Flat-Rate vs Hourly Rate: Differences & Comparison

What Is Flat-Rate Billing?

Flat rate is a billing method that involves charging a fixed price for a job upfront, after factoring in direct costs for parts and labor and the indirect costs of overhead expenses.

The price doesn’t change for this billing method, even if the task costs more and takes up more work hours than anticipated.

Therefore, a flat-rate pay system is best for short-term jobs with well-defined scopes.

Let’s see what the experts say about charging flat fees for your services.

Example of Flat-Rate Pricing

An example of a plumbing flat rate for installing a new toilet might include setting specific prices for:

• The new toilet

• Hours spent on the job

• Permit fees (if necessary)

• Commissions

• Per billable hour overhead costs

• Profit as a percentage of the final selling price

• Labor (hourly rate) 

  • What is a fair hourly rate for a plumber? According to Home Guide, the cost of a plumber ranges from $500 to $800 for large repairs and $75 to $250 for small jobs. 

With all these variables accounted for, the flat-rate price you quote for installing a new toilet might range from $500 to $700. 

If a customer complains about the price, simply explain the value of installing a new plumbing fixture that is likely to last for 15 to 20 years.

However, to minimize customer complaints about pricing, you can consider offering service tiers that accommodate different budgets.

ServiceTitan’s Pricebook allows you to create elegant, good-better-best service tiers with images, descriptions, and price points. This allows customers to pick a price point that suits their budget without trying to negotiate.

It also displays regional averages for the materials a job needs so techs can attach accurate flat-rate prices to service tiers. This ensures your business remains profitable.

Expert opinion:

Kathy Nielsen, a business development consultant and operations expert, notes that a professional pricebook helps techs provide better value to customers and improves a company’s bottom line. 

“Your pricebook is the foundation for everything you do in your company,” Nielsen says. “Your pricing guide drives your tech efficiency, profitability, reporting, truck replenishment, and inventory.”

What is Hourly Rate billing?

Hourly rate (hourly pricing) involves charging customers for the hours needed to complete the job.

To get started with this billing system, you have to estimate the hours it will take to complete the job and multiply that number by your hourly fee.

Hourly billing works great for small business owners lacking experience in the trades. 

But it may not serve an experienced, self-employed home service professional who, due to years of honing their craft, has learned to condense a three-hour job into one hour.

Example of hourly rate

Imagine an HVAC contractor charging $100 per hour and a minimum service-call fee of $150. 

Based on the amount of work, the HVAC contractor predicts the job will take three hours.

This means the customer pays $150 for the first hour and $100 for the remaining two hours. So, in total, the client will pay…

$150 + $100 + $100 = $350.

Flat Rate vs. Hourly: Pros and Cons

As previously mentioned, flat-rate and hourly pricing have advantages and disadvantages.

Let’s go deeper into each one, starting with…

Pros of flat-rate pricing

Flat-rate pricing benefits both the customer and the home service company.

Flat-rate pricing pros for the customer

• It answers the customer’s main question: How much will it cost?

• It closes the door on price concerns since they know the fixed cost in advance.

• It reduces the need for customers to closely monitor the tech’s progress since the tech doesn’t receive a penny extra for exceeding the hours they predicted the job would take.

• It eliminates repair-bill surprises, even if a tech needs more time to complete the work.

• It’s easy for customers to understand and for your techs to sell.

Flat-rate pricing pros for the contractor

• It rewards high performance and above-average productivity, allowing your company to book more jobs per week and earn more revenue. Time savings = more profits.

• It allows you to price your services based on the value you give the customer rather than the scope of work.

• It eliminates the problem of unapplied labor (underperforming techs).

• It lets you focus on delivering the agreed-upon service without the hassle of explaining or negotiating hourly rates.

• It shortens the billing cycle, allowing customers to prepay the fixed cost or pay the tech on-site for completed work.

• It eliminates the stress of investing in time-tracking software to keep detailed accounts of a tech's time on a job.

Cons of flat-rate pricing

Charging a flat rate or set price has pitfalls for both your company and the customer.

