plus why.
there are many ways to price professional services. alternative pricing methods in the legal profession have received much more attention than in the accounting profession. in fact, entire publications have been issued by the american bar association on this particular topic.
more: 12 subjective factors for pricing your next engagement | ethics question: commissions and contingencies | how competitors drive pricing | what we know about pricing strategies | when hourly billing hurts profits
exclusively for pro members. log in here or 2022世界杯足球排名 today.
i am aware of at least 14 different approaches to billing that attorneys can use under different sets of circumstances. obviously, each method has advantages and disadvantages as well as marketing and operational implications. i maintain that several of these methods can be used by accountants and consultants in accounting firms when pricing their services.
let’s explore some of these methods and discuss the various advantages and disadvantages of each one. the majority of the ideas that follow are based on chapter 9 in richard c. reed’s 1992 book win-win billing strategies: alternatives that satisfy your clients and you.
fixed or flat fee
a flat fee is the price that will be charged for defined services. many firms today will quote a fixed fee for the audit or other financial statement engagements. it is not always necessary to provide a fixed fee for the entire engagement. often, just one part of the engagement is quoted on a fixed-fee basis. most accountants dislike a fixed-fee pricing strategy for fear that they will lose money. more and more clients however are asking for fixed fees in their requests for proposals as a way to control expenses. we definitely need to get accustomed to this trend. it doesn’t look as if it is going to go away.
when to use: fixed fees are called for whenever clients ask for them in their requests for proposals. larger corporations in requesting audit proposals often ask for a three-year bid with fees fixed for each of the years.
fixed fees are appropriate for commodity services in a highly competitive market. smaller accounting firms often offer a package deal to their client accounting services clients. for a fixed monthly fee, these firms will maintain the company’s books and prepare the year-end tax return.
use fixed fees for volume work on a repetitive basis. often when a firm is doing certain types of governmental grant audits, low-risk work or repetitive types of engagement, fixed fees may be appropriate.
finally, use fixed fees for routine services where experience shows that there will be very few variations in what it normally costs to provide the service.
the marketing and operational perspective: the client knows what the fee will be up front. there will be no surprises and the client will be better able to control cost. a fixed fee also eliminates any of the problems that clients may currently face with billing. you, on the other hand, need to know the value of the work to the client and the total cost of providing the service. if not, you run the risk of having unprofitable engagements because of pricing too low or cost overruns.
this billing method encourages the use of billing systems to track, monitor and manage engagements; the emphasis on technology; and the ability to leverage and properly allocate human resources. it also can eliminate partners from doing more basic work just to reach their billable time goals.
unit fee
the unit fee is a subspecies of the fixed or flat fee in that you charge a fixed amount for a specific service, irrespective of the actual time spent. some firms may refer to this type of billing arrangement as “menu billing” or “task-based billing.” the firm has a fixed charge for every tax form, letter or page typed, phone call and any other forms or procedures. the method could be combined with hourly billing rates.
when to use: this method has perhaps gained the most popularity in the tax preparation area. in the aicpa’s 1993 book seasonality: practitioners’ suggestions for managing work load compression, there is a discussion of this method. it’s referred to as a “charge per schedule.” according to seasonality, “a growing number of accounting firms are billing individual tax returns based on published fees per schedule prepared.” this method is good to use whenever you have accurate knowledge of the time typically required to provide a specific service. in addition to tax preparation engagements, this method can be useful in quoting bookkeeping engagements, preliminary projections, budgets, computer-based calculations, etc.
the marketing and operational perspective: this method can definitely add a premium over straight hourly billing. it requires clear communication with the client about your fees. clients usually accept this method because it is very simple to understand. other professions, such as physicians and dentists, often bill in this fashion.
this method will help change a firm’s culture with regard to the billable hour concept because it encourages minimum time expenditure for a specific service. because clients are billed for the specific service or activity, the service provider will put more emphasis on performing more of these activities rather than trying to take as much time as possible to complete just one activity. because activities are tracked and not timed, this method can reduce time lost from inadequate recordkeeping. it could in the long run not only simplify timekeeping but completely eliminate it.
contingent fee
the aicpa’s professional standards defines a contingent fee as “a fee established for the performance of any service pursuant to an arrangement in which no fee will be charged unless a specified finding or result is attained, or in which the amount of the fee is otherwise dependent upon the finding or result of such service.”
contingency fees in and of themselves are not bad. in a number of circumstances, they are perfectly ethical. in thinking about a contingent fee, remember that they may be combined with a fixed or flat fee or with an hourly billing quote.
