Flat Rate vs Hourly: The Math That Settles the Debate

The flat rate vs hourly debate has probably followed you from the parking lot to the supply house to an online forum at 11 PM when you should have been sleeping. Everyone has an opinion. Very few people have done the math.

So let's do the math.

The Real Cost of Picking the Wrong Pricing Model

Here's what most contractors miss about the flat rate vs hourly debate: it's not about which model is "better." It's about which model is better for which type of work. Using the wrong one on the wrong job can quietly drain 15-25% or more of the profit you should have made, based on what we commonly see in shop data.

Think about it this way. If you're running flat rate on a job that goes sideways - old house, rotten subfloor, surprise knob-and-tube wiring - you eat every extra hour. And if you're running time and materials on a straightforward service call that your crew knocks out in half the estimated time, you just left money on the table because you charged for three hours instead of capturing the value of a fast, professional fix.

Over a year, those mismatches add up to tens of thousands of dollars. Not because you're bad at your trade. Because the pricing structure didn't match the work. The SBA's guide to managing business finances emphasizes this point - understanding your cost structure is fundamental to pricing correctly.

Why the Flat Rate vs Time and Materials Argument Never Gets Settled

The reason this debate goes in circles is that both sides are right - about their own situations.

The flat rate crowd runs predictable work. Standard installs, maintenance calls, routine repairs. They've done 500 water heater swaps. They know exactly how long it takes, what parts they need, and where the margin lives. For them, flat rate is a money machine.

The T&M crowd deals with chaos. Custom builds, renovations in 100-year-old buildings, commercial retrofit jobs where the drawings never match reality. They've been burned by fixed prices on jobs that turned into nightmares. For them, T&M is the only way to protect their margins.

Both are correct. The mistake is assuming one model works for everything.

There's also a customer psychology piece. With flat rate, the homeowner knows the price before you start. No anxiety about the meter running. That certainty has real value, and many customers will pay a premium for it. With T&M, customers sometimes watch the clock and question every trip to the truck. That friction is a real cost, even if it doesn't show up on your P&L.

The Math: Flat Rate vs Hourly on a Predictable Job

Let's run the numbers on a standard service call. Say you're an HVAC contractor doing a capacitor replacement. (These are simplified example numbers - your actual costs will vary by market and trade.)

Your costs:

Parts: $25 Labor (1 tech, 1 hour on site): $60/hr loaded cost Truck roll (fuel, wear, drive time): $40 Overhead allocation per call: $30 Total cost: $155

Flat rate price: $350

Your gross profit: $195 Your gross margin: 56%

Now here's where flat rate gets interesting. Your experienced tech does this job in 40 minutes, not 60. That means he can squeeze in an extra call that afternoon. Same overhead, same truck roll pattern, one more $350 ticket.

If you'd priced this on an hourly basis at $95/hour plus parts with a typical one-hour minimum, the invoice would have been $95 for the service call plus $25 in parts plus maybe a small parts markup. Call it $130-$140 total. Your gross profit on that same job drops to somewhere around breakeven instead of the $195 you'd pocket on flat rate. You just left a big chunk of profit on the table because you charged for time instead of value.

This is why understanding your service call margins matters so much. Flat rate on predictable work rewards your team's speed and expertise. The better they get, the more you make.

The Math: T&M on an Unpredictable Job

Now flip it. You're a contractor doing a bathroom remodel in a 1960s ranch home. The customer wants a full gut and rebuild - basic finishes, nothing fancy.

Your flat rate quote: $18,000

You based this on a standard bathroom remodel: demo, rough-in plumbing, electrical, tile, fixtures. Two-week timeline (10 workdays).

What actually happens:

You open the walls and find galvanized pipe that needs to be replaced back to the main line. The subfloor has water damage. Depending on your existing service panel and local code requirements, the electrical may need a panel upgrade to handle the new bathroom fan and heated floor.

Actual costs:

Original estimated cost: $10,800 Surprise plumbing: $1,800 Subfloor repair: $900 Electrical upgrade: $1,400 Additional labor (3 extra days): $1,575 Actual total cost: $16,475

You just made $1,525 on an $18,000 job - an 8.5% margin instead of the 40% you planned. And that's before you count the three days of schedule disruption that pushed your next job back, which created a callback issue that cost you a Google review.

This is profit fade in action. The estimated margin evaporates because the scope was impossible to nail down upfront.

