Flate Rate vs T&M vs Cost Plus

[jfls41]

I stumbled onto another online forum called "electrical-contractor.net" and they have some discussion threads talking about Flat Rate vs Time and Materials and the benefit of flat rate pricing. I am new to this estimating business and need to get a good system in place. Right now I am finding I am underestimating the time needed to do old work in residential. Does anyone have any info that can help me? Does anyone have any MS Office files or something that can be used for residential old work? I am also trying to locate the Home Depot Worksite CD. I just found out this exists and I assume I should ask them at the service counter about getting a copy?

[charlie tuna]

there is no quick fix to your problem --- it's something that you must adjust to your own work and types of service. i once had another contractor tell me "figure what you would think the labor was and double it" ---you know it kind of works for me!!!

[jfls41]

Ok, so lets say I quote a customer 16 hours to re-wire a bedroom, I think it will take 8 hours and I double it to 16... I end up taking only 9 or 10 hours to do the job, do I adjust the hours down on my invoice so the customer only pays 10 hours or do I not show the hours on the invoice? How does this work?

[apauling]

You give the customer the quote for the BID, not the cost for the work. If you break it down past indicating the difference for the time and materials (time=$, materials=$) you are working for time and materials only. You have to add in all the extras that the customer does not believe they have to pay, BUT you HAVE to collect to survive.

paul

[jfls41]

Apauling, is there anyway you or someone else reading this can email me or post a sample bid vs time and material estimate to show what you mean? I am trying to understand this and without some visual aids I think I'm getting lost...

thanks

[jfls41]

When you say quote for the bid, you mean a very basic, this is what it will cost ?? not a breakdown of materials you think it is going to cost and number of hours, right?

[jimwalker]

Part of my old job was estimating fire jobs.I took it item by item on site.Exspected material and time.Might look like this ,item #1 bed room #2 outside wall receptacle ,23 feet 12-2,1 plastic nail on box,1 duplex receptacle,1 plate cover,3 red wire nuts,staples,.75 man hours rough .25 man hours trim,ITEM #2 ------- .Then add in travel time for the total job.This worked out great.Keep in mind that the customer usually is better off on a T and M rather than a flat charge.If they need a flat charge then you must figure on high side for everything.Most remodels want a locked in price,if it was a fire job they will need a locked in price to deal with the insurance.The real hard part was it often had to be broken down to damage from fire and items required to bring house to code.Code often took a $100 repair to a $1500 service change

[apauling]

I don't have a contract up and running as i am not contracting anymore. it contained disclaimers and required info.

What is relevant to this aspect of this discussion is that my bid contained the scope of the work to code, to pass inspection. A reference to a specific set of plans, or to a complete listed description, with limitations for remodeling. It contained inclusions like being present for inspections. It contained the manner in which changes were to be agreed upon, either as set price or per hour+costs and %profit. And it contained a price for said work with a sentence like this... "I propose to do the above described work for the price of...."

This sentence was set apart from the others and was followed by a place for me to sign and date and for the owner or contractor to sign and date.

That type of contract is generally suitable for small projects, remodels, etc. But for McMansions and above you actually need a contract designed for you by your lawyer and insurance agent (lawyer last).

hope this helps. I never usually described materials unless it was time and materials. Some contractors just add 40 to 50 % on each, some use price guides with different guidelines for types of work. I thought that was a paperwork nightmare since I was doing the work as well. I said it cost this much, and if they wanted it broke down I assumed that they were going to argue about my time as well, and that my time would be spent better elsewhere. I would rather be poorer than feel pissed on just because i have to work. I didn't think it was their business to pick my bid apart.

If they needed a lower bid, I asked them to lower the amount of work. There were a few that I bid high to give a discount to, to make sure that job was ready, clean, completely framed and rough plumbed and the mechanical was roughed, AND I had the job to myself.

paul

[jfls41]

Good Info Paul, thanks alot...

[jfls41]

Good Info Paul, thanks alot...

[mro]

I had an experience in Vail, Colorado:
The G.C. (Builder) wanted a proposal to wire his million dollar house. He asked for the proposal to be itemized. (being a newby) I did what he asked.
1: service and permit_$xxxxxx
2: wire the house_____$xxxxxx
3: Something else, don't remember.$xxxxx

He picked my proposal apart to his liking and wanted me to ONLY do the service. Then he wanted to buy the materials and have me work hourly. He gave the house to another contractor. I told him find someone else. :D

[hbiss]

I stumbled onto another online forum called "electrical-contractor.net" and they have some discussion threads talking about Flat Rate vs Time and Materials and the benefit of flat rate pricing.