when to use: contingency fees are most commonly used in merger and acquisition situations, in representing a tax-only client in an examination by a revenue agent of the client’s federal or state income tax return, representing a client in connection with obtaining a private letter ruling or influencing the drafting of a regulation or statute. the reader should be familiar with rule 302 to make sure that he or she is not in violation of this rule.
often, you may have the opportunity to represent a client for whom you are not providing any attest services. or you may find it desirable to represent clients who need the service but who otherwise would be unable to pay unless the transaction is complete.
a contingent fee pricing strategy gives you the opportunity to accept only those engagements with a high likelihood of success. firms that are successful in obtaining results for clients will soon find that their expertise and reputation will attract additional clients looking for similar results.
the marketing and operational perspective: contingent fees entail little or no risk for the client. unless the agreed-upon results are achieved, the client does not pay. it does require that there be a perfectly clear understanding between you and the client as to the desired outcome.
this fee arrangement should get accountants to think of getting the best results for the client. such thinking is not always the case, of course, under the hourly billing method. there is always the risk that you may spend more time than the engagement is worth; this is where you would want to combine the contingency aspect with an hourly element in order to protect yourself.
there is also a tremendous upside to this pricing strategy. it offers the accountant the opportunity to make a substantial amount of money in a very short period of time. for example, buying or selling a business, most clients would pay a contingent fee according to a basic lehman formula, which is 5 percent of the first million dollars, or $50,000, 4 percent of the next and so on. an accountant could earn $150,000 on the sale of a $5 million business. at $250 per hour, an accountant would have to spend 600 hours to bill that amount. if clients work with business brokers, they expect to pay a commission or contingent fee. are the services that an accountant provides worth any less than those paid for to a broker? is it wrong to ask clients to pay their accountant a similar value for the same kind of service?
hourly rate
the hourly billing rate was intended to cover the cost of production plus a profit factor. the question is whether the hourly billing rate actually covers all the costs for a given client. does your hourly rate capture the various disbursement charges and out-of-pocket expenses you incur to service the client? most firms that use the hourly billing method also have a minimum time requirement. it may be as long as 15 minutes or as short as five or six minutes. for example, an eight-minute phone call with a client would automatically be clocked as 15 minutes.
many firms that use the hourly billing method are using multiple billing rates. i recommend that firms have at least two, and even in some cases three or more hourly billing rates depending on the type of service they are providing to their clients. each billing rate could be 25 to 50 percent higher than the standard rate.
over the years, clients have become comfortable with the hourly billing method. this method is also easy for the accountant, because it requires less work and thought at the outset in determining fees. it also lessens the amount of communication that is needed between the client and the accountant. this reduction in communication is not entirely positive, however, because it also reduces client satisfaction and increases client turnover. as a result, firms wind up spending more marketing dollars to replace business that is being lost.
one final aspect of hourly pricing is that there are only so many hours in a year that a firm can bill. therefore, the hourly billing method does put a cap on the total gross fees that can be billed in any given year. many years ago a lawyer claimed to have billed 6,000 hours in one year. that means he billed 16 hours a day, every day! you can imagine the negative publicity he received.
when to use: some clients may demand hourly billing and will not consider anything else, even though the client may not know what the total fee will be. this is how they have always been billed and they need to be educated in the different ways of billing.
if you are doing consulting work as well as compliance work with clients, hourly billing may be appropriate. one firm was able to increase per-partner compensation by $35,000 in one year by using dual hourly billing rates. the firm did a great deal of auditing in a regulatory industry as well as high-level consulting that was not price-sensitive. they had no trouble in charging $275 per hour for their compliance work and $400 per hour for their consulting work.
the marketing and operational perspective: the client is more at risk because he or she does not know the total fees that can be incurred. in fact, this method discourages efficiencies and any relationship between the fee and the value received. it also, as we have noted, decreases the communication between the client and the accountant.
billing can be automatic, especially with a good time and billing system. in an ideal world, few subjective judgments in billing are required if you use this method. detailed itemized invoices based on contemporaneous time entries are a chronology of work done and can be a means of communication (albeit a poor method of communication) between accountant and client.
blended hourly rate
in the legal profession, this method is becoming very popular with firms working with corporate counsel. instead of specific hourly rates for individual timekeepers, one rate applies to all hours billed. this method is often used when the total time of the engagement cannot be established, but you do know the mix of people you will need to accomplish the task. in the accounting profession this method is being used for audit proposals and other competitive situations.
as an example, let’s say that you are quoting on a system integration project. you are not completely sure of the time it will take to complete the project, but you do know that you will need a senior consultant at $300 an hour, a manager at $175 an hour and a staff person at $95 an hour. you estimate that the senior consultant will spend 30 percent of the total project time, the manager 50 percent and the staff person 20 percent. the blended rate will be $195.50 an hour, which is computed below.