If you'd priced this T&M at a $95/hour labor rate plus materials with a 20% markup, your invoice would have reflected every hour of actual work and every dollar of actual materials. The customer pays for what the job actually required, and you protect your margin.

T&M invoice for the same job:

Labor (13 days x 8 hours x $95): $9,880 Materials ($6,300 base with 20% markup): $7,560 Total: $17,440 Your actual cost: $16,475 Gross profit: $965 Gross margin: 6%

Not a 56% margin like the service call. But you're profitable instead of scrambling. And on a remodel where everything went wrong, staying in the black is a win.

Which Pricing Model Fits Which Jobs: A Decision Framework

Stop thinking about flat rate vs hourly as an either-or decision. Start sorting your jobs into two buckets.

Flat rate works when:

You've done this exact job many times. Water heater installs, AC tune-ups, drain cleaning, standard panel upgrades. You know the time, you know the parts, you know the margin. Build your flat rate price book from at least 20-30 actual completions (or enough to feel confident in your averages), add your target margin, pad 10-15% for bad days, and review it quarterly.

The scope is tightly defined. The customer wants X. You deliver X. There's very little chance of surprises behind a wall or under a floor.

Speed is your competitive advantage. Your team is fast because they're skilled. Flat rate lets you capture the value of that skill instead of penalizing yourself for efficiency.

Time and materials works when:

You can't see what you're getting into. Remodels, older buildings, commercial retrofits, any job where the plans say one thing and the walls say another.

The scope is likely to change. If the customer adds things mid-project ("While you're in there, can you also..."), T&M protects you. Every addition gets billed. Just get change approvals in writing - signed change orders are safest, and some states legally require them above certain dollar thresholds. Check your state and local requirements.

The job is a one-off. Custom work, unusual configurations. You don't have historical data to build a reliable flat rate price.

The risk of eating overages is high. Set a "not to exceed" range upfront ("I expect $8,000-$12,000, and I'll call before going past that"). Bill weekly, not at the end. If you're already dealing with cash flow gaps that widen every billing cycle, long billing cycles on T&M work make the problem worse.

The Hybrid Approach: Using Both Flat Rate and Hourly

The most profitable contractors I talk to use both models. They're not religious about either one. They match the model to the job.

Here's what a typical hybrid setup looks like:

Flat rate for: Standard service calls, maintenance agreements, routine installs, any job they've done dozens of times. These are the bread and butter. High margin, high volume, repeatable.

T&M for: Remodels, custom work, diagnostic jobs where the problem is unclear, any project involving older buildings or unknown conditions. These are the jobs where flat rate would be a gamble.

T&M with a cap for: Mid-range jobs where they have a rough idea of scope but not enough certainty for a firm flat rate. The cap gives the customer some comfort while the T&M structure protects the margin.

Some contractors even start a job on T&M for the diagnostic or demo phase, then switch to flat rate once they can see the full scope. "Let me open this up and see what we're dealing with. That diagnostic is $200. Once I know what's in there, I'll give you a firm price for the repair." Smart approach.

A Better Way to Run the Numbers

Everything I just described works with a spreadsheet, a calculator, and discipline. You can absolutely build a flat rate price book in Excel and track your T&M jobs with a paper log.

But here's the reality: most contractors don't maintain these systems consistently because they're busy doing the actual work. The price book gets stale. The T&M logs get scribbled on receipts that end up in a shoebox. The quarterly review never happens because Q1 turns into Q2 and suddenly it's tax season.

This is where automation earns its keep. Systems that track your actual job costs in real time, flag when a T&M job is trending over budget, and suggest price book updates based on completed job data so you can review and approve changes. Not because you can't do math. Because you're busy installing furnaces and fixing leaks, and the system doesn't forget to update the spreadsheet.

If you're tired of doing paperwork when you should be done for the day, automating the numbers behind your pricing model is one of the highest-ROI things you can set up. It doesn't change which model you use. It just makes sure the model works the way it's supposed to.

The Bottom Line

Flat rate and time and materials are both tools. Arguing about which pricing model is "better" is like arguing about whether a hammer is better than a drill. Depends on what you're building.

Run flat rate on your predictable, repeatable work. Capture the value of your speed and expertise. Build a price book based on real data and update it quarterly.

Run T&M on your unpredictable, complex work. Protect your margins when surprises show up. Document relentlessly and communicate constantly.

And stop leaving money on the table by forcing one model onto every job that comes through the door.

If you want help figuring out which of your jobs should be flat rate and which should be T&M - or you want to automate the tracking so the numbers actually stay current - let's talk.