A look at the pros and cons of flat-rate pricing and an example of what it looks like.
By Mike Price
When JKA Well Drilling & Pumps began fielding service calls and providing water treatment and other offerings in 2006, Pierce Kiltoff was at a crossroads.
The president of the company in Monroe, Washington, didn’t know how to price the new services, let alone how to estimate or sell it. About eight lean years followed and during that time he read about large-size plumbing and HVAC companies using flat-rate pricing.
“The thing that really spoke to me about flat rate was that time and material doesn’t reward me for being better at my job,” says the 40-year-old Kiltoff. “That’s kind of the two options: you’re flat rate or you’re time and material.
“To be clear, I always conflate flat rate with lump sum billing—effectively it’s the same thing, but they’ve taken it a bit further in the HVAC/plumbing business. To be lump sum billing for every task, you add up all the tasks, and there’s the price to do the work. The drilling contracts aren’t even really T and M. A drilling contract is a lump sum, plus per unit pricing contract—mobilization is flat, while footage is a per unit item, but there’s very little ‘time’ on the estimate.”
The water well industry traditionally bills customers by time and material based on how labor and materials fluctuate. However, outside of drilling due to all its variables and uncertainty on final depth and a few other tasks, nearly every quote by Kiltoff’s company in the Pacific Northwest is flat rate.
“My dad [James Kiltoff who started the company in 1989] always said you make money on your fifth well,” Kiltoff shares. “Every fifth well is going to be a real profit maker and the other four wells you might make a little here and there or you might lose your butt on one, but on average it’s every fifth well, and I never could understand that concept.
“He also always said, ‘You never know how much you can get until you ask,’ which has always been a guidepost for us in how we price our offerings.”
Kiltoff, whose company is in its second year of doing flat rate full-time but has been experimenting with it for about five to eight years, has maintained 20% profit margins over the last two years through the pandemic, supply chain issues, and rising inflation. He has done so with the aid of field service management software.
Here are the pros and cons of flat-rate pricing and an example of what it looks like.
Pros of Flat-Rate Pricing
1. Reward for Being Better
Prior to flat-rate pricing, Kiltoff noticed that he stopped making a profit as he continued to improve in the service and filtration part of the company in 2006. He went from installing a water softener in four hours for $4000 to two hours for about $3500.
“It didn’t take long to go, wait a second, I’m not going to put two water softeners in today,” he says. “I’m still only going to do what I’m going to do today, so I should be paid whatever the lump sum amount that I think I need to be paid to work on this project today regardless of if I’m really good at it or something went sideways, and it took me longer.
“Because more often than not, the older I get, the better I am at it. So that was really the incentive to try to get there [flat rate].”
Kiltoff elaborates that if one is billing by the hour and becomes more efficient as time goes on, the profit will decrease. Conversely, with flat-rate pricing, the profit increases as one becomes more efficient.
“Flat-rate pricing allows us to move away from a model of profit/annum analysis, or per fixed period of time, and look at the profit per job, per task, per install, etc.,” he says. “Rather than rewarding the customer with a better and better deal as you get more efficient, you provide all customers with a flat price that’s ‘fair,’ and you the operator get a reward from operating your business better and better by becoming more efficient.”
2. Eliminates Challenge of Estimating a Job and Gives Employees Freedom to Learn
Kiltoff says one of the more complicated lessons to teach an employee is how to estimate/bid a job. With flat-rate pricing, they can pull out the price for different components installed and are ready to go.
“We can pad our costs to allow for the younger, less experienced employees to have a bit more time to do the job,” he says. “Additionally, the customer isn’t breathing down their neck. They know they are paying X amount, not A rate × B hours for someone who may not know entirely what they are doing.
“The relief the techs feel from being able to freely learn the job is palpable, and they feel more empowered when we can let them go start to do work on their own earlier in the training process.”
3. Improves Employee Growth and Retention
Kiltoff believes both are better managed in a profitable enterprise.
