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This service market is highly competitive, and to be profitable, the EC must reduce overhead by reducing its service cycle time—which includes streamlining customer quotations, billing and payment. Since most residential and light commercial service calls are small, the electrical contracting firm can lose money as a result of its back office processes even though the service technician responding to the call made money. One way to streamline quotations, improve billing and reduce receivables for residential and light commercial service work is to institute a flat-rate pricing system.
Residential and light commercial service work can be a very profitable market for the electrical contracting (EC) firm. However, to be successful, the EC needs to thoroughly understand how to make money performing this work. Residential and light commercial service work is very different than commercial, manufacturing and industrial service work. Therefore, the electrical contractor must not only have experienced service technicians but also have processes and procedures in place that maximize the service technician’s productivity and minimize the cost of each service call.
Electrical service work is usually priced on a time and material (T&M) basis. T&M pricing involves tracking the direct cost of performing the work and then adding a markup to cover overhead and profit. The EC firm’s bigger customers usually prefer T&M pricing, and the service jobs for these customers are usually large enough to absorb the additional overhead associated with T&M pricing. However, T&M is time-consuming and inefficient for smaller one-time service calls that are common in the residential and light commercial service market. Replacing T&M pricing with flat-rate is one way the EC can improve overall efficiency of the service process and make smaller service calls more price competitive and profitable.
Flat-rate pricing of service work is really just a variation of T&M pricing. Flat-rate pricing assigns predetermined prices to predefined service activities. These are based on a detailed analysis of the service activity and include all of the same costs in a T&M price. The difference with flat-rate pricing is the amount the customer will be charged for a particular service activity has been predetermined, eliminating the need to either develop a detailed quotation for the customer before the work starts or prepare a detailed invoice after the completion of the work.
Why residential and light commercial?
If the electrical contracting firm analyzes its past residential and light commercial service work, it will probably find that the service calls can be categorized and are often routine. This is very different than the service work done for its larger customers where there is a great deal of variation from customer to customer. In addition, the construction and layout of residential and light commercial buildings in a given service area are usually very similar, and the cost of performing the work varies but usually within a predictable range. As a result, the electrical contractor could develop a flat-rate pricing system based on its historical data that would allow it to quote work quickly, bill at the time it provides service and collect before leaving the customer’s site.
Flat-rate pricing advantages
First, residential and light commercial customers like flat-rate pricing. With flat-rate pricing, these customers know the cost of the service work before it starts. Flat-rate pricing reduces the customers’ concern about doing service work on a T&M basis where the final cost is unknown until the job is complete. To put it simply, the cost of the project has been predetermined, and the EC risks completing the work for the agreed price.
Using standard prices for performing predefined work eliminates the need for service personnel to complete detailed service reports at the end of a job that will become the basis for T&M billing. Service personnel are typically excellent technicians and troubleshooters, and they sometimes put off completing service reports. As a result, all of the time and material used in performing the service work may not be accurately recorded and accounted for, resulting in reduced revenue for the electrical contracting firm.
Quicker price quotations
Flat-rate pricing reduces the time and effort required to provide the customer with a firm price for performing the needed service. Neither the service manager nor a senior service technician have to make a trip to the customer’s location to give a price that may or may not win a job. Instead, anyone that is trained in the flat-rate pricing system and knows the right questions to ask can provide a customer a quote when they call in. If the customer wants to shop around, he or she has your firm’s price and the time in quoting the customer has been minimized. On the other hand, if the customer wants to proceed, the electrical contracting firm can schedule the service on the spot and even ask for a credit card number to lock in the service call.
At the end of the service call, the service technician can either provide an invoice to the customer and take check or credit card payment, or if the office has the customer’s credit card on file, the technician can notify the office that the job is complete. This eliminates the need for the service technician to prepare a T&M ticket, send it to the office, prepare an invoice, mail it to the customer and then wait for the customer to pay the invoice. The fee charged by a credit card company on each transaction should be much less than the interest and bad debt expense that the contractor may incur through the T&M billing process. Also, billing disputes should be eliminated because the customer has the opportunity to discuss and clear up any questions about the invoice directly with the service personnel.
Establishing a flat-rate pricing system
The first step in establishing an effective flat-rate pricing system is to select the activities that will be included. As discussed above, flat-rate pricing is most applicable to those more standard and routine activities. Once standard service activities have been identified, they need to be analyzed to determine the labor, material, tools and equipment, expendables, direct service overhead, and allocation of home office overhead that should be included in the activity’s standard cost. Profit should then be added to the activity’s standard cost to arrive at its flat-rate price.
Most service activities include both fixed and variable cost components. For example, unshielded twisted pair (UTP) horizontal cabling runs all involve labeling, termination at both ends of the run and other common activities; these represent a fixed cost per run. The length of the run represents a variable cost because it affects the amount of cable that needs to be installed. Therefore, the greater the accuracy of the flat rate for an activity, the greater the detail that needs to be considered in arriving at the price for the work.
Viva Las Vegas
Unlike T&M service pricing, the electrical contracting firm is not guaranteed a profit using a flat-rate pricing system. With a flat-rate pricing system, the electrical contracting firm needs to understand it will lose money on some service calls because its pricing is based on averages. It’s similar to how Las Vegas casinos do not win every bet. However, the flat-rate pricing structure must be such that, over the long run, it will make its required profit and return on investment. Creating a flat-rate pricing system is not a one-time undertaking, and you must establish an accounting system that can track and measure its success. To remain effective, the electrical contractor must continually monitor and update its flat-rate pricing system to ensure that it continues to be accurate and profitable. EC
This article is the result of a research project investigating the use of flat-rate pricing for service work that is being sponsored ELECTRI International (EI). The author would like to thank the foundation for its support.
GLAVINICH is an associate professor in the Department of Civil, Environmental and Architectural Engineering at The University of Kansas and is a frequent instructor for NECA’s Management Education Institute. He can be reached at 785.864.3435 or email@example.com.