Day Rates Are a Tax on Bad Estimators

Day rates are a tax on bad estimators.

I've said it before. I'll keep saying it until I stop watching good shops run busy months and end up with thin checking accounts. You see the hours, you see the parts, you write the invoice. Then you wonder where the money went.

Here's what's happening. T&M feels like protection. Every hour covered, no fixed number to be wrong about. What it actually does is hand the customer a lever they will eventually pull on you, while making it nearly impossible to know what any job actually made you.

Some jobs can't be priced flat. A gut renovation with unknowns behind the wall, a service call where the problem isn't diagnosed yet — real cases exist. But most shops telling me they have to use T&M haven't tried pricing flat. They've decided the uncertainty excuses them from doing the math. That's not protecting yourself.

What T&M Actually Costs You

A T&M job looks clean at close. Tech was on site six hours, parts were $340, you bill both and move on.

What you didn't bill: drive time, the second trip because something didn't work right the first time, the callback three weeks later on a fitting you should've caught. One hour, back in the van, disappeared.

On flat-rate you know what the job paid. On T&M you know what you billed. Those aren't the same number, and most shops never reconcile them.

This is the thing I keep coming back to whenever I talk to a shop in trouble: how long could you pay your guys and your truck notes with zero new revenue? Ninety days is the floor. When I was rebuilding in 2009 — after laying off four guys, after watching receivables stretch from 45 days to 110 — I realized I had no idea what any individual job had actually made me. I knew total revenue. Margin per job was a guess. When you don't know your margin per job, you don't know your cash health, and when you don't know your cash health, you're running scared.

The shops that live and die on T&M are usually the same shops that have never built their own cost-of-doing-business number. They don't know their burden rate or their overhead per hour, which is exactly why they never built their own flat-rate prices either. So they price off feel — just by a different method than the guy buying a subscription flat-rate book and calling it done. You're not pricing your work. You're guessing in real time and hoping the customer doesn't push back.

The Customer Problem

The homeowner agreed to T&M. Fine. But what she agreed to and what she understood are not the same thing. "Time and material" to her means roughly I'll pay for what it takes. It doesn't mean a $1,100 invoice on a job she thought would run six hundred.

When the bill lands, the argument starts.

I watched this play out on the commercial side. The standoff with Whitman Builders in 2011 — $61,000 owed, paid out at 38 cents on the dollar in their bankruptcy — wasn't just a slow-pay problem. The invoices themselves gave them cover for months. Every line on a T&M invoice is something to dispute. They used it. I heard all of it: four hours to run that section, guy standing around, justify the labor before I sign. That's not a coincidence. A T&M invoice on commercial work is a roadmap for contesting payment, and GCs who slow-pay know exactly how to drive it.

A flat price signed off upfront is a different situation. They said yes to $2,400. The work is done. The invoice says $2,400. There's nothing to pick apart. Payment speed goes up. The negotiation happened before the work started, not after.

T&M Rewards Your Slowest Guy

This is the part that should bother you most.

T&M bills hours. A tech who finishes a water heater swap in two hours bills less than the one who takes four. Your fastest guy is your least profitable guy under this model. Skill and speed have no place to go on a T&M invoice. None.

The guy I keep coming back to is the working foreman — the one running three guys and still getting dirty, still finishing while the apprentice is reading the manual. That guy is the engine of a real shop. He's also the one T&M punishes hardest. His efficiency shows up as fewer hours billed, not as more value captured.

I've said before — half the "skilled trades shortage" is real, half is lazy framing. There's no shortage of guys who'll run the clock. What's actually short is guys who show up on time for ten years and move like they give a damn. Those guys are worth more to your shop than your T&M invoice reflects, and eventually they figure that out.

On flat-rate, the two-hour tech billed at a four-hour price makes the shop money and goes home with a full ticket. That's the system that keeps the guy you actually want.

What Smith Mechanical Got Wrong in 2007

Six trucks, twelve guys, spring of 2007. I was measuring success in revenue, not margin. That's the condition where T&M looks fine — you're moving, checks are coming in, the pile of jobs is big enough to hide the bad ones.

We had a commercial T&M contract with a property management company in Shrewsbury. Ongoing work, decent scope, billing roughly $8,000 a month. Looked great.

