Retaining your technicians, keeping your customers happy, and making more money; these are the cornerstones of your business. Flat rate labour payments don’t adapt as well for construction work nor major retrofit projects. However, it is an ideal setup for service and smaller retrofit-type work. This begs the question, which works best for your business? Flat rate? Hourly? A combination of both?
Contractors have the choice in deciding to bill their customers based on an hourly rate, on a flat rate, or a combination of both. Independently, they could also decide how to remunerate their employees — this is the money paid for work.
Many HVAC and plumbing contractors use flat-rate billing for their customers. This has been particularly successful in Ontario and less so in the rest of Canada. There are many advantages to flat rate; billing can be done faster and with greater accuracy, and the customer knows upfront what a repair will cost. There are several recognized flat rate programs that are used in Canada.
Does a flat or hourly rate work best for your employees? Should you consider menu pricing? Let’s explore the pros and cons of each.
Higher levels of productivity
Hourly rates are calculated in a fairly familiarized fashion, therefore there isn’t much need to go into how it is calculated. Let’s review how flat rate works. Flat rate pay is payment based on each job that’s completed.
An employer estimates the amount of time a job should take and predetermines the amount for those jobs based on the expected time. When contractors use flat-rate pricing for their customers, they know what the labour allowance is. That makes it simpler to calculate the time allowances for the employees. Without using flat rate for sales, it is very difficult to use flat rate for paying employees. Travel time and diagnostic time need to be added to the flat rate for the employee. As this is a normal price for the customer, it is a straightforward process to allow the equivalent time for the employee.
There are advantages and disadvantages to both hourly paid and flat rate. It is important to be aware of these and ensure your employees endorse whichever method you use. Unless employees buy in to the process, it will be difficult to implement the changes. Flat rate suits motivated and productive employees. At least one study has shown that employees can earn up to 25 per cent extra remuneration. They can take on more work and the company will also benefit from the increased productivity as the employee is motivated to beat the targeted time allowed.
It is also important for the technician to be good at diagnostics as once the problem is diagnosed, the company is on a fixed charge and, likewise, the employee. Marginal employees will likely leave, and motivated employees will likely apply for the positions, thus enhancing your workforce and productivity to even greater levels. With the shortage of mechanics, doing more with less and hiring motivated technicians is very attractive. Non-productive time would be expected to reduce significantly.
It’s complicated
There are disadvantages to flat rate and these need to be acknowledged and addressed.
If employees work overtime there needs to be an adjustment to the labour factor, however as companies tend to charge customers more for overtime work, this can be handled by sharing the extra revenue with the employee. However, if the employee works more than 40 hours, you need to ensure you follow provincial labour laws.
A major concern regarding flat rate is the risk of the employee rushing the work and causing warranty issues. Generally, warranty work must be undertaken by the technician without remuneration if the failure is deemed to be their fault. If it is a parts failure, then they should be reimbursed. The biggest advantage to hourly rate is that it is predictable. Many people like to know exactly what they are going to get with each payroll. There is less risk than using flat rate. The biggest disadvantage to hourly pay is that motivated and unmotivated technicians receive the same remuneration. Therefore, why would one technician work more effectively than another? We want to attract the best technicians and keep them motivated. Hourly pay does not support that without adding incentives.
Hybrid systems
Let’s look at a hybrid system that a company can adopt with the least level of disruption. A simple example would be where the company has a service contract for a rooftop system. The service rate would not include replacing parts such as motors, belts, etc. When the customer signs the service contract, they should be given a menu of pricing to cover normal items that are likely to need replacing during the lifecycle of the system.
This avoids having to quote for repairs and discourages the customer from seeking alternative pricing. Likewise, on a call-out, a contractor can have fixed pricing for changing faucets, replacing toilets, cisterns, thermocouples, fans, and motors. These prices can be established in advance and make it simpler to carry out the repairs so that the customer knows in advance what they are paying.
So, if you are not ready for a flat rate program you could try menu pricing for both the employee and the customer. This could be a win all around, the customer knows in advance their cost, the employee has an opportunity to make extra money, and the company makes extra money with higher margins. By not having to spend time quoting the work and explaining the charge to the customer, the employee will likely do more work. Other advantages include making it simpler and faster for invoicing and improving cash flow. Sooner invoiced, sooner paid.
Talk to your team and customers to get a better feel for what the best approach is for your business. COVID-19 has shown us we need to change the way we do business. The previous two articles written for Plumbing & HVAC magazine certainly underscore the need for reviewing how companies reward employees, retain customers and make more money.