“You can challenge your employees to learn new techniques and equipment with hands-on training by letting them work on the customers’ site to finish a final product, and the customer gets exactly what they agreed on,” he says, “just maybe not in the most efficient way possible, but that didn’t affect the customer as they get the product for the same flat price regardless of how efficient your employees are.
“It’s easier to retain an employee who is rewarded well for the work they do and isn’t worked into the ground to do their job. If you’re paid by the hour and the job is billed by the hour, do you have incentive to be more efficient and better at your job? What if you’re paid by the hour and the job is lump sum? What if you get paid by the hour plus a profit share and the job is lump sum versus by the hour? It doesn’t take long to see what makes the most sense from an employee’s perspective.”
4. Prevents Awkward Lost Money-Type Conversations with Employees
Associated with the previous one, Kiltoff says one of the top advantages is that he can send trainees and less qualified employees to a job with less concern for the loss associated with their time on the job, or any errors in estimating the time necessary to complete the work.
“I’ve found, in general, it’s easier to control our revenues from different employees—they all run the same estimating system after all—so there’s less, ‘Well, employee A estimated less hours than it would take employee B to do the work, so we lost money’ kind of conversations,” he says.
“If we flat-rate bid a job for six hours and the tech can do it in four usually, we’re money in the bank. If we send a trainee out and he does it in eight, but on the next does it in seven, and the next six, then we’re back to our full profit margin, and the tech has learned without the homeowner breathing down his neck because the homeowner isn’t paying by the hour.”
5. Improves Contractor’s Image and Gives Customers What They Expect
In Kiltoff’s mind, customers are generally accustomed to dealing with contractors who say, ‘Oh yeah, I’ll put that deck in for $5400.’
“Then we show up there as water well guys and go, ‘Well, you know, it might take us four hours, it might take us six hours, and here’s a list of a bunch of parts that you have no idea what they are. That’s what we think we’ll use. It could be about $8000, or it could be $12,000,’ and who knows what’s going to happen?” he says partly tongue-in-cheek.
“It doesn’t really inspire confidence, and so when you can see what you’re going to do and they can see what you’re going to do, you get a certain amount of rejection in your sales because they’re like, ‘Why are you giving me a T and M estimate for something that’s obviously a flat-rate thing?’”
Additionally, Kiltoff’s company has moved away from itemized bids.
“I’m not saying not to put the equipment in the bid so they can see what they are buying,” he says, “but they don’t need to know how much you charge for every little part and minute of time. Put it all down as you would normally, but only put $X at the bottom.
“Ultimately, the customer’s trying to solve a problem or meet a goal. Show them how you’re going to do it and what it costs or solve it right. I rarely hire the cheapest contractors for stuff at my home. I want to trust it’s going to be done right. I’m not going to have to futz with it or them, they’ll fix the problems, and they’ll be done in a reasonable timeframe. I hire contractors who I think understand all that.”
6. Contractors Already Do Lump Sum Pricing
Many water well contractors already do lump sum pricing on many tasks, and Kiltoff says the difference between lump sum and flat rate is subtle.
“The idea behind flat rate is that you pull off a menu of prices and can then say that the cost to do X is Y,” Kiltoff says. “If you’re in the habit of doing that, bidding atypical jobs as lump sum prices becomes standard practice, and the client is expecting it rather than T and M estimates.”
There are certain tasks like mobilization, installation of the well cap, installation of the drive shoe, etc. that Kiltoff does in the drilling business that are now flat rate where the company used to do some things by the hour or some things by the foot. His company has since lumped them all together.
“I think most people would say that they have a mobilization charge that constitutes a flat-rate charge,” he says. “It might cover one thing, or it might cover like for us five or six things that we just lumped up into one charge. But on the pump and filter side, it’s very rare anymore where we do anything by the hour.
“We also have a few pump/rehab operations that are difficult to flat rate, such as lengthy pumping tests or chemical rehab processes, but again, you can lump sum bid much of it and put an hourly clause in for anything beyond a certain number of hours.”