What I wasn't tracking: drive time from Worcester to Shrewsbury twice some days, callbacks on a boiler zone we patched instead of fixed because we were stretched, warranty work on a pump seal from six months earlier. None of that went back on an invoice. All of it went into labor hours that were eating into jobs I considered closed.

When I went back through those records in 2009 — after the crash, after the layoffs, after rebuilding on residential because that's all I could get — the math was ugly. What looked like steady money was closer to break-even once the real hours went in.

What changed me was homeowners. Residential customers wouldn't tolerate open-ended billing. First question, every time: how much is this going to cost? You say depends what we find, half of them hang up. That pressure forced me to build real prices. I started with water heaters because I knew the hours and the parts cold. Worked backward from burden rate, added overhead, added margin, landed on a number. Did it for a dozen job types over four months.

That's the price book I wish I'd built in 2005.

What You Do Monday Morning

Pick the job type you run most. Pull your last six T&M invoices for it. Add up total hours and parts, divide by six, that's your average. Add 20% to the labor side — that's your unbilled drive time and callbacks talking. Load in parts markup. Round up to the nearest clean number. That is your first flat-rate price, built from your own costs, not somebody else's subscription book.

Write it down. A card, a whiteboard, a clipboard — I don't care. I'll say this plainly: anybody under five trucks running ServiceTitan right now is paying for software a salesman convinced them they need. Jobber does the job for a small shop. So does a clipboard. Four flat prices you actually use beat four hundred T&M invoices nobody reviews.

Test the price on the next three jobs of that type. Quote it upfront. Get it signed or confirmed and noted. When the job closes, compare what you billed to what you'd have billed on T&M. Three jobs will tell you whether the number is right, too low, or has room to go higher.

Then add another job type. Six flat prices by end of the month means six job types where you've stopped guessing.

FAQ

Aren't some jobs impossible to price upfront?

Yes. An undiagnosed service call, a gut with unknowns behind the tile — real cases. But the diagnosis itself should be a fixed price. One-hour diagnostic at $150, flat, gets you to the point where you can quote the repair. "I don't know what I'll find" is a reason to break the job into a diagnostic phase and a repair phase, each with its own number. It's not a blanket excuse to avoid pricing.

My customers ask for T&M because they don't trust flat pricing.

Usually they've been burned by a contractor who low-balled a flat price and then buried them in change orders. Walk them through what's included, explain you'll call before proceeding if something outside scope comes up. Most customers asking for T&M don't actually want an open-ended bill — they want to know they're not getting robbed. A clear flat price with a defined scope handles that better than an hourly rate that surprises them on invoice day.

If I switch a builder client to flat-rate, won't they just find someone else who'll do T&M?

Maybe. The GC who fights hardest on switching to flat pricing is usually the one who's been benefiting most from fuzzy billing. If they leave because you want to price work clearly and get paid, that tells you what the relationship was. Builder clients worth keeping adapt fine to flat pricing if the number is fair and the work is clean. The ones who walk were using your invoices as a negotiating tool after the fact. That's just using you.

What about callbacks after a flat-rate job?

Build enough into the flat price that routine callbacks don't hurt — that's what the 20% labor buffer is for. And know the line between your problem and theirs. A fitting that failed because of your work, you go back fast. The hour doesn't matter; the callback handled clean is worth more than an argument. A second issue the customer found after close that wasn't in scope — that's a new job with a new price. Write your scope clearly and the line holds.

Do you break out materials or roll them into the flat price?

Roll them in. Itemized parts on an invoice are just as negotiable as hours. If the job is $1,800, the customer doesn't need to see that the expansion tank was $47 and you charged $95 for it. That markup pays for the fittings you used, the parts in the van they didn't ask for, the supply house run. Itemize it and you've opened the conversation. One number for a complete job and there's nothing to argue about.

I'm one truck, been on T&M six years. How long does a real price book actually take?

If you already know your burden rate and overhead, you can build your first five flat prices in an afternoon. If you don't — and most one-truck guys don't — that's your first week's work. Pull last year's expenses, divide total overhead by billable hours, add burden. That's your real cost per hour. Pricing a water heater swap from there is arithmetic. Most shops avoid doing this because they're scared the number will be higher than what the market pays. Sometimes it is. When it is, that's a problem you need to look at directly — either you find the overhead to cut, or you find customers who'll pay the real number, or you find out the hard way that you've been working for less than you think. Guessing doesn't fix it.

T&M Pricing Feels Safe — It's Actually Killing Your Margins