Not that I would want to discourage you here but why don't you go over there and ask? Most of us are members there also but that's where the thread started.

-Hal

[bigjohn67]

I see nothing wrong with him asking his question here and referencing the other forum.
What's the beef?

In a nut shell, Flat Rate is a dishonest way of doing business, it's nothing more than hiding overcharges from the customer. If Flate rate works so great the way some people say it does, why doesnt everyone use it. Because it does not work!

Best bet to help your company grow is to be honest from the time you ring the bell and introduce yourself.

Im not saying not give them an expected cost, but atleast be fair. A steady customer is better than no customes at all and a bad reputation is very hard to shake once word gets out because word of mouth business is your best advertisement.
And that is a fact.

[ March 09, 2005, 11:53 PM: Message edited by: bigjohn67 ]

[aline]

Flat rate doesn't work?
There is a electrical contractor in Atlanta, Georgia that started in 1996 and has grown almost 2,000 percent, served more than 40,000 customers, operates more than 25 service trucks and does 6 million in sales each year with a net profit between 15 and 20 percent.
His company appeared in Inc. magazines list of the 500 fastest growing companies. Apparently many of his customers do not feel they are being overcharged or ripped off.
Seems to me that flat rate pricing has worked quite well for him.
Is 15 to 20 percent net profit too much?
I don't think it is.

[hbiss]

I see nothing wrong with him asking his question here and referencing the other forum.
What's the beef?

No beef at all. Just that those were the guys who started the discussion and should be able to explain what they were talking about if you were to ask them. Like I said, most of us are over there too so ask away, it's the same bunch!

-Hal

[bigjohn67]

Aline

I have to disagree with you and well wishes to the company you are speaking of.
Flate Rate is just what I said it was- a gimmick
How can you justify what the book says to change a single pole switch. These are approx. to any market

Diag. fee $42.50 (ok I figured out the problem)
Perform Repair: $45.00 (now I have to change a sw)

Total repair: $87.00 It took only 30min min.

How about $45.00 now thats fair.

[aline]

I could do it for $45 dollars if they would bring their house to my shop. :)
I thought that $45 dollars was fair when I first started my business but quickly learned I was headed for the poor house.
What is your dollar per hour overhead?
Can you break this down so I can see where this $45 goes.
How much does the tech cost you?
Workman's comp?
Liability insurance?
Vehicle costs?
Owners salary?
Utilities?
Advertising?
Depreciation?
License fees?
Tech training?
Office personel?
Health Insurance?
Retirement Plan?
Etc.
$87 is a bargain to have someone drive out diagnose the problem and replace the switch.
Also I might add that if I wanted to I could make the price in my book $45 for this job.
There is nothing that dictates the prices in my book. I set the prices based on my overhead costs and my desired profit. I crunch the numbers and calculate my dollar per hour overhead then add the desired profit. Right now I'm shooting for around 10% net profit.
So out of the $87 the company would make a net profit of $8.70
What is wrong with that?

[ March 10, 2005, 07:48 PM: Message edited by: aline ]

[aline]

Here's an article about calculating your dollar per hour overhead.
http://www.pmmag.com/CDA/ArticleInformation/features/BNP__Features__Item/0,2379,4147,00.html

[willyj]

This is a subject which is close to my heart. We as electricians were given instruction in electrical and not business, just as lawyers and doctors wern't given business courses also.
This is only one of a very few sites where we get together and discuss pricing unlike plumbers who get together once a week and talk price.
I've been doing this for 30 years and have seen prices go all over the board.
You start out small have one truck and maybe a helper and have your wife work somewhere else to get health insurance to cover you and then you charge $45 an hour and then one thinks one is living high off the hog.
I run a business similar to the one in Atlanta and I use flat line pricing although we call it undercarridge pricing. If we went time and material we would have to charge over $200 an hour with all the insurance, vehicles, office staff and other overhead.
I recently called a plumber to my home for a clogged drain. He charged me $185 per hour and believe me I was happy to pay it and get that drain cleared.
Point is you charge what your situition dictates and some of us will stay small and others will grow but prices should be steady with others in your area

