HVAC business owners sometimes make the mistake of assuming that as their work volume increases, their profits will, too. Unfortunately, things often don’t work out that way.
In fact, HVAC contractors who’ve just closed out their busiest twelve months to date often find that despite all of the jobs they’ve won, they’re actually looking at a loss for the year.
How can this be? Often, the underlying problems are tied directly to their HVAC pricing. Namely:
HVAC businesses often price their services incorrectly, making it impossible to achieve profitability.
Even when services are priced correctly, their prices aren’t implemented accurately throughout their business.
This pricing and cost guide will provide guidance in addressing both of these issues. Below, we’ll cover:
Using time and materials vs. flat-rate pricing
3 make or break factors for setting accurate HVAC prices
The challenges with implementing HVAC pricing properly throughout your business
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At the end of this post, we’ll also explain how our comprehensive HVAC flat rate software helps to optimize pricebook management and ensure that techs and office staff provide accurate estimates and invoices for every single job — HVAC system installations, recurring services, HVAC maintenance calls, and repair work alike.
Using Time and Materials vs. Flat-Rate Pricing
Despite the clear advantages of flat-rate pricing, some HVAC contractors continue to stick with a Time & Materials or hourly rate pricing model.
Based on our experience working with dozens of HVAC companies, the most successful businesses use flat-rate pricing, particularly because there are two significant disadvantages with the Time & Materials approach.
1. Justifying Hourly Rates
HVAC contractors inherently understand that an hourly work rate incorporates all of their overhead costs, plus some take-home pay for themselves. They also know that the latter makes up a minority of their revenue: if they’re charging $200 or $300 per hour, most of that cash is going to be absorbed by expenses.
But for a homeowner — particularly a homeowner who makes an hourly wage themselves — an HVAC contractor’s Time & Materials rate can cause serious sticker shock. To someone who makes $35 or $50 an hour — and who’s not in the trades — it can be tough to understand why a service would cost hundreds of dollars, and easy to mistake that service for a rip-off.
Without having run your own business, it’s simply very difficult to wrap your head around the numerous costs that an hourly work rate reflects. For HVAC contractors, that can often make a homeowner feel suspicious that they’re being taken advantage of — and less likely to sign-on as a customer.
2. Encouraging Poor Performance
With Time & Materials pricing, HVAC technicians who work slowly — whether as a result of inexperience, insufficient training, disorganization, or laziness — run up the bill, even if they’re doing subpar work. That goes for any job they’re assigned to: HVAC replacement, ac unit installation, central air or HVAC unit maintenance or tune-up, cooling system warranty service, HVAC repair, etc.
Simultaneously, a tech who’s fast, organized, skilled, and well-trained — the kind of employee who finishes assignments quickly without sacrificing quality — can end up generating less revenue for their boss.
The result of these misaligned incentives is often lower quality HVAC services, reputational damage, and less overall jobs getting completed.
The Benefits of Flat-Rate Pricing
In contrast, implementing flat-rate pricing solves both of these problems. By simply providing a flat rate for services, there’s no room for customers to get held up on hourly rates.
Customers know exactly what a job will cost them — regardless of how long it takes. So there’s no need to sit around watching the clock, or worrying about the final tally of their bill, providing for a much improved customer experience.
And, techs are incentivized to execute jobs efficiently, encouraging them to tackle more jobs in a day, resulting in higher revenue.
3 Make or Break Factors for Setting Accurate HVAC Pricing
1. Price Based on Value (Not Competitor Prices)
Rather than price for value, too many service businesses set prices according to their competition. But when HVAC contractors compete with one another on price alone, they get into a race to the bottom — lowering prices to a level that makes it impossible to maintain profitability.
Using competitor pricing as a yardstick can seem like an inviting solution because you don’t have to do the work to really figure out what the optimal pricing is for your business, based on your costs, and your goals for profitability, reputation, service quality, and more.
But doing this work is worth the effort. It’s what all of the most successful HVAC businesses do.
2. Factor Unbillable Time into Labor Rates
Labor rate calculations are the source of some of the most common HVAC pricing errors. Very often, these mistakes come from failing to account for the time employees spend on non-billable tasks, which have a significant impact on the cost of doing business.
Factoring in the time employees spend working outside of customers’ premises is crucial for setting profitable pricing.
Beyond holidays, vacations, and sick days, businesses also need to consider:
How much time do techs spend on training every year?
How many hours are they driving, in meetings, planning, etc.?
How often do they wash their trucks, and how long does each wash take?
In order to maintain profitability, it’s essential to factor these types of non-billable work tasks into the prices your customers pay.
3. Factoring in Membership Agreements
It’s tough for HVAC contractors to compete these days without offering maintenance agreements to homeowners — and most do, often discounting their services by 10 or 15 percent as a loyalty incentive. Among other things, membership agreements make for an effective marketing tool. But they can trip up HVAC businesses when it comes to pricing.
