What Does Flat Rate Mean? How to Set and Use Flat Rate Pricing

What is flat rate?

The definition of flat rate is a pricing model where you charge a fixed price for a service, regardless of the time or resources you need to complete the job.

Unlike hourly pricing—which you use to charge based on the amount of time (in hours) you spend doing the job—flat rate pricing is a predetermined cost. You’ll know exactly how much you’ll earn on the job, and your customer will know exactly how much they’re expected to pay for the service.

For example, a plumbing business basic faucet replacement for $200 flat, including the removal of the old faucet and installing a new one. The cost is the same, no matter how long the job takes.

Flat rate vs. hourly pricing

Choosing between flat rate and hourly pricing is an important decision for your home service business, but it doesn’t need to be a stressful one.

Knowing the differences helps you determine which method is the best fit for your business. Here’s a closer look at flat rate vs. hourly pricing.

Key differences

The main difference between flat rate and hourly pricing is how you calculate the cost of your service.

With flat rate pricing, the price for a specific service is fixed and always the same, regardless of the time it takes to finish a job or what resources you use. The customer knows upfront what they’ll have to pay, which can help them trust you more.

With hourly pricing, on the other hand, you charge the customer based on the time spent on a job. The final cost can vary depending on how long the job takes. Although the hourly method can be more flexible, your customer may not like that they don’t know the final cost upfront.

Common uses

Service businesses use flat rate pricing when the scope of work is predictable. Some examples include:

• Cleaning: Regular cleaning tasks that have a consistent time requirement.
• Lawn care: Routine services like mowing and edging that are similar in effort and time.
• Plumbing: Common repairs like fixing leaks or installing fixtures.

An hourly rate is more suitable for jobs where the duration can vary significantly. Examples:

• Construction: Projects with many variables and potential delays.
• General contracting: Custom, complex jobs that require a flexible approach.
• Landscaping: Custom installations that may take longer than expected.

How to set flat rate pricing

Setting a flat rate requires you to cover your costs, make sure you’re profiting, and provide value to customers.

Here are some basic steps to set flat rate pricing, using a plumbing business as an example:

1.   Calculate costs for time and materials

Start by identifying the costs that come with providing your service. For a plumbing business, this might include:

• Labor: The time it takes for your plumbers to complete a job. And the amount of travel time.
• Materials: The cost of pipes, fittings, fixtures, and more.
• Overhead: Operational costs such as insurance, vehicle maintenance, and marketing.

For example, let’s say the cost to replace a water heater involves $500 in materials and three hours of labor (including travel) at $40 per hour. The base cost for the job would be $620.

Benefits of flat rates

Using a flat rate means you have several advantages for your business. Here are some of the benefits:

• Predictable income: One of the main advantages is predictability. By setting a fixed price for each of your services, you can forecast your revenue better. A lawn care business, for instance, will know exactly how much it’ll earn from mowing a lawn or trimming hedges.
• Better customer satisfaction: Customers appreciate transparency. When they know the exact cost upfront, it reduces the chance for any billing disputes. A lawn care business that offers flat rates for weekly mowing or seasonal fertilizing allows customers to budget for those services. They feel confident in the value they’re getting.
• Competitive advantage: Flat rates can give you an edge over competitors by making your services more appealing to customers. Customers may prefer the certainty of a fixed price over the uncertainty of an hourly rate. Advertising flat rates can attract clients who want straightforward pricing. No surprises.
• Faster sales process: It can be a quick process for both your sales team and customers to understand and agree to a set price. Less time is spent negotiating prices. When you have a menu of flat rate services, it’s easy for customers to choose and book a service.
• Higher efficiency: With flat rate pricing, your team will be incentivized to work efficiently. Since the income from a job is fixed, the more work you complete in a day, the higher your income. 
• Simple bookkeeping: By charging a set price for services, tracking your income and expenses becomes easier. A lawn care business that charges a flat rate for yard clean-ups won’t need to log labor hours or adjust the rate frequently.

Challenges of flat rates

While flat rate pricing offers benefits, there are also challenges to consider:

• Risk of underestimating: One of the biggest challenges is the risk of underestimating the time and resources you need for a job. In the construction industry, projects can be unpredictable because of issues such as weather delays and site conditions. If your flat rate doesn’t account for these variables, you might not be profitable.
• Difficulty in setting accurate rates: Setting accurate flat rates requires that you know every potential cost involved in a project. This can include labor, materials, equipment, and permits. Overpricing can drive customers away, while underpricing won’t be very profitable.
• Potential for confusion: Customers might not understand what’s included in a flat rate, which could lead to potential confusion or even disputes. A customer might expect certain materials to be included in the flat rate, but the materials are extras.
• Unforeseen costs: Equipment breakdowns and price increases for materials can add to the cost of a project. Without the flexibility to adjust your pricing, these unexpected expenses can be detrimental to your bottom line.

When to use and not use flat rate pricing

There are times when flat rate pricing is advantageous, and there are times when it might not be the best fit.

Understanding how to price jobs as a contractor, for instance, can help you decide the best pricing strategy for profitability and client satisfaction.

When to use it

• Use it for services that involve predictable, repetitive tasks where the scope of work is consistent. For example, auto detailing projects like interior vacuuming and window cleaning often have defined parameters.
• Use it when you know that customers will appreciate transparency and simplicity. For a handyman, flat rates for standard services like installing a light fixture or replacing door knobs can attract clients who like predictable pricing.
• Use it in a competitive market to differentiate your business from competitors who may use hourly rates.
• Use it if your business operations are efficient. Skilled teams and good project management can complete jobs within the estimated time and cost.

When not to use it

• Don’t use it if your projects are variable and unpredictable. Time and material pricing is better suited for large-scale construction projects that involve customization or complex requirements.
• Don’t use it when the scope of work is uncertain or likely to change. Projects like major renovations may uncover hidden issues (mold, structural damage, etc.) that require additional work and costs. Hourly or cost-plus pricing allows for flexibility.
• Don’t use it for customized or specialized services. These projects often require unique materials, specialized skills, and more time.
• Don’t use it when there’s a risk of cost fluctuation, such as unpredictable material prices. For general contractors, factors like sudden increases in lumber prices can impact project costs. Pricing that allows for adjustments based on actual costs is better suited for this.

Flat rate pricing examples

Cleaning

Assume a cleaning service offers a standard cleaning for homes up to 2,000 sq. ft.

Their estimated cost of materials is $20. This includes cleaning supplies and equipment.

Their estimated cost of labor and travel is $80. Two hours of cleaning at $30/hour, plus $20 for travel expenses.

The base totals $100. Factoring in their 20% profit margin, the flat rate for the service is:

READ MORE: How Much to Charge for Lawn Mowing