Cons of Flat-Rate Pricing
1. Difficult to Set Up
Kiltoff’s company spent years trying to figure out how to be properly set up to do flat rate. It’s only been in the last few years that he’s been satisfied with the field service management software to feel comfortable doing flat rate.
“It’s really the software being present. The software makes it easier,” he says.
Currently, Kiltoff is testing ServiceTitan’s Dynamic Pricing, which uses real-time calculations to figure out prices for customers, looking at the latest cost the company has entered for materials and adjusting prices on the fly accordingly. It adjusts pricing every time a purchase order is filed.
“In theory, our office could enter a PO [purchase order] and have the price change on a part, and within a minute of doing that, a field user could see the result of that being updated pricing for one to 100 different tasks in the price book,” says Kiltoff, who also has a pricing escalation clause in the company’s contract, but it has only been used once in 10 years.
2. Doing Math and Price Checking Are Necessary
At the most basic level, Kiltoff explains that accomplishing a flat-rate billing method requires calculating the hourly costs in the job in terms of equipment and labor, then add material costs and markup, then issue a flat-rate price to the customer for the sum of all those amounts.
“That’s a lot of math and price checking to do from the field, and it’s also complicated to implement and complicated to keep current,” he says. “I would suggest that in a market like we have today, it’s impossible if you’re not using software to have a price book or similar function for your technicians.
“The real challenge has been how do you deal with 2000, 3000, 4000 parts in your system that you’re only buying 200 of them on a regular basis, but once a year you’re going to quote something that takes that 3962nd part and oh, it turns out you haven’t got a price on that since January of last year. Now it’s 30 or 40 percent higher or double or triple.”
3. Can’t Flat Rate for Drilling
There are still some tasks that Kiltoff performs on a per unit basis, including drilling because of the uncertainty of the final depth of the well.
“But we decommission wells on a flat-rate basis,” he says. “For example, we’ll decommission hand-dug wells [typical 32-inch diameter] on a flat-rate basis for depth ranges. We’ve figured out we can use X materials for range zero to six, X+Y for depths six feet to 10 feet, and X+2Y for ranges 10 feet to 15 feet, etc.
“So, I can go out and measure the well and say it’ll be $4539 or whatever based on the depth range. We can flat rate in pressure tanks, filters, etc. Our pumps are sold by ‘depth ranges’—we sell a 10 gallon per minute, 1 horsepower pump with 100 feet of pipe and wire and downhole
accessories, installed, for every well between 80 feet and 100 feet. Does it really matter if the well is 95 feet or 85 feet? I’m using most, if not all, the same stuff and the time involved is pretty consistent.”
4. Time and Money Spent Managing Software
Kiltoff spends money monthly for the subscription to ServiceTitan and has since spent considerable time managing it, not to mention the data entry work he did on the back end to create the flat-rate system.
“I think there’s an axiom in the software industry that says for every 40 hours saved by technology, they create at least an hour of work maintaining the software/IT. It’s definitely not a set-it-and-forget-it type thing,” he says.
“We’re also trying to standardize and create process for things as much as possible—standard operating procedures.”
Kiltoff says Microsoft Excel and other low-budget methods can be used for flat rate, but they do require a whole other level of maintenance.
“QuickBooks can do it too with ‘Group Items’ and the like. I’ve heard good things about FieldEdge. Both of these solutions, ServiceTitan and FieldEdge, are really for larger companies—five to 10 people and bigger. I would suggest ServiceTitan is better at 20 to 25 people or larger
companies. We’re finding we’re too small of a company to be able to use it effectively because it’s so vast and complicated to work. We’re just not able to run it at 100 percent of effectiveness.”
5. Must Think of Everything
Kiltoff says his company’s purchase orders to vendors update the prices in the software while he’s looking at the calculated labor rates about once a month to ensure it’s still a good enough rate.
