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Fixed Fee Pricing

April 22, 2014

Professional fees are typically billed based on time.  Yet, clients want outcomes and place a value on results which doesn’t necessarily relate to time