Flat Rate or Flat Rape?

Maybe We Should Call It 'Flat Rape'
by Ken Secor

With regard to columnists Frank Blau, Ellen Rohr and Maurice Maio, I would like to remind everyone of just how narrow the PM audience they pander to actually is. This one-sided staff of exclusively flat rate advocates does our business - and the vast majority of PM readers - a disservice. What they have to say is one part of the problem. The obvious absence of editorial balance is the other.

I'm referring to a balance of articles on the pricing method still used by the 90 percent of us who read the magazine! We could be referred to as the forgotten Time and Material majority. (Frank calls us "slugs.") This method, and the 90 percent who use it, continually get the short end of the stick by the misinformed, unethical and one-dimensional writers at PM.

We all agree knowing costs is essential to a successful business plan. However, there's a world of difference between knowing costs and using flat rate methods. In fact, there is no connection between the two. If you don't know your costs of doing business, any method of financial planning is suspect.

The ominous consequences of articles by Frank, Ellen and Maurice are that the reader is intentionally misled to believe that knowing costs and using flat rate are somehow inseparable. Nothing could be further from the truth. Knowing the costs of doing business is a function of basic accounting - not pricing schemes. The fact that all three authors have financial stakes in companies that cash in on flat rate pricing "systems," books, Web sites, seminars and the lecture circuit leaves this intentional misleading of readers, as blatantly unethical behavior.

Frank Blau, the alleged guru of flat rate, has suggested only 10 percent of his audience actually uses a flat rate system. This means 90 percent might use the obvious alternative, namely T&M. The conclusion drawn is that during all the years of editorial bias favoring only flat rate promoters, 90 percent of the readers continue to reject that bias and prefer to read instead, the best technical writers on the planet, i.e., Dan Holohan and John Siegenthaler, people who truly write for us all, not just the obscure 10 percent.

Meaningless Numbers
Any reader interested in flat rate methods encounters another problem; that being the financial "examples" used in the articles (particularly with regard to gross revenues and number of employees) and the simplistic notion that one flat rate system fits all. This suggests flat rate methods are somehow universally workable. To make flat rate as attractive as possible, the models typically have more than five employees, and sales figures that tend to be upwards of $1 million dollars. The writers, therefore, shun the majority of real world small-businessmen by making the illustrations appear realistic - when in fact these distortions result in financial examples that are useless and meaningless to most readers.

For instance, the flat rate devotees like to throw numbers around like techs making 70K+ a year. As evidenced by the census, the average guy in our trade more realistically earns half of that - especially if working for a small shop. The very basis of flat rate is completely unrealistic for the majority of folks that are one, two or three man shops, but the false data continues nonetheless. It is any wonder most new businesses fail?

This is not to say many small (under five-man) shops can't or won't make 70K net a year, but it is absurd to expect most readers to relate to those kinds of numbers. The census suggests income for all jobs is still roughly half of that!

Frank makes statements like, "We should be able to make 20 percent net - because McDonald's does. Then he quips, "They feed us junk." "We provide for the health, safety and welfare of mankind." As if to say, working at McDonald's is unrespectable and being a plumber is. Despite all of Frank's bad examples, McDonald's does not made that kind of net, but then, 20 percent of what is the question. Few of us could live on 20 percent of $100,000 gross. But 20 percent of a million is serious money.

Real Accounting
I think PM readers deserve better. Since PM has apparently assumed the mantle of educating small contractors in accounting, I suggest real accounting and not get-rich schemes should be the norm, not the exception. PM needs someone who can speak to the 90 percent of us who could benefit from understanding the critical nature of knowing costs - and how to apply that information - without having it appear that knowing costs and flat rate are somehow inseparable.

The unethical and illegal nature of flat-rate schemes has been demonstrated in the courts (http://lawlibrary. rutgers.edu/courts/supreme/a-125-95.opn.html). In addition to false promises of wealth and prosperity, a few who embraced your staff's flat-rate schemes have endured property seizures, huge fines, bankruptcy and lost licensure, as was illustrated in the Tom Warner legal debacle.

Somehow the epiphany of "knowing your costs" is being projected as necessarily integrated with the unethical get-rich schemes the flat rate columnists promote. It's at the expense of those of us who want to hear about accounting and real business, not some snake oil salesman hustling price books and drain chemicals.

The methods used (flat rate or T&M) are not part of any serious business plan. They are merely forms of implementation.