Generally speaking, the issue is that contractors often apply their membership discounts on top of their standard prices. And while this might seem like the right thing to do, it actually has the effect of diminishing the work that went into coming up with profitable flare-rate prices.
Instead, HVAC contractors need to incorporate their 10 or 15 percent membership discounts into their standard prices, so that their membership prices are their baseline prices. Put another way: customers who do business outside the terms of a membership agreement should be charged at a premium.
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The Challenges with Implementing HVAC Pricing Properly Throughout Your Business (and How ServiceTitan Solves Them)
Whether or not HVAC pricing has been set accurately for profitability, there are two core operational challenges involved with implementing pricing.
First, as costs of materials, supplies, and wages change, keeping pricebooks up to date requires constant monitoring and manual updating.
If you’re using paper documents or spreadsheet templates (as many businesses do), these updates are tedious and time-consuming, taking office staff away from revenue generating work, and leaving plenty of room for manual error.
There’s also a lag time between when changes are made, and when they’re accessible by field and office staff, which causes delays in the implementation of pricing updates.
Second, even when prices are being kept up to date, they’re often not translated accurately onto estimates and invoices. For example, techs make miscalculations or misread pricing that leads to delivering inaccurate estimates to customers. Or, information gets entered incorrectly during invoice creation, displaying pricing that doesn’t reflect the total cost of the job.
These problems can have serious adverse affects on your bottom line.
Here’s how it works.
Streamlining Pricebook Management with ServiceTitan
Regardless of whether you use Time & Materials or flat-rate pricing, ServiceTitan offers a number of features that make pricebook management easier (and more effective) than the traditional mix of paper documents and spreadsheets.
With ServiceTitan, HVAC contractors can use the digital tools we’ve created to quickly, painlessly, and easily edit their pricebook to keep up with changes. And whenever edits are made, they’re immediately accessible by field techs and office staff through our desktop and mobile apps.
Prices can be adjusted for individual services or items — air conditioning system installation or thermostat repair, refrigerant replacement or heat pump, condenser, or compressor swap, etc. — for single jobs, or on a long-term basis.
All of the common equipment and materials pricing can be easily edited: air handlers, blowers, evaporator coils, gas furnaces, fan motors, drain pans, heat exchangers, new furnaces, circuit boards, ductless units, and more.
Or, global changes to service pricing can be easily implemented across their entire pricebook: member discount, visit fee, add-on pricing, labor rate, and surcharge, for instance.
This capability allows contractors to skip the confusing and time-consuming process of recalculating the correct price for every one of their services separately.
Most HVAC contractors who use ServiceTitan like to link the materials and equipment required for particular services directly to those pricebook items — HVAC equipment models to HVAC installations, ducting materials to ductwork, air conditioners to AC installations, and the like. But if they prefer, they can also adjust material prices alone, as distinct from the projects in which they’re commonly used.
With our Pricebook Pro option, contractors get direct access to equipment catalogues from top HVAC industry suppliers. Items from the catalogues, complete with images and product descriptions, can be linked to users’ pricebooks, so that the estimates they create feature the exact makes and models they will actually be using in their jobs.
Seamlessly Integrate Your Pricebook with Estimate and Invoice Features
When field and office staff create estimates or proposals, the services they select reflect the most up to date pricing information, and estimate totals are calculated automatically and with precision accuracy.
Instead of a tech or office manager looking at a printed pricebook or spreadsheet to reference pricing, then transferring that information onto other documents when creating estimates (and making manual calculations that are prone to error) — they simply select services when building an estimate, and all of this is done for them.
As a result, the time it takes to generate estimates is reduced — whether it’s created from the field or office — and errors from data entry or miscalculation are essentially eliminated.
Businesses can avoid costly errors related to underbidding jobs, and save thousands of dollars over the course of a year.
The same, seamless integration and workflow applies when it’s time to generate invoices. Instead of office staff translating information on a customer estimate to an invoice when a job is complete — which, again, is time consuming and error prone — invoices can be automatically generated with all of the relevant information from the job.
Ready to Streamline Your HVAC Pricing?
As we’ve discussed throughout this piece, getting your HVAC pricing right — correctly accounting for labor costs, materials, etc. — is only half the battle to maintain profitability and thrive as an HVAC business. It’s just as important that your pricing is implemented accurately throughout your operation.
If you can address both of these challenges, it can be transformative for your business — helping to reduce costly errors and overhead, increase revenue, and improve the overall experience for your employees and customers.
Want to see ServiceTitan in action? Schedule a call with us to learn more about how our software can streamline your pricing and help you grow your business.
ServiceTitan HVAC Software
ServiceTitan is a comprehensive HVAC business software solution built specifically to help service companies streamline their operations, boost revenue, and achieve growth. Our award-winning, cloud-based platform is trusted by more than 100,000+ contractors across the country.