06-07-2022 07:55 AM - last edited on 05-10-2023 12:43 AM by LBabayan
We are switching from a time/material model to the flat rate model, but I'm struggling with how to calculate the pricing for flat rate. I don't have any experience with flat rate, and we purchased the ST Pricebook Pro; however, I'm struggling with how to calculate the material markup and determining an appropriate labor rate.
I know these things are calculated by determining our labor burden or other types of calculations, but I don't know what equation to use to get these numbers.
Does anyone have any advice on switching pricing models and ensuring we are calculating the right markups/labor costs? I can get the numbers, but I need to know what numbers to get. Thanks!
06-07-2022 12:06 PM
Flat rate is the way to go , as long as you calculate it properly , first figure out what your billable hour is (all overhead and travel expenses must be figured in) then multiply that by your average job time , add your material cost and last add your profit percentage . Figuring out your billable hour will be the most tedious task due to all of the costs and factors that have to be accounted for
06-07-2022 09:16 AM
Hey Jake! Not sure if you've seen this information in our contractor playbook, but it might be helpful as you're getting into the process of moving to flat rate: https://www.servicetitan.com/field-service-management/pricing-for-profit
06-07-2022 09:15 AM
First, you are correct that your starting point has to be the cost of providing the service. This isn't easy, and you may want to consider using some of your accountant's time to assist, but here goes. From a Service Titan perspective, there are 4 elements of cost that you must consider. These include materials, purchase orders, equipment, and labor burden. The first 3 are relatively easy. Materials, equipment, and stuff bought on purchase orders should all be based on what you would pay to buy those things now, not what you paid in the past. Review similar jobs for the items you intend to flat rate price and develop a list of the items needed for the work and then determine the current costs, (including freight, sales tax, and any other costs) for those items. Once you have that information, you can work to get the labor burden. Note that I said burden, not labor cost. Too many people, including some from Service Titan, think that those are the same thing. They aren't. Labor burden has to include everything associated with the cost of employees. That means your share of FICA and Medicare tax, Workmen's Comp, health insurance, 401K, etc. etc., etc. Once you have the total cost for all of those things for each employee, you can calculate the burden rate for that employee by dividing total cost by average work hours. The last time that I saw this reported, these additional costs averaged between 25% and 50% of the employee's hourly rate, so ignoring them will have you badly underpriced. Then you have to figure the average time spend on the task you are to flat price and multiply that time by the burden rate to get labor burden. Total cost is the sum of all 4 elements. Then set you price to achieve the margin you want on that cost. Simple, right?