| $300 x 30% = $90.00
$175 x 50% = 87.50 $90 x 20% = 18.00 blended rate = $195.50 |
you quote the client an hourly rate of $210, which provides you a premium of $14.50 per hour. if the senior consultant can manage this engagement more effectively and push an additional 5 percent of the time to the manager, the new blended rate is reduced and the premium is increased. see the figure below.
| $300 x 25% = $75.00
$175 x 55% = 96.25 $90 x 20% = 18.00 blended rate = $186.25 |
the blended rate now becomes $189.25 or an additional premium of $6.25 per hour. if the blended rate engagement takes 100 hours, the firm will receive $19,995 at the original blended rate ($195.50 x 100 hours) plus a premium of $2,075 ($20.75 x 100 hours). this method requires that you can properly staff and manage the engagement.
when to use: the work being quoted on needs to be fairly defined and you can determine with a high degree of accuracy the accountant and consultant staff mix to provide the service.
the marketing and operational perspective: under this method, compared with that of having different rates for each biller, it is easy to negotiate with the client and internally administer.
it may endanger the quality of the work product, because there always exists the danger in trying to get the highest premium possible. if your firm decides to uses this method, make sure that it has excellent quality controls in place.
there is another danger to this billing method. it can be highly unprofitable if the blend is at the high end. in other words, if the senior consultant in the above example had to spend 60 percent of his or her time on the project and the firm could only charge the same blended rate, the engagement would most likely be very unprofitable for the firm.
depending on the time and billing system you currently have in use, it may be difficult to assign to several different billers a blended rate that is different from their standard billing rate.
this method does encourage delegation because the firm is focusing on profits and not just billable time. partners and managers can then spend their time doing more valuable work, such as spending more time with clients, improving client service, cross-selling other services and doing more marketing.
fixed or flat fee plus an hourly rate
this is a hybrid method. there are two parts to this method. the first part deals with the portion of the services that can be defined. this is the part of the engagement for which you will use the flat or fixed fee. the second part of the engagement is more uncertain. you just don’t know how much time you will need. you will want to use an hourly rate agreement with the client.
when to use: this method can be useful when the services cannot be totally defined, or when you and the client want to share in the risk of the fee. for example, in an estate planning assignment, the initial interviewing, goal-setting stage and determination of any tax consequences can be done on an hourly basis. the preparation of the written documents can be charged on a fixed-fee or flat-fee basis. the method provides some degree of security for the accountant, especially in those areas that are difficult to accurately determine the total time commitment. the hourly rate portion protects the accountant from underquoting. after you obtain more information about the engagement, you are then in a better position to provide a more realistic fixed-fee quote. at that time the client will also have a better feeling of where the project is going.
accountants can also use this method in litigation services. the accountant agrees with the attorney to perform a range of routine engagements for a fixed fee, with the understanding that if the services required go beyond this range, the additional services are charged on an hourly basis. finally, we should not forget that this method can be used with compliance work, for example audit, review, compilation or tax returns that would be on a fixed fee, while miscellaneous consulting services would be on an hourly rate. you could have an arrangement with the client that any additional significant projects be quoted on a fixed fee as well.
the marketing and operational perspective: as we saw above, this method takes some of the risk of not knowing the final fee away from the client. both the accountant and the client share in the risk. this sharing will improve communications between the two parties and the accountant will more likely do what is in the best interest of the client, rather than try to build up billable hours. clients realize and appreciate the efforts of the accountant and speak highly of him or her in the marketplace, thus providing more positive word-of-mouth advertising.
use of this method makes it more difficult to prepare an annual budget because the hourly fee portion is not predictable.
hourly rate plus a contingency fee
this is a combination of hourly billing and a contingency factor. what’s important is to clearly define how the contingent fees will be determined. will they be based on dollars saved, or some other outcome, such as purchasing or selling a business? this method would be used in a consulting engagement where the firm might be involved in a merger and acquisition for a company. depending on the arrangement, some of this engagement could be done on an hourly basis plus a contingency factor (or success fee as it is commonly referred to in the accounting profession). as you can see, this and other more sophisticated billing practices require that you communicate clearly and frequently with your clients to avoid any misunderstandings.
when to use: this method is appropriate for situations in which a significant dollar value exists and there is a willingness to share in the risk with the client. it is certain that the hourly fee will be paid, but the contingent part is at risk.
the marketing and operational perspective: the client will pay the full amount only if the accountant achieves all the agreed-upon results. you can be sure that the accountant will do his or her best to get results for the client.
because of the contingency factor, a close relationship with the client should be established. this method creates more of a partnership between the client and the accountant.
