Hourly Billing Is Eating You Alive

When you write down your hourly rate on an invoice, it feels honest. The customer can see every hour and check every line. You're the good guy, not the guy gouging them on a flat price they can't verify.

That's costing you money. Has been for years. You probably don't know it.

The Problem Nobody Told Me When I Was Coming Up

At Beacon Heating & Plumbing under Donny Ferraro, T&M was just how you billed. Nobody called it a choice. Customer calls, you go, you fix it, you write down the hours, you charge for the parts. Donny could thread pipe blindfolded and he ran his billing the same way he'd been shown in 1978. I never questioned it because he never questioned it.

Here's what's wrong with that. The better you get at a job, the less you earn on it. You figure out how to re-route the new vent stack through a cleaner chase and cut ninety minutes off the job. Under hourly billing, you just gave those ninety minutes to the homeowner. They didn't ask for them. You didn't negotiate anything away. The billing model did it for you, automatically, every time you got faster.

The customer wins when you're good. You win when you're slow. Nobody designed it that way. It's just what the model does.

What the Homeowner Is Actually Buying

They don't care how long it took. They care that the water heater works, the pressure is right, and they don't have to call back in three weeks. The moment you price by the hour, you've put it in writing that your skill and speed are liabilities.

Think about what a service call actually costs you. Not the hourly rate — the real number. Loaded labor: your guy's wage, workers' comp, payroll taxes, whatever benefits you're carrying. Truck time and fuel. The drive out. The parts run he made because the supplier shorted him. The callback two weeks later nobody billed. Most shops running hourly have never added that up because the calendar was always full enough that it didn't matter.

That last part is the trap.

If you can't say how long you'd survive with zero new revenue — in actual weeks, written down — you don't know your real cost of doing business. Your hourly rate is a guess wearing a math costume.

I've run the numbers with guys billing $95 an hour who were netting closer to $60 once you load everything in. Calendar was full. They thought they were fine. A full calendar on a broken rate doesn't save you. It just pushes the reckoning out.

You Already Have a Floor. You Just Haven't Written It Down.

T&M isn't inherently broken. I billed T&M for years on the right work. The problem is most shops running T&M have never identified the floor below which no job should go, so they hit it constantly without knowing it.

Every shop I know has a two-hour minimum on service calls. Not because they read it somewhere — because they drove forty minutes, cleared a ball valve, drove back, billed an hour and a quarter, and netted about eleven dollars after gas. Pain taught them the floor. The problem is they stopped there.

Same logic applies to every job category you run. A tankless swap has a number below which you cannot go and stay in business. Same for a circulator swap, a boiler tune-up, a floor drain. If you haven't written that number down, it isn't policy. It's a mood. And a mood changes the second a customer looks at you sideways.

Flat-rate pricing books — the subscription kind you buy and update every year — are training wheels. Useful for the first year when you have no data and you're just trying to stop bleeding. After that, you're pricing someone else's business. The book doesn't know your truck insurance rate. It doesn't know that your guy runs slow on boilers and fast on rough-in. It doesn't know that material costs in Worcester aren't what they are wherever the book was built.

Build your number from your own cost of doing business. Even rough. A floor you'll actually defend is worth more than a perfect number you haven't calculated yet.

What October 2008 Taught Me About Hourly Billing

Two builder accounts gone in the same week. I saw it coming and didn't believe it, which I think is worse than being blindsided. Receivables stretched from 45 days to 110. I laid off four men I'd hired personally. Kept three.

Those four men had been billed out at an hourly rate that looked fine when twelve guys were moving. Cut the volume in half and the overhead doesn't follow it down. Rent stays the same. Truck notes stay the same. Insurance doesn't care that October went sideways.

2009, I was doing service-only work. Drains, fixtures, PRVs, water heaters. Small stuff. For the first time in my career I was forced to look at job-level margin because I had no volume to hide behind.

A drain call that billed two hours at my shop rate. I'd load the labor burden, the truck time, the drive, the material — and I'd be looking at a job that barely covered the gas to get there. Not every call. But enough that it wasn't bad luck. It was structural. The rate was wrong and the full calendar had been covering it for years.

That's when the floor stopped being abstract. I wasn't sitting around theorizing. I was staring at actual numbers on actual closed jobs in a bad year in Worcester with three guys left and a truck note due on the fifteenth.

Day Rates Are Hourly Billing With Different Paperwork

Some shops doing commercial service or remodel work have moved to day rates. Flat charge per man, half-day minimum. Feels like progress.