[charlie tuna]

t&m--flat rate--bid--not to exceed--cost plus--
the electrical trade has many little facits and nitches of different types of work. residential--custom residential--multi family--condominium high rise--thats just housing!!! and there is more!!! each of these is different and to which one you work in, you will have to be knowledgable in the billing process to remain in business. the relationship between you and your customer is a thing of trust --- any of the above methods can be used and will work. the whole idea is for the customer to pay a fair price for the job at hand. this price needs to cover all the costs to complete the job and also profit and overhead. two type contractors make this process rough on everybody! those who have too big an overhead and those that are crooks!!! before i went in business, i worked for a group of brothers who specialized in high rise condo buildings. many of the buildings were never bid! the developer would call them to pick up the plans and start the building---"send me the bill" they would say!!! they had a reputation! this reputation was earned by years of relationships with these developers!

there are many jobs that should not be "bid" or can't be "bid" properly because of unforseen possible problems. if all the "possible" problems are figured into the "bid" and these problems surface on the job and are answered, everybody is happy. customer gets the job done and the contractor makes a proper profit. but again, if the job goes along without any problems arising, the customer may think he got ripped off and the contractor walks away with a large profit! then you have the contractor who doesn't see the problems and as they surface he's asking for more and more money!!! i just retired, and was in business for over twenty five years. the last ten or so years i did "no"- "bid" type work. i had a few customers ask for a price not to exceed -- and i never took advantage of them. i took mike holt's recommendation to "shed" those custormers that were problems and/or "slow pay" --- sent them to my competitors and it worked like a charm!!! soon we had a group of customers who trusted our costs, appreciated our service and payed their bills on time! it is a pleasure to work under these conditions --- zero pressure!!!
when a customer tells you they never questioned or looked at the total cost on my bill ---just signed off on payment --because they knew they could call at any time and get their work done for a reasonable price and "on time" ---it means something! but it takes time! the sooner you gain their trust, the sooner you can enjoy being in business!

[willyj]

Charlie congratulations on your retirement. I for one love this too much to walk away.
Please explain to me how you do a job with "not to exceed". Do you get to a point and say I can't do any more and leave it unfinished or do you continue and go over the allotted price and eat the cost?

[charlie tuna]

a "not to exceed" price is one that i can see and know without questioned areas of labor and material prices to determine a price. usually, i come across these when they are really looking for a "ballpark price". example: a school begins some night classes and needs lights installed between the parking lot and the school for safety and security purposes. it will require six 400 watt metal halide fixtures mounted from the roof area and needs some kind of control. they want them operating in the next few days! i know all the material is locally available ---figure the fixtures at $500. each --- lamp-fixture and photo cell----a safe price. thats three grand. don't know where i'm gonna find power, but the worst case is from an electrical closet on an outside wall--one 277 volt circuit. two men - three days is more than enough! thats another three grand. basic materials---pipe(emt)-wire-bell boxes-etc. is about $200.00.. not to exceed price $6200.00.. did the job in two days -- found a few short cuts to get the power up on the roof --actual job cost to the school was $4600.00, this was my cost plus 23 per cent! they were satisfied with the job and the job cost, and i was happy with my profit--about $860.00..

you can never walk away from a job! there will be some you would like to run away from!!! you noticed-- i said there were no questionable areas concerning this job. if there was - i probibly would have suggested t&m in that case! if you give a "price not to exceed" you are committed to do the job without exceeding the "not to exceed" price! and i have given "not to exceed" prices that did not make much of a profit--thats business! i have also been involved in bid jobs that i have adjusted the price due to excessive profits! example: we installed a tenant metering system that the original bid price was $68,000.. during the job, i found out that the power company would sell me their existing C.T.'s at a price that they figured the would get for "scrap". they do not re-use them!!! this was about fifty per cent of the job costs! when the job was finished --- with maximum mark up on overhead and profit was $38,000.. i could have stuck it to them --- i don't do business that way! that customer continued using our services until i retired---millions of dollars worth of electrical work was generated by "trust"!

[willyj]

Charlie,
Sounds like you had a system that worked for you but the key word is "millions". You can't make millions charging labor out at $45 an hour.

We also have thousands of satisfied customers and use a totally different pricing system than yours.
Our main goal is customer satisfaction and quality with repeat business.
I am a young 50 and have people in place so when it's time for me to sit in the sun I am able to.
This is called business which too many electricians don't understand.
I'm sure GM, Sears,Home Depot, Microsoft all have high overhead and look at where thier at.