Flat-rate pricing cons for the customer

• Flat-rate fees rarely come with detailed breakdowns of how the company arrived at the cost. So, customers may think there are some extra charges they are unaware of or that you’re upselling them on a service without their knowledge.

• It doesn’t allow customers to haggle over the price.

• The service may seem overpriced, especially if the customer doesn’t understand the value your company brings to the job.

• Flat-rate work may pressure the techs to cut corners excessively to complete more jobs in a day and increase their daily rate. Clients may feel like your techs rushed the job (which is sometimes true).

Flat-rate pricing cons for the contractor

• You can’t charge more if the job takes longer than predicted. This means you may end up earning less than your regular hourly rate.

• Clients may insist on hourly invoicing or want to haggle over your flat-rate pricing.

• Flat rates are approximate. So you may get locked into a certain price even though the job was more complicated than you initially thought. 

• With the emphasis on performance, slower techs may struggle to earn, leading to low morale.

• Slow periods, especially for HVAC techs, may require creative job reallocations to meet performance goals.

Pros of the hourly rate

You have as much to benefit from an hourly rate pay system as your customer—just like with flat-rate pricing.

Hourly rate pros for the customer

• Customers understand hourly rates or T&M (time and materials) pricing. So, they use it as a baseline to compare prices from different service providers.

• Some customers appreciate an itemized list of everything included in their home repair bill.

• Per-hour billing tends to work better for clients with long-term projects rather than short, sporadic jobs.

Hourly rate pros for the contractor

• It allows you to track the exact number of hours a job will take and invoice the customer upon completion or at certain phases on big projects.

• With hourly rates, you charge more as variables like material and labor costs increase. You can also charge extra for overtime.

• Your techs, CSRs, and other employees know their hourly wages and how many hours they need to work each week to reach a particular pay level. This keeps employees productive.

Cons of the hourly rate

Hourly rate has its baggage, too. 

Hourly rate cons for the customer

• Customers may feel compelled to stand watch over your techs to ensure they’re not wasting time to reach a certain number of hours.

• Techs who don’t perform at a high level may cost customers more money for less work.

• Unexpected changes and other variables may significantly increase the project's cost.

• Customers prefer predictability rather than uncertainty of the outcome. 

Hourly rate cons for the contractor

• Charging by the hour requires detailed bookkeeping and time tracking. Many contractors are too busy to do this regularly and accurately.

• Billing hourly provides no incentive for your techs to perform quickly and efficiently. This means your company may lose out on new revenue.

• T&M pricing limits your profitability, but pricing focused on production boosts your revenue potential.

• As time passes, you may frequently have to remind techs to invoice customers correctly.

Hybrid Rate Pay

Hybrid rate pay involves using both a flat and an hourly rate to bill a customer based on the peculiarities of the job at hand.

For example, you could charge a flat rate for installing a faucet since you can predict precisely how long it will take, having done it many times. 

The labor costs, the price for materials, and a small markup are all baked into the fixed rate.

But you’ll have to charge an hourly rate for repairing a damaged main water line, which can take days to fix and may involve unforeseen complications.

The key benefits of using hybrid-rate pricing are:

• A hybrid rate supports flexibility, allowing you to tailor your billing method to match each job's scope of work and requirements.

• Hybrid billing ensures you're always making a profit since you can adapt your billing method to each job's complexity.

Pro tip!

Snap up pre-built estimate templates techs can use to present service costs to customers.

Now Over to You

From all we’ve covered above, it doesn’t make sense to use just one billing method, regardless of the job’s complexity or the amount of time it will take.

So, tailor your billing method to the job. This way, you’ll be able to meet customer expectations and continue to operate profitably.

Remember, you can always use ServiceTitan to automate your billing process and increase employee productivity.

And if you need to dig deeper into billing structures for home service businesses, these resources may help:

• Labor rate calculator (for calculating direct labor costs)

• 4 Steps to Help You Stop Guessing and Start Pricing With Confidence

Try out ServiceTitan to bill customers with confidence!

ServiceTitan is a comprehensive tool for companies in the trades to streamline their business processes, boost employee productivity, and increase profitability. Over 10,000 contractors across the United States use it.