Charging the right rate is vital, especially when you're just starting out. You might find yourself wondering how much to charge or scouring the internet for advice.
Set your rates too high? You risk missing out on future work.
Too low? You could end up losing profit.
So how do you do it? There are two charging options: flat rate and hourly rate.
Let’s say you need to install an appliance in someone's home. With your previous experience, you know it should cost around $200 to complete the job but then you need to install 4 more after that. You can then offer an additional price of $125 per appliance. This is a flat rate.
However, if it’s your first time offering a particular piece of equipment and you don’t know how many hours it will take to install or it’s a new project that could last multiple days, an hourly rate might make more sense.
Let’s check out the pros and cons of the two and which would be better for your business.
What is a flat rate vs what is an hourly rate?
As mentioned earlier, a flat rate is a single fee that covers the entire job, regardless of how long it takes to complete. For example, if you know a job will cost $300, you present that price to the client. They can choose to accept or decline. If they agree, you'll complete the work for that amount, no matter how much time it takes.
In contrast, an hourly rate is a fixed price charged per hour of work, with the final invoice determined once the job is finished. This approach, often referred to as the "quoting" model, is based on the actual hours worked by the tradesperson.
You can also combine these two rates into a hybrid approach, where you might offer a flat rate pay for a project with a specific time limit or charge an hourly rate for repairs that may take weeks.
While most home service businesses and customers favour flat rates for their simplicity, this model isn’t suitable for every type of job.
Pros and cons of an hourly rate
Let’s lay out why a tradie may or may not pick an hourly rate for their small and large-scale projects. To figure out how much to charge an hour, it’s helpful to research what the industry standards are.
Pros of an hourly rate
- Get paid overtime: Get paid your set rate for every hour spent on a project. If unexpected challenges arise and a project takes longer than planned, you can simply add the extra hours to your invoice and be compensated for the time it took to complete the additional work.
- Flexible hour adjustments: You’re working on a 3-hour project, but after starting it, you realise you actually need to adjust it to a 5-hour project. With an hourly rate, there is flexibility to make room for change by just adding extra hours into the project time, without losing money.
- Get the full amount: If you finish work in 30 minutes, but you get paid an hour, you still get paid for the full hour.
Cons of an hourly rate
- More loss for the client: While this hourly rate approach benefits a tradie if they need extra hours to complete a project, clients don’t benefit in the same way because they’re paying more for a project to drag on and there’s no price certainty. They may not be so thrilled to see costs increase as the project still goes on.
- A potential lack in transparency: A client wants to know exactly how much something is going to cost - down to the final cent. So if the hours of a project aren’t clear, they will instead price shop and potentially pick someone else, leaving you out of business.
- More complaints: Clients want to see their money being used well. If you’re charging by the hour, clients may watch over you working more closely and confirm everyone is getting their tasks done in a timely manner. If not, clients may complain and ask why it’s taking too long.
- Unknown ROI: When a tradie is first starting out, they may be unaware of how much they need to charge per hour in order to see a return on their investment. Some of this can be alleviated through research, but often it’s best learned through trial and error.
- Finished early? No time to take on additional work: The tradesperson could end up doing extra work for no additional pay. For instance, if they finish in just half an hour, the customer may expect them to take on another task to fill the remaining time. If they work with a flat rate, they can instead move onto another project and continue to make more money.
Pros and cons of a flat rate
Now if you decide not to go with an hourly rate, a flat rate is your other option. To figure out pricing, you can either make a price book on your own or connect with a professional to learn about what prices tend to be charged. If you have little experience in trade, it’s recommended to connect with someone who knows the industry well so you can price your work and skill level at a profitable amount to make sure your profit margins are covered and you aren’t losing money.
As you set your flat rate, consider costs such as: additional labour required, parts and materials, tax, and potential overhead costs.
Pros of a flat rate
- Predictable for both sides: Having flat-rate pay for every scenario is needed so you know how much to quote, giving clients clear and consistent pricing not just for their first service but for any future visits. By setting your prices in advance, you make communication straightforward and establish yourself as a reliable choice for employers. Clients will be more inclined to hire you, which will lead to more work. There are no hidden surprises.
- Estimate profit: You can accurately estimate your growth margins if you know how many calls you typically receive over a period of time for each type of service. Let’s say you constantly fix plumbing issues. Have prices set for the standard plumbing repairs plus additional flat prices for leaks or replacements, so you can be prepared to charge the right amount and hit your ideal profit.
- Make more money in less time: With a set fee, a job might take 30 minutes or 2 hours. If you work efficiently, you’ll earn more profit and free up time for more jobs. Done right, this approach ensures profit every time.
- Get paid upfront: Clients will feel more confident to pay you ahead of time if they know your flat rate. For you, pre-pay saves stress from having to chase payments and clients are less likely to dispute the invoice when they agreed to the flat rate upfront.
- Get more work in: Boost your average sale by upselling and offering additional quoted services while on-site. Stay to complete the extra work and provide even more value to your customers. It’s easier to answer work calls or take a bit longer if you need it, as the client isn’t clocking your time and looking over you.
Cons of a flat rate
- More planning: If you don’t have a flat rate book, it can take weeks to provide a quote and by then, a client may leave. Avoid this by having a book with set prices ready.
- The reality of undercharging: If you undercharge, you can’t change the quote after it has been sent. If a job takes longer than you expect it to, you can lose out on potential earnings, which can be frustrating at times.
- Less opportunity to get paid for extra hours: If a job is more complicated than expected or problems arise, clients are unlikely to pay you more than what’s agreed, so you’ll be faced with hours of extra work and no additional pay.
- Not adjusting to inflation: Failing to account for rising costs like parts or wages can lead to losses. Regularly updating your rates — at least twice a year — helps you stay competitive and aligned with inflation.
Hybrid rates: how they work
What if you could bridge these two together? A hybrid rate is a blend of hourly and fixed rates. For example, you might charge a fixed rate for installing a new piping system because it’s a job you’ve done before and know how long it takes. But if the same client also needed a leaky roof repaired, that could take many days, you may opt to price it by the hour. Hybrid rates allow you to be flexible and mix in both options.
A structured pricing system has the potential to work well when you estimate the hours needed for a job, but if you want to win more work for same-day work or weekly projects, sometimes an hourly rate gives you more money. Either way, pick how you plan to run your business so you can be consistent and reliable.
If you have clients coming back for additional assistance after their first time, another rate to consider is a “mates rate” - a discounted price to reward the customers that keep coming back. Could be anywhere from 5% to 20% or so, that you give off for those who return.
Start charging the best prices today!
Ready to see a return on your investment? Start charging the best prices for your services to stay relevant and competitive. You can do this by tracking all your expenses and payments with an all-in-one software platform such as Mira. Through our app, you can automatically sync all your financial details to your preferred accounting platforms and then watch your money come in and out — it’s that simple. You can set up pay days, store client details for future references, and keep a backlog of all your invoices and quotes.
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