[charlie tuna]

willy,
at one time i had a labor rate at $45.00! today it is $60.00.. labor rate means nothing if you don't have work for your men --- if you read what i said is that one customer has directed millions of dollars in electrical work through my company and if you say "high overhead" means little--your in trouble. we could compete with any contractor in our area --we were union ---but ran a minimum overhead with good men. in twenty five or more years my men never had to miss any work!

[willyj]

Charlie,
I've read your posts and see that you have done well once again congratulations, but at $45 an hour you must of been paying your men close to minium wage. I have guys that make $30 an hour now and there is no way I could charge even $60 and make money.
High overhead or low overhead means mothing if you don't know how to run a business and my point has been electricians aren't taught how to be business men.
If you look in the code you won't find any sections on business.
I put the tools away 10 years ago and got in the office to run my business because I want to retire well off not relying on Social Security to suplement my income.
I know a fellow electrician who is a machine tool man who at 72 still has to work because he has always charge $42 an hour for his services. His wife is very ill and never having proper insurance because he couldn't afford it he now has to work to keep his family alive, again poor business managment.
Charlie my friend that is what it is all about. Some have the know how to make money others are happy to just scrape by with enough money at the end of the week to pay the rent buy food and a case of Buweiser.
Since I was a child I was told that you are in business to make money and retire comfortable.
We supply our guys with health insurance, dental insurance, uniforms, paid vacations, tickets to major sporting events, paid holidays, bonuses,and a retirement plan.We also pay for thier continuing education.
What did you offer your guys? I have guys that have been with us for years and plan to retire here and we aren't union.
We do residential and commerical service work, we don't bid, we won't bid.
So if you can tell me how to squeeze all that into $60 an hour I'm sure Bill Gates would like to talk to you.

[aline]

Willyj,

You're where I hope to be 10 years from now.
I'm in the process of changing my company name and plan on concentrating on residential service.
There doesn't seem to be to many in my area doing this. I did see a coupon for electrical serive for the first time in my local paper.
It looks like the company is a member of ESI.
They don't have a yellow page ad out yet.

[willyj]

Aline,
I have heard of ESI and believe they are a fine organisation after all the man that is running the program runs one the fastest growing electrical contracting company's in America. However with good business sence everyone can do the same, but it takes getting out of the field and into the office.
It won't take ten years, just some financal backing with a small business loan, some heavy yellow page and radio advertising and knowing what your bottom line is.
You will also need quality employees and residental service work is where it is at.
Of course there is a lot more to it but those are the basics

[hey_poolboy]

Hi guys,

This is a good discussion. I have read very good arguments on both sides of the flat-rate issue. Following is a link to the best and i think the first FRP guide. It is geared toward mainly HVAC and plumbing. They have recently added a pool and spa repair pricing guide.
Callahan Roach Flat-rate Pricing (http://www.callahan-roach.com/cap.asp)
Edit: (It incorporates a travel charge in the main price, the second tier is the primary repair, there are also additional columns for things like incidental repairs, and additional repairs which are billed at a lower labor rate since you are already on the site.)
I have used their method in the past and liked it very well. We used to tell the customer it was $50 for a diagnosis, but if they elected to have us perform the repair we counted it toward the repair cost.

I don't know where you guys get your overhead costs from, but even in the pool industry we couldn't have worked for the change you guys are talkin'. We were near $90/hour.
Take labor burden and add to that the insurance costs, phone, cell phones, advertising, vehicles, tools, rent, and all other expenses, then add in your intended profit margin, and unless you are a one-man show working out of a garage you just came up with a very big number.

[ March 12, 2005, 04:46 PM: Message edited by: hey_poolboy ]

[tryinghard]

Flat Rate simply summarized is: a value for product furnished and installed.
It works great and is as ethical as any other method of business.
The auto body industry was probably the one who started it; i.e. fender $300.00, this value is all you see and it includes product, pieces, and labor to install it.

Time and Material summarized is: you furnish and install first then bill your client for your time and material spent. Your service rendered to your client is your design, labor, and material.
Often you give a window price or a not to exceed before you are hired or pre-qualified. This method usually ends in dispute because your client does not truly understand what you must provide for a legal application. If you have staff installing they will always miss time and material actually provided this causes animosity within your own company. Time and material method requires much more overhead to manage the indifferences and disputes as well as track product and labor.

Lump sum method: value for scope of work described.
You simply give your client a price for a scope of work. If they hire you, you provide the work and get paid. You do not have to share any breakout values or costs.
The lump sum method is much safer for all parties involved than time and material.