Flat Rate vs. Time and Materials: The Complete Pricing Guide for Modern Contractors

The debate between flat rate and time-and-materials pricing has divided contractors for decades. But the right answer isn’t which one is “better”—it’s understanding when and how to use each effectively.

The Great Pricing Debate

Walk into any contractor gathering and mention pricing—you’ll spark an immediate debate. Flat rate devotees swear by the predictability and profitability. Time-and-materials (T&M) loyalists argue for fairness and flexibility.

Here’s what we’ve learned working with contractors across the country: both models work when implemented correctly, and both fail when implemented poorly.

The question isn’t which pricing model to use. It’s which model fits your specific situation—and how to execute it professionally.

Understanding Your Options

Time and Materials (T&M) Pricing

How It Works: Customer pays for actual labor time plus materials used, typically with a markup.

Formula: Total Price = (Labor Hours × Hourly Rate) + (Materials × Markup) + Trip Charge

Example:

• 3 hours labor @ $85/hour = $255
• Materials cost $75 × 1.35 markup = $101.25
• Trip charge = $45
• Total: $401.25

Advantages:

• Simple to understand and explain
• Fair for complex or unknown scope
• Lower customer suspicion
• Easy to adjust for job variations
• Works well for commercial contracts

Disadvantages:

• Revenue limited by billable hours
• Customers may watch the clock anxiously
• Difficult to predict cash flow
• Penalizes efficiency (faster = less money)
• Hard to compare estimates

Flat Rate Pricing

How It Works: Customer pays a predetermined price for a specific service or repair, regardless of how long it takes.

Formula: Price is set based on:

• Average time to complete
• Material costs
• Overhead allocation
• Desired profit margin

Example: “Replace standard water heater: $1,495 installed”

Advantages:

• Revenue not tied to hours worked
• Customers know cost upfront
• Rewards efficiency
• Easier upselling opportunities
• More predictable revenue
• Higher profit potential

Disadvantages:

• Requires detailed price book
• Complex jobs harder to price
• Some customers want itemization
• Must constantly update pricing
• Risk on difficult jobs

The Numbers Tell the Story

Let’s look at how pricing model affects a typical service call:

Scenario: Standard Water Heater Replacement

Time & Materials Approach:

Flat Rate Approach:

Margin Comparison:

That’s nearly 3x the gross profit on the same job.

But Wait—Is That Fair?

This is where the pricing debate gets heated. Critics of flat rate argue it’s overcharging. But consider:

1. The customer gets certainty. No surprise bills.
2. The price includes expertise. You know what you’re doing.
3. The risk shifts to you. If complications arise, you absorb them.
4. The convenience has value. One call, one price, done.

When you buy a new car, you don’t pay based on how many hours it took to build. You pay for the value of having reliable transportation.

When to Use Each Model

Use Flat Rate When:

✅ Service calls and repairs with defined scope ✅ Residential customers (most prefer certainty) ✅ Maintenance agreement work ✅ Common repairs you perform frequently ✅ Competitive situations (easier to compare) ✅ You want to maximize revenue per call

Use Time & Materials When:

✅ Commercial contracts requiring itemization ✅ Highly variable or unknown scope ✅ Renovation and remodel work ✅ Warranty or builder work ✅ Customer specifically requests it ✅ Complex troubleshooting with uncertain outcomes

Hybrid Approaches:

Diagnostic Flat Rate + T&M for Repair: “It’s $95 for us to diagnose the issue. Once we know what’s wrong, we’ll provide a flat rate price for the repair.”

T&M with Not-to-Exceed: “We charge $85/hour plus materials. Based on what you’ve described, I’d estimate 2-4 hours, so you’re looking at roughly $300-$500 total. We’ll call if it looks like it’s going to exceed that.”

Service Agreement Flat Rate + T&M for Additional Work: Maintenance is flat rate; anything beyond scope is T&M.

Building a Flat Rate Price Book

If you’re moving to flat rate, you need a comprehensive price book. Here’s how to build one:

Step 1: List Every Service You Offer

Start with categories:

• Emergency services
• Diagnostic calls
• Common repairs
• Installations
• Maintenance services
• Add-on services

Step 2: Determine Average Time per Task

Track actual time on jobs for 30-60 days. You need real data, not guesses.

Example tracking:

Step 3: Calculate Your Costs

For each task, determine:

• Labor cost: Average time × loaded labor rate (wages + burden)
• Material cost: Typical materials used
• Overhead allocation: Your fixed costs divided across jobs

Step 4: Add Profit Margin

This is where many contractors go wrong. They add 10-20% and wonder why they’re not profitable.

Target gross margins by service type:

Step 5: Market-Test Your Prices

Compare your prices to competitors. You don’t need to be cheapest, but you should understand where you stand.

If you’re significantly higher, make sure your value proposition justifies it (response time, guarantees, quality).