“Then we throw on extra surcharges, just percentages of the job, on top like a cover your butt for warranty and ‘Hey, we forgot this or that,’” he says. “That’s the problem with flat rate is that you have to try to think of everything—all the parts you’re going to use, and not every job is the same.”
6. Getting Outbid for Jobs
To account for every variable, Kiltoff’s bids may include excessive parts due to not knowing what will be needed. This can lead to his bids being higher than others and thus being outbid for jobs.
“That’s the downside to it, it’s geared to making more profit than higher volumes,” he says. “But if you want to know what the charge is for a storage tank install, you take an iPad and you look up storage tank and there’s the charge. It’s up to date because I just bought float switches
and float valves last week and those prices haven’t moved, and you don’t have to think too hard. Makes it easier to quote the work and we’re running at great profit margins.
“I see it as a tradeoff. I can do the job easier and at higher profit but not as many of them.
“We’re probably in the top 10 percent of the market pricewise, and I don’t really care because the phone rings enough that we’re constantly busy, which I think every decent water well contractor is in that same boat. If I’m constantly busy and get 20 to 30 percent more than everybody else, I have to work that much less. It’s kind of a self-feeding thing.”
A sidenote on bidding on work that one hasn’t done before, Kiltoff recommends not bidding low to get it, but rather bid high until it’s accepted. “Now you have enough money so you can learn how to do it and the next one you can bid it less,” he says. “That’s a foreign concept for a lot of people.”
Flat-Rate Pricing Example
For someone interested in switching to billing flat rate, Kiltoff says establishing a cost for doing business on a daily and hourly rate is necessary: How much does it cost you to do business every hour or day your business is operating (regardless of whether you’re on a jobsite or not)? Typically, this requires that the business owner at least know their accounting system and job costs. They need to track hours for themselves and their employees, their inventory, etc.
“For a simplified example, if I know it cost us $1 million last year to operate, less cost of goods sold, just expenses, and we had 20,000-man hours, I know it costs me roughly $50 per man-hour to operate, or about $446 per business-hour, assuming that the company is open 280 days a year from 8 a.m. to 4 p.m.,” he says.
“If I buy a pump and all the fittings for $750, and it takes me an hour to sell the job and do the paperwork, two hours or less to get to and from most of my jobsites, two hours to do the work, and an hour to clean up the mess from the work in the shop/truck, I’m six hours into this job. I know I need to cover the depreciation of my equipment, replacement on the equipment, and my annual expenses of $1 million.
Now, we also have equipment expenses—service vans, hoists, drill rigs, etc. You need to factor in the operating costs, the depreciation loss, and the replacement costs, and put that into terms of costs per hour. Operating costs are handled as an expense, so we’ve
covered that. Depreciation costs is the loss in the equipment from us owning it—meaning what it costs us to own the equipment over its useful life, or the purchase price minus the sales price when we dispose of it.
For example, if we buy a pump hoist at $150,000 and sell it 10 years later at $25,000, it cost us $12,500 per year in depreciation to own that vehicle. I think when a lot of people look at depreciation, they are thinking about the tax losses, but that’s not what we’re
talking about here. So, $12,500 divided by the business operating hours of 280 days a year for 8 hours a day, we’re at $5.60 per hour to just own the truck.
Now, we also need to replace it, so we must factor in the dreaded ‘I’ word—inflation—and calculate our replacement costs in, say, 10 years. If we assume 4% inflation for 10 years, we’re at $222,000 to replace that truck. Take the sales price of our old truck out of that,
and we must front $197,000 to buy the next one, which shows us we need to have $8.80 dollars per hour saved to buy the next truck in 10 years. So, our actual budgeted ‘cost’ of ownership is $14.40 per business operating hour (ownership costs + budgeted replacement
costs). [If you finance the truck, you’ll need to factor in finance fees and interest, then the payment for the current truck would come out of this budget, and you’d have enough money set aside at 10 years to pay cash for the next one.]
