It only leads to unneeded stress, frustration and disgust for your chosen business life, which often leads to mental and physical health problems.

From a mathematical perspective, T&M pricing hinders profitability. If you identify and calculate your real hourly cost based on all potential revenue-producing hours, and you include a properly profitable margin, you will believe your prices will cover your cost and earn you a profit above that cost. However, when you don’t sell all your potential revenue-producing hours, hourly profit decreases and, possibly, disappears in totality as hourly cost increases.

If you calculate your hourly labor/overhead cost per qualified tech with a properly equipped service vehicle to be $100 (if you sell all potential revenue-producing hours), and your annual maximum likely revenue-producing hours per tech/truck are 1,700, then your true annual labor/overhead cost per tech/truck would be $170,000 ($100 x 1,700 hours = $170,000). 

However, if you only sell 1,500 hours, your $170,000 operational cost doesn’t change. In that instance, your hourly tech/truck cost would increase to $113.33 ($170,000 ÷ 1,500 hours = $113.33 per tech/truck hour).

This example shows the intrinsic danger involved regarding time & material pricing. You can’t recover from the damage done by that danger. Once an hour is gone, it’s gone forever. If you didn’t sell it, you will never sell it because it doesn’t exist anymore. But contract pricing allows some leeway. 

Properly calculated and implemented contract pricing is based on the average time and material spent by an average tech to perform a particularly described task. Since it’s based on the average time and material spent by an average tech, if your techs are above average, your profitability will potentially be higher. 

With T&M pricing, when your tech is above average, you bring less money into your business than a company using average techs to perform tasks because your tech did the job in less time. 

As a bonus, contract pricing tells consumers they only pay the amount to which they agreed in the first place, which leads to fewer price arguments and more repeat customers. The consumer is paying the right price rather than a price that could be inflated or deflated based on erroneous mathematics.

Therefore, my answer to the young lady who asked if I recommend contract pricing instead of T&M pricing is yes, I do, for the reasons I have stated. If I were a caveman, I would have embraced the safe use of fire. As a contractor, I have. As a person who needed to transport people and items, I would have embraced the safe use of the wheel. As a contractor, I have. As a person who performed plumbing, heating and cooling tasks, I have used the tools and devices that make the task easier and more efficient. 

As a PHC contractor, my contracting business provided upfront prices to consumers before performing any task. Contract pricing is a useful tool that solves problems and improves business results when safely and adequately implemented.

To help make the transition to contract pricing or my thoughts on any business situation, visit www.contractorprofitadvantage.com or call me.

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