Step 6: Create the Book

Options for format:

• Software: ServiceTitan, Housecall Pro, and similar platforms have built-in flat rate pricing
• Tablet-based: Custom apps that walk techs through pricing
• Printed books: Physical books organized by service category
• Hybrid: Printed guides supplemented by software

Training Your Team on Flat Rate

The biggest flat rate failures come from poor presentation. Train your team on:

The Psychology of Pricing

Don’t apologize for prices. Present them confidently. If you seem uncertain, customers become uncertain.

Offer options. Good-Better-Best choices give customers control and often result in higher tickets:

• “Option A is the repair at $385. It’ll get you going today.”
• “Option B is the repair plus preventive maintenance at $495. This addresses the root cause.”
• “Option C is replacing the unit entirely at $1,295. Given the age, this eliminates future repair costs.”

Focus on value, not price. Don’t just state the number—explain what they get: “That includes the part, all labor, a 2-year warranty, and we’ll handle proper disposal of the old unit.”

Handling Price Objections

“That seems high” “I understand. Let me explain what’s included…” (Review value, don’t reduce price)

“Can you do better?” “This is our standard price, which reflects our quality of work and guarantee. We find our customers value the reliability.” (Stand firm, but acknowledge the question)

“Let me get another quote” “Absolutely, make the decision that’s right for you. Just remember that we’re available 24/7, we guarantee our work for 2 years, and we can have this done for you today.” (Respect their decision, reinforce value)

When to Adjust Pricing

Document legitimate reasons to adjust:

• Access issues (attic, crawlspace difficulty)
• Additional work discovered
• Customer requests added services
• Materials more/less than standard

Create add-on pricing for modifications rather than discounting base rates.

T&M Best Practices

If you use time and materials, implement these professional standards:

Clear Communication

Before starting: “Here’s how our billing works. Labor is $85 per hour billed in 15-minute increments. Materials are cost plus 25%. I’ll keep you updated as we go, and you’ll see itemized invoices for everything.”

During the job: “I’ve been here about an hour and I’ve found the issue. Here’s what we need to do and what it’ll cost…”

After completion: Walk through the invoice. Explain each line item. Answer questions before you hand over the bill.

Documentation

Every T&M job should have:

• Arrival and departure times
• Work performed (detailed notes)
• Materials used with quantities
• Photos of before/during/after
• Customer signature acknowledging work

Billing Structure

Consider these T&M enhancements:

• Minimum charge: 1-hour minimum for service calls
• Portal-to-portal: Bill from shop departure to return
• After-hours rates: 1.5x standard rate for evenings/weekends
• Tiered rates: Different rates for different skill levels

Transitioning from T&M to Flat Rate

Making the switch? Follow this roadmap:

Month 1: Preparation

• Track time on every job type
• Document all materials used
• Research competitor pricing
• Calculate your true costs and overhead

Month 2: Build the Book

• Create pricing for 80% of your common calls
• Test prices internally
• Train office staff on pricing structure
• Prepare customer communication

Month 3: Soft Launch

• Offer flat rate as an option
• Track close rates vs. T&M
• Gather customer feedback
• Adjust pricing as needed

Month 4+: Full Implementation

• Make flat rate the default
• Continue expanding the price book
• Monitor profitability by task
• Refine training based on results

The Profitability Reality Check

Let’s be direct: flat rate, implemented well, almost always increases profitability.

Contractor A (T&M):

• 1,200 service calls per year
• Average ticket: $285
• Annual service revenue: $342,000
• Gross margin: 42%
• Gross profit: $143,640

Contractor B (Flat Rate):

• 1,200 service calls per year
• Average ticket: $425
• Annual service revenue: $510,000
• Gross margin: 58%
• Gross profit: $295,800

Same number of calls. $150K+ difference in gross profit.

The flat rate company can:

• Pay technicians more
• Invest in better equipment
• Spend more on marketing
• Actually have profit for the owner

Making Your Decision

Here’s our recommendation after working with hundreds of contractors:

For residential service companies: Implement flat rate pricing for 80%+ of your work. Customers prefer knowing costs upfront, and your profitability will improve dramatically.

For commercial service companies: Use a hybrid approach. T&M for contract work, flat rate for service calls and repairs.

For new construction and renovation: Stick with T&M or bid pricing. These projects are too variable for flat rate.

The key isn’t the model—it’s the execution. Whichever you choose, implement it professionally, train your team thoroughly, and track your results.

Get Help With Your Pricing Strategy

Pricing isn’t just about numbers—it’s about positioning, psychology, and profitability. Get it right and everything else becomes easier.

Ready to optimize your pricing? Schedule a consultation →

At The KPS Group, we help contractors develop pricing strategies that improve profitability while maintaining customer satisfaction. Because you deserve to be well-paid for the value you provide.

Pricing strategy is one of the most impactful changes you can make to your business. Explore more profit-boosting strategies in our resource library.

Related Reading:

• Pricing for Profit: The Complete Guide
• Job Costing 101: Know Your True Margins
• Training Technicians to Sell