So, $446 an hour in expenses plus $14.40 in truck ‘ownership costs,’ times six hours = $2762.40, times 120% for warranty and a reasonable profit margin = $3314.88 to install that pump. I can then take and use that as my flat-rate price moving forward. If we can get the job done close to that period of time, we’re making money. If we can do it in less time, we make even more money, paying us to be quick and efficient.
I shoot for 20% margins because I want to be able to invest in equipment and also earn a return as a business owner. I want my investment in the business to pay back and I want to be able to move the business forward by updating equipment, etc. The only way to
do that is with enough profit and budgeting to allow for the business to support it.
There are multiple ways to do the above calculations to take other factors into account. Tracking the data is paramount to doing this correctly.
For example, we track every warranty invoice as if it were a regular job and write it off into separate categories depending on what got warrantied—the motor was bad, or the fittings failed, or it was installation error, etc. We’ve figured out after a few years that costs us roughly 6% to 8% of our revenue, which is a lot! It’s not really an out-of-pocket cost of that amount, but if you interpret that number as lost revenue and lost time, it is really a drain on your company. So, we factor in about 6% to our flat-rate pricing system for ‘warranty’ and if we can work that number lower, it’s gravy in the bank.”
When Unsure How to Price a Job, Kiltoff Often Switches to Hourly to Simplify
“If you take all your annual expenses, divided by the number of total payroll hours, you’ll get a cost per payroll hour. Now, the reality is that you have to figure out how to pay that rate in less hours because you’re going to be lucky if your billing hours are at best 60% of this number.
Assuming someone uses QuickBooks and they are accurate:
Open QuickBooks, open a profit and loss for the last fiscal year to date, get your Total Expenses from the bottom of that report.
Open a Sales by Item summary report and find the labor items, add up total labor hours sold, go to the cash flow report and get Net Cash Provided by Investing Activities (convert to positive number), then divide total expenses and investments by the labor-hours number (expenses + investments ÷ hours), you get operating costs per billable hour. Multiply this number by 120% or whatever your desired profit margin is.”
Kiltoff says the trick is making sure the above data reflects reality.
“If your drilling numbers get mixed in, it can skew things,” he says. “We use classes in QuickBooks to track the different divisions of the business. If you’re a pump company and not billing out the above calculated rate per hour per employee on a jobsite, you’re losing money, I guarantee it.
“When we did the above math, we came up with a number three times the market rate for labor. That’s not sustainable when you charge T and M. But when you can look at the job, figure out how many operating hours it’ll likely take, including driving, shop time, etc.
“Add that up and multiply it by your above rate, then tell the customer that the installation will cost $X dollars plus parts, you’ll be surprised at how little pushback you get, and how much better your bottom line looks.
“That rate also would include any markup you have on parts. It’s your total profit margin and overhead over your labor rate.”
Kiltoff acknowledges that it’s easy to come off sounding greedy when discussing flat rate, profit, etc.
“The flat-rate model of pricing to customers is just a different way of selling a project to a customer,” he says. “If they get the same end result and are happy with the project at the end and the company produces a profit, everyone leaves happy. Ultimately, the goal of any business is to turn a profit, and metrics have to be used to objectively see how your business is doing.”
Kiltoff has spent considerable time studying his numbers over the years on such items as how many pumps and wells were sold, man-hours per well, etc.
“What I’ve found after 20 years is the best numbers to look at aren’t any different than any other business,” he says. “It’s profit per period (profit at end of year, year to date, etc.) and profit per job, gross margin, etc.
“All the ratios and measures used to analyze big business can be used to analyze the pump and well business just as well. The real trick, like evaluating any business, is to figure out what the numbers mean and how they can be measured and used to improve.”
Mike Price is the senior editor of Water Well Journal. In addition to his WWJ responsibilities, Price contributes to the Association’s scientific publications. He can be reached at email@example.com, or at (800) 551-7379, ext. 1541.