It is truly unfortunate that PM, the best plumbing and mechanical trade magazine around, chooses to avoid and even ostracize 90 percent of the readers for avoiding unethical and illegal get rich schemes. Along with the thousands of readers who enjoy prosperity using T&M, most of us simply avoid the flat rate hype, and read the real heroes of this biz, Dan Holohan and John Siegenthaler.

Without them, PM would have little relevance to 90 percent of us.

Ken Secor is the owner of Palmer Heating, LLC, Rahway, N.J., and can be reached at palmer.heating@verizon.net.

Ken, You're Missing The Forest For The Trees
by Jim Olsztynski

Hey, what am I, chopped liver? I feel insulted being left out of Ken Secor's rogue's gallery of PM columnists who "pander" to our audience with advocacy of flat rate pricing. I, too, have been known to promote this pricing mechanism. Ken has taken me to task for it on more than one occasion in private correspondence and public forums. Perhaps he thought that leaving me out of his adjacent diatribe would give it a better chance of being published. If so, that was unnecessary. I've decided to inject myself into the debate anyway.

I've never met Ken Secor, but feel like I know him. What I know about him from others, and from my encounters with him over the phone and through correspondence, leads me to believe him to be in most ways a credit to our industry. I'm told he runs a reputable contracting business that's oriented toward customer care. He's an intelligent individual with considerable technical proficiency. And I feel a special affinity with anyone who shares such obvious passion for his profession and our industry.

Ken is an honorable person. It's just that he's got this blind spot about flat rate pricing, and something verging on obsession to purge it from the industry. PM has decided to give him an outlet to exorcise his demons because he speaks for many readers who feel that same way, and he makes some valid points. However, he misses the forest for the trees. Many of the assertions cited in his commentary are true as far as they go. It's the conclusions he draws from them that are wrong. Let's take it from the top.

Point: For example, Ken makes much of the fact that upwards of 90 percent of this industry's service contractors still use time-and-material pricing. Therefore, he chides PM's writers for devoting too much attention to the flat rate pricing used by a tiny minority.

Counterpoint: More than 90 percent of automobiles are powered by internal combustion engines. Yet, the automotive publications are filled with stories about electric and fuel cell vehicles. Should they be devoting 90 percent of their coverage to the internal combustion engine? What more can be said about it after all these years?

It's precisely because flat rate pricing is unconventional that it's worth writing about. We'd be happy to publish an article about the advantages of T&M pricing, but have yet to find anyone able to articulate what they might be. Tradition is the reason why the majority of PHC service contractors use T&M. It's the way they were taught and the way it's always been done in the industry. That doesn't make it sacred, or even necessarily a sensible way of doing business.

Ken believes his customers are better served by T&M than flat rate. PM doesn't share that belief, but even if we did, it would be irrelevant. This magazine doesn't cater to consumers. It's aimed at an audience of contractors, and we will promote what we perceive to be in the best interest of our readers, even more than that of their customers.

Ironically, various surveys have shown most consumers prefer the certainly of flat rate prices over the "clock is running" angst associated with T&M.

Point: Ken stresses that knowing one's cost of doing business is a different issue than flat rate pricing.

Counterpoint: Doubtlessly true, as far as it goes. But flat rate pricing arose because hourly labor rates laid bare by T&M give consumers a convenient way to shop prices among PHC firms, and thereby instill in them a bottom feeding mentality that flat rate advocates believe to be harmful to the industry.

Frank Blau has been the industry's most prominent advocate of cost-based pricing. This philosophy is hinged to two key premises:

1. Most PHC contractors are unable or unwilling to figure out their true cost of doing business and convert it to an hourly breakeven labor rate. Instead, they blindly price their services in accordance with the "going rate" of T&M labor in their trading area.

2. If they would take time to analyze their costs, they would conclude, in the vast majority of cases, either their labor rates are too low to cover their costs, or they succeed only by shortchanging their employees and/or capital needs. Baring one's labor rates in a T&M system invites price shopping and makes it hard to boost prices, which explains flat rate's appeal from the contractor's perspective.

It's not a direct relationship, but there is a train of logic leading from cost analysis to flat rate pricing.

Point: Says Secor: "The flate rate devotees like to throw numbers around, like techs making 70K+ a year ?the average guy in our trade more realistically earns half of that - especially if working for a small shop. The very basis of flat rate is completely unrealistic for the majority of folks ?Is it any wonder most new businesses fail?"

Counterpoint: Various industry surveys support Ken's assessment that the average service tech earns about 35K a year. The issue is whether that is the way things must be and should be. Ken seems to accept it as an unalterable fact of life. Pro-flat raters think 35K is not nearly enough to attract talented people to the trades, and see flat rate pricing as a way to establish a higher level of value for PHC services.

Ken feels there's something shady about the way flat raters conceal their labor rates. If that's the case, all of us ought to clamor for a time and material breakdown on the prices charged by most businesses in the country that feel no moral obligation to reveal their internal cost data to the public. When we order a $25 steak at a restaurant, must we know what portion of that price represents the cost of the food? Although T&M is this industry's tradition, flat rates prevail throughout the vast majority of our economy.

Relating flat rating to the failure rate of new businesses is totally loopy. Using Ken's own 90 percent figure, most PHC service firm start-ups are T&Mers, since that's what they were taught.

I think what Ken is getting at here is that he has known some companies that went under after switching to flat rate. I believe him. Raising one's prices without concurrently adding value is a recipe for disaster, whether T&M or flat rate.

Point: "The unethical and illegal nature of flat-rate schemes has been demonstrated in the courts. (http://lawlibrary.rutgers.edu/courts/supreme/a-125-95.opn.html)"

Counterpoint: This assertion is even loopier. The legal case Ken refers to concerned an episode dating back to the early 1990s in which a contractor named Joseph Fichner was punished by the New Jersey Board of Examiners of Master Plumbers for "excessive pricing." The administrative ruling underwent various procedural challenges in the courts, which ultimately upheld the agency's right to do as it did. Whether one agrees or not with the outcome, no reasonable reading could possibly interpret it as outlawing flat rate pricing. The N.J. Supreme Court legal citation referenced by Secor contains not a single mention of the term.

Likewise, Tom Warner's well-documented travails had nothing to do with flat rate pricing per se.

Point: "Real accounting and not get rich schemes should be the norm."

Counterpoint: I think Ken is genuinely on to something important here. He's distilled, without quite understanding it, the real essence of the complaints against flat rate pricing.

It has become a buzzword for a litany of aggressive business practices that sometimes do get carried to extremes. Some firms go overboard in selling people goods and services of dubious value. Some pay little more than lip service to technical proficiency in hiring plumbers solely for their sales ability. Nobody in his right mind would deny there are some outright crooks doing business in this industry.

But these are sins also committed by T&M contractors, and it doesn't describe the majority of flat raters who are upstanding citizens of this industry and their communities. Ken, can you honestly claim that you've never heard of a T&M contractor who didn't stretch the clock when business was slow, or hustle people to buy something they didn't need?

The ethical case against flat rate pricing is overblown. Industry tradition has been for T&M contractors to restrain labor rates for competitive reasons, but "step on" material prices. This stems from an era when most people didn't have a clue about how much plumbing products should cost, but has become difficult to do in the modern era when Home Depot's ad flyers appear on just about every doorstep.

Frank Blau's flat rate system, the one I'm most familiar with, turns this philosophy upside down. It's based on assigning overhead to labor rates, with normal profit margins on materials. This boosts labor rates far above the typical T&M charge, but the material component of Blau jobs actually tend to get priced lower than they would by many T&M contractors. How is it morally superior to keep labor rates down but sell a faucet for double or triple what you paid for it?

Flat rate is a method of pricing, not an amount. Yes, some flat rates are so extravagant they are like waving a red cape in front of a bull in inviting scrutiny by consumer protection watchdogs. Yes, there are some "flat rapists" out there that indulge in shady sales pitches. Yet, this problem is barely a blip on the industry's radar screen compared with the more compelling issue of the vast majority of PHC firms charging too little to sustain trade and business professionalism. Flat raters are trying to establish a new paradigm of value for PHC services.

How much you charge a customer is irrelevant until related to the perceived value. One of the most telling indicators of a firm's ethical behavior is how much repeat business it attracts. It's not hard to pull the wool over someone's eyes once, but next to impossible to keep doing it over and over. I have seen internal documents from Frank Blau's and many other flat rate companies that Ken rails against showing as much as 60-80 percent of sales coming from repeat customers. This tells me they are leaving satisfied customers in their wake, and delivering value for the premium prices charged.

When all is said and done, flat rate pricing is not about accounting, or ethics, or even about pricing. It's a business philosophy. It says that the old ways of this industry aren't working to achieve an equitable balance of risk versus reward for contractors. I'm all for a system that is better able to provide the revenues and profits needed for this PHC contractors and their employees to prosper, and even to better serve their customers.

Jim Olsztynski is the Editorial Director of Plumbing & Mechanical. He can be reached at WrdWzrd@aol.com.