It's the same problem. You're pricing your input, not your output. You're efficient, you finish early — you just gave those hours to the GC. And GCs love T&M and day rates for exactly that reason. It shifts the risk entirely to you, gives them line-item ammunition on every invoice, and keeps you in a position of justifying every hour instead of holding a signed scope.

I know that story from both ends. Whitman Builders out of Marlborough. I was owed $61,000 across four jobs, all T&M. Kept working because they kept saying next Friday. They paid me 38 cents on the dollar in the bankruptcy.

When you're billing T&M with no floor, no not-to-exceed language, and no change order protocol, you're not in a business relationship. You've got a handshake with someone who has lawyers and you don't. The day rate doesn't fix that. It just makes the invoices look different when you file the mechanics lien you should have filed six weeks earlier.

What You Do Monday. Not Next Week. Monday.

Pull three closed T&M jobs from the last 90 days. First three you find. Calculate actual cost on each one: loaded labor for every man-hour, truck time, fuel, material at what you paid, an honest cut of your monthly fixed costs divided by your real billable hours. Then look at what you billed.

If you can't do that math, that's your answer. You cannot protect a margin you've never measured.

Once you've done it on three jobs, you'll see one of two things. Either you're fine and you didn't know it — good, now you know. Or you've been subsidizing customers for years and didn't know that either. One of those is urgent.

Second: write down a floor for your five most common job types. Not a number from a book. Your number. A water heater swap is never less than X. A service call has a two-hour minimum at Y. Write it down. Tape it inside the estimate folder. A floor you haven't written is a floor you'll walk through the second a customer pushes back.

Third, this week: if you're on T&M with any GC right now, pull the contract and read the payment language. If there's no not-to-exceed clause, no change order requirement, and a pay-when-paid clause buried in paragraph nine — you need to know that before you're 90 days in and owed $40,000. I learned that at full price. You don't have to.

Get the floor right first. Worry about the billing method after. You can run T&M with a solid floor and be fine. You can't run anything — T&M, flat rate, day rate — without knowing your number and holding it.

The Questions I Get

Isn't hourly billing more honest? At least customers see exactly what they're paying for.

The customer sees your hours. They don't see your loaded labor cost, your truck depreciation, your callbacks from jobs you didn't bill. The invoice looks transparent. It isn't complete. And if you're fast and good, you net less than the slower guy down the street. That ain't honest — that's just familiar.

I do mostly insurance and warranty work on T&M. Does any of this apply to me?

Different problem, same math. Insurance and warranty work has floors set by someone else — the carrier, the program, the national contract. Your job is knowing whether their floor is above or below yours. If the program pays $180 for a repair and your floor on that repair is $210, you're losing money on every call and volume isn't saving you. Map your real cost against the reimbursement schedule. If you're underwater on certain job types, stop taking them or renegotiate. Shops die on "we do it for the relationship."

How do I figure out my actual loaded labor rate?

Start with what you write the check for. Say your tech earns $30 an hour. Add workers' comp, payroll taxes, benefits — you're probably at $38-42 before the truck moves. Now add truck cost: payment, insurance, fuel, maintenance, divided by your actual billable hours per month. Not the hours you hope for. What you get is a real cost-per-hour-in-the-field. Most guys find it's 20 to 30 percent higher than what they're billing. If it's higher than your rate, that's the problem. It's fixable. But you have to look at it first.

Customers push back on flat-rate quotes and want hours broken out. How do I handle it?

Show them the scope, not the clock. Here's what the job involves, here's what it includes, here's the price. If they ask how many hours, the answer is: it takes what it takes to do it right, and that's what this covers. Shops that fold the second someone asks for a timesheet — those are the shops paying for every hour of pushback out of their own margin. Hold the number.

What's the difference between a T&M floor and just padding my hourly rate?

Padding is raising the number because you're nervous. A floor is a minimum job value built from what the job actually costs you — labor, truck, materials, overhead — plus a margin you've decided to hold. One is math. The other is a feeling that evaporates the second a customer argues. The floor is defensible. Padding isn't.

I'm a two-truck shop. Is this worth my time or is flat-rate pricing for bigger operations?

It matters more at two trucks. At two trucks, one bad job category running thirty calls a month can be the reason you can't make payroll in February. A twelve-truck shop has volume to absorb it. You don't. One underpriced water heater call repeated forty times a month is a real number at your size — not a rounding error. Get the floor right now, while you can still see every job clearly. When you're busy, you stop looking. Busy is exactly when the bad rate does the most damage.

Your Hourly Rate Isn't Protecting You — It's Costing You