this method also puts an added burden on the accountant or consultant. it is necessary to assess, with a high degree of accuracy, your chances of success, because a major portion of your fees is based on results.
retrospective fee based on value
this method differs in approach from most of the alternative billing methods already discussed in that the exact amount of the fee is not known to either accountant or client until the engagement is concluded. it is critical that the representation agreement sets forth the factors that are to be considered in setting the final fee. in a certain manner this approach might come closest to a satisfaction guarantee based on value, except that the service provider and the client do not yet know what the final fee may be. nevertheless, it is the accountant who will ultimately determine what the fee will be, not the client. again with this type of method it is critical that the various factors that will go into determining the fees be clearly delineated at the beginning of the engagement and that they be documented in the engagement letter.
when to use: for this method, as for several others that have been discussed, a trusting relationship between the service provider and the client is critical. each must act fairly and there must be good communication between them. this method should be kept in mind anytime an engagement may result in a better than expected benefit to the client.
the marketing and operational perspective: the retrospective fee permits the advisor to market his or her services based on the real value to the client, especially when the advisor enters a situation where there are many uncertainties and unknowns.
on the one hand, this method forces providers to think of value rather than time spent. on the other hand, it will make most clients wary of agreeing to this type of billing method because the client has no way to budget for the final expense.
retainer-only availability
this is a method that is seldom used by professional service providers. but it is one that should be mentioned nevertheless. the availability-only retainer, is also referred to as a pure retainer, is characterized by a payment to the service provider of a specific fee for which no direct services or limited services will be performed. when you agree to accept the fee you make a commitment to the client to be available when requested. in the legal profession the attorney would also agree to refrain from representing either parties adverse to the client or competitors of the client within a specified time period. this pricing method could be used by an accountant who has developed a certain expertise and has served as an expert witness. the accountant could develop this billing relationship with an attorney and agree to only work with that particular attorney.
when to use: retainers are useful only if the monetary amount is significant enough to justify the disqualification from taking work from other clients. i am unaware of any accounting firm that has used this method, but it would be applicable to a professional who has high-level expertise or prestige.
this billing method could also be used when doing executive search work for a client or in acquiring a business for a client.
the marketing and operational perspective: a predictable stream of income is provided for the period of the retainer. in addition, your competitors are locked out from doing business with this client. work on retainer-only may cause some supply and demand problems because you will not know the work level required by the client or when the client will demand your services.
the service provider who is fortunate enough to bill under this type of scenario is apt to enjoy increased prestige in the marketplace, especially if you are doing expert witness type of work.
retainer as a deposit against future services
this method is becoming more popular with accounting firms because it helps reduce collection problems and permits the accountant to protect himself or herself against clients who, for whatever reason, may not pay their bills. actually, this is not so much a billing method, but a technique to ensure that the client will pay for services to be rendered.
the secret to this technique is to collect fees on an ongoing basis so that you are always ahead of the client. if you do this you will always have negative wip. this technique can also be used with a variety of billing methods discussed here.
many sole practitioners have used this method for years with their monthly write-up clients. unfortunately it has not spread to other types of services.
when to use: this method should be used whenever possible, because it enhances your cash flow. the technique can be used with existing clients as well as with new clients. obviously with existing clients, it will be necessary to communicate with them and explain your new billing procedures.
the marketing and operational perspective: most firms originally start to use this method to help screen out unqualified clients or clients with payment problems. from a marketing perspective, this method is more of a defensive posture than an offensive marketing tactic.
statutory or other scheduled fee system
the amount to be paid to the service provider is spelled out in a statutory enactment, which states whether a fee is imposed, negotiated, fixed or flat. or it may be specified in a prepaid personal financial plan, similar to the fee charged for assets under management. for example, a cpa firm could offer a prepaid individual tax preparation plan or a personal financial planning/estate planning program to executive employees of large clients.
when to use: sometimes service providers are compelled to use this method, such as when trying to include a value-added service to attest work for a major corporate client.
the marketing and operational perspective: this type of prepaid plan will help a corporate client in cost containment, if the company is interested in providing this benefit to its key employees. an employer can offer this service to its employees without any additional cost. from a marketing perspective this type of service can be offered to attest clients as a value-added service to their employees. firms that are interested in growing their tax practices might want to consider this method. this pricing arrangement can also be offered to strategic alliance partners, for example, with financial planners who only sell products, but do not provide tax planning and preparation services.
ending thoughts
as you can now see, there are many different alternatives to consider when developing your pricing strategies. the old way of thinking about pricing will go the same way as the typewriter or pay phone. these pricing methods strive to achieve three major objectives:
- to increase the revenues of your firm as well as the bottom line
- to improve your operating efficiencies
- to provide superior service to your clients