Published In January 2002
The service cycle starts with the initital customer contact and ends with the electrical contracting firm being paid for the service provided. Shortening the service cycle has advantages for both the customer and the contractor. From the customer’s perspective, shortening the service cycle means that needed service work is completed quicker, resulting in easier scheduling of service work, reduced downtime, and less disruption of work processes. From the contractor’s perspective, it means simplifying the service process, which should result in more productive use of service resources, reduced overhead and nonbillable time, and increased profit. Implementing a flat-rate pricing system for service work can streamline the quotation and payment processes, which will reduce the service cycle time. This article will define flat-rate pricing, discuss its advantages, and describe how to implement it for electrical service work. What is flat-rate pricing? Service work can be priced in various ways, ranging from a comprehensive service contract to a detailed time and material (T&M) pricing method. The latter involves either estimating or tracking the direct cost of performing the work and then adding a markup to cover overhead and profit. T&M pricing, which electrical contracting firms commonly use for service work, can be very time-consuming and inefficient. Replacing T&M pricing with flat-rate pricing is one way to improve the overall efficiency of the contractor’s service process. T&M pricing can take a number of forms. The customer can be given a quotation before the work begins based on a detailed estimate of the direct cost of labor, material, equipment, and expendables, plus a markup to cover overhead and profit. This amount is then used as the basis for the service agreement, which can be a T&M budget, a maximum amount not to be exceeded, or a lump sum for performing the work. Upon completion, the customer is billed for the work performed in accordance with the terms and conditions of the service agreement. Flat-rate pricing is really just a variation of T&M pricing. It assigns predetermined prices to predefined service activities. These predefined prices are based on a detailed analysis of the service activity and include all of the same costs that are included in a T&M price. The difference is that with flat-rate pricing, the amount that the customer will be charged for a particular service activity has been predetermined. This eliminates the need to either develop a detailed quotation for the customer before the work starts or to prepare a detailed invoice after completion. Using a flat-rate pricing system will improve the efficiency of a company’s service cycle. Flat-rate pricing’s advantages to the electrical contractor Flat-rate pricing’s benefits include the following: • Increased customer satisfaction • Greater dispatch flexibility • Improved invoice accuracy • Quicker price quotations • Reduced billing cycle Increased customer satisfaction. With flat-rate pricing, the customer knows the exact 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 work is completed. With flat-rate pricing, customers don’t have to worry about service personnel’s familiarity with the customer’s facility or system. The company runs the risk of incurring costs for completing the work that exceed the agreed-upon price. Greater dispatch flexibility. With flat-rate pricing, the customer is not focused on the time service personnel spend in their facility. Customers do not rate their service experience based on the perceived productivity of the service personnel. Therefore, if those that normally service a customer are not available, other equally qualified service personnel can be dispatched without arousing the concern of the customer about service cost. Improved invoice accuracy. Using standard prices 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 highly skilled technicians and troubleshooters. The last thing they want to be is cost accountants. They sometimes see completing service reports as a secondary priority, so they put off this task. Consequently, all of the time and material used in performing the service work may not be accurately recorded, resulting in reduced revenue. Quicker price quotations. Using flat-rate pricing reduces the time and effort required to provide the customer with a firm price. If the customer needs a price for performing service work before he or she can authorize service personnel to proceed, flat-rate pricing allows the contractor to provide quick, accurate pricing information. The quicker the customer knows the price, the quicker a decision can be made to proceed with the work. Reduced billing cycle. Flat-rate pricing can improve cash flow and reduce both the amount and age of accounts receivables. It enables service personnel to prepare the customer’s invoice immediately after completing the work and then give it to him or her before leaving the facility. This reduces the time required for the home office to prepare an invoice, mail it to the customer, get his or her approval, then forward it to the customer accounts payable group where it may sit until the check is cut and mailed out. If the customer has the authority to pay with a check or credit card, payment can be made to service personnel before they leave the customer’s facility. Also, billing disputes should be eliminated, because the customer has the opportunity to discuss the invoice directly with the service personnel and clear up any questions on the spot. 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. Such pricing is most applicable to scheduled and programmed service activities, but not to demand service. Scheduled and programmed service activities are more standard and routine, and are typically planned in advance, such as moves, adds, and changes to an existing structured cabling installation. Programmed service includes either pre-scheduled or trigger-point service, such as fire alarm testing. Demand service, conversely, is usually performed in response to a customer’s immediate needs when a critical piece of equipment or system fails. Demand service is less defined in terms of work scope and typically should be provided on a T&M basis. 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 termination at both ends of the run, labeling, and other common activities that represent a fixed cost per run. The length of the run represents a variable cost, because it affects the amount of cable and cable support system that needs to be installed. Therefore, the greater the accuracy of the flat rate for an activity, the greater the detail that must be considered in arriving at its price. To be effective and reap the benefits of flat-rate pricing, the company must balance the accuracy of the flat-rate price for a particular job against the benefits of a simpler and more generic pricing system. Achieving this balance is the art of establishing an effective flat-rate pricing system. Adopting flat-rate pricing for scheduled and programmed service activities can benefit both the customer and the electrical contracting firm. Establishing an effective flat-rate pricing system can improve the efficiency of the latter’s service process both in the field and in the office. However, establishing this system is not a one-time undertaking. To remain effective, the process must be continually monitored and updated to ensure accuracy and efficiency. Acknowledgement This article is the result of ongoing research into the development of service contracting business by electrical contracting firms sponsored by the Electrical Contracting Foundation, Inc. The author would like to thank the foundation for its continuing support. GLAVINICH is an associate professor in the Department of Civil, Environmental & Architectural Engineering at The University of Kansas. He can be reached at (785) 864-3435 or email@example.com.