… and why flat rate inspections often work against the customer
The current trend in billing style for annual equipment certification, at least in the Alberta area, is that more and more companies are asking for flat rate pricing. That is to say that they ask to know in advance how much the inspection will cost for a specific type of equipment. Sometimes the inspection goes a little quicker and the inspection company wins. Sometimes it goes slower and the customer doesn’t see a cost increase. I can fully appreciate why companies are asking for this type of pricing, but I don’t agree with it. Here is, in my opinion, the top reasons why companies should choose to pay their inspectors an hourly rate rather than by the inspection completed. I expect this to be a somewhat controversial topic so if you have something to say please do so in the comments.
1. It’s the wrong motivator
The biggest problem I have with getting paid on a flat rate system is that it motivates inspectors and inspection companies to short cut the process to be profitable. Weld inspection is a very detail-orientated task and it takes a great deal of concentrated focus to find small “failures” on a large piece of equipment. If the inspector is constantly being aware of the time he or she isn’t focusing on doing a good job. If for some reason the inspection is taking longer than expected you also don’t want the response to be to shortcut some aspect of the job. Annual structural inspections are often the primary mechanism to assess ongoing structural safety and in many cases is the only thorough inspection completed. Given the potential loss of life or equipment, it isn’t a process you want to short cut and we shouldn’t be motivating people to do so.
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2. The inspection company doesn’t lose with this arrangement
My experience with flat rate inspections is that the inspection company rarely loses in these arrangements. Due to the inspection company assuming all the risk with regards to quoting the flat rate they are always going to add some factor to account for “unforeseen problems”. The customer ends up paying for this risk on every inspection rather than just paying when there is an actual problem. This is sometimes highlighted when performing inspections on new equipment. Many industries require a structural inspection to be performed after the new equipment is received, but before it actually heads to the field. These inspections generally go quicker because the equipment is clean and brand new. There is also less risk in these situation because the equipment was inspected at the factory and a second inspection happens before it actually becomes operational. Now, does it make sense to pay the same for this type of pre-operational inspection as it does for an inspection on a piece of equipment that has been in the field for 10 years and has failures on it?
3. Customer / organization can have a huge impact on price
It is surprising how much impact the customer can have on the cost of an inspection. The more organized the customer is, the easier the inspection. For instance, some of our customers (the best ones) book an appointment weeks in advance. When we get to the site there are multiple pieces of equipment to be looked at. Each piece of equipment is clean and if it’s cold out, the equipment is stored inside. Some customers even stretch the boom of a crane out over a trailer to eliminate any ladder work. Now compare that to a customer that phones last minute, has the inspector working out in the weather on equipment that isn’t clean. Obviously, circumstances arise that prohibit any amount of planning but the two inspections described above are hugely different in terms of efficiency. On an hourly basis, these savings would be reflected in the price and the customer is happy. On a flat rate system, the customer isn’t motivated to do these simple things and in turn the inspector spends more time doing their job and everyone loses. Again, I would like to see the right motivation in place that creates a win-win relationship between the customer and the inspection company.
4. It is more difficult for the inspection company to regulate & standardize their service
This point has very little to do with the customer and more to do with organization in the inspection company. As an inspection company grows, there inherently becomes many different inspectors covering the same area and performing the same type of work. One of the operational challenges of an inspection company is establishing and maintaining a consistent level of service across all the inspectors. You don’t want one inspector following one procedure and having a job take an hour and another inspector following a different procedure and it take 2 hours. The easiest way to monitor and control this is in an hourly billing system with a built-in method to track time. Obviously, with enough effort this problem can be managed through other means but no system will be as transparent or comprehensive as simply billing on an hourly basis.
5. The gains from efficiency are internalized
Weld inspection is a very commoditized service (when compared to other engineering services). What I mean by that is it operates on a high volume, low margin premise where the scope of service varies very little from one job to the next. In an idealized state, that means that all the companies operating in that space have comparable service for a comparable and market-efficient price. So as a business manager there is really only two ways to grow the business. Increase throughput (do more) and/or increase efficiency (do more with less). The underlining difference is when you are performing the inspection on an hourly basis. Any efficiencies created are instantly passed to the customer. Whereas with a fixed-rate system, the benefits from that efficiency are internalized in the inspection company (at least until the rest of the market catches up). For instance, when Sparta switched from a paper-based inspection system to a cloud-based one, we were able to cut at least 0.5h of paperwork time out of every inspection. Our customers that used us on an hourly basis saw an immediate drop in total cost, whereas the flat rates remained inline with the market.
Now that we have gone through five points of why operating on an hourly basis is great, I feel for the sake of comparison we should mention what motivates us to operate on a flat rate. If anyone out there loves flat rates and wants to add to this list please let me know, because for me there is only one big reason: “Knowing the cost beforehand.” This is such a strong and important reason to use a flat rate system that I can certainly relate to everyone that leans this way. For people reselling the inspection services, (such as crane companies) this is important because they can communicate to their customer what the cost will be without needing a bunch of back and forth. They can also save themselves the hassle of having to go back to the customer with cost increases if something goes wrong. For many middle management people, that can be one of the most nerve racking functions of their job. The other advantage to knowing the cost beforehand is transferring all risk off their table and onto the inspector. On a flat rate system, they have all the information needed to make an informed decision before they actually engage a company to do the work.
As the saying goes: “The customer is always right”
So if the demand is for flat rate systems, I am confident that the market will react.
Thank you for reading my thoughts on flat rate vs hourly inspection services. If you have any questions or comments you can reach out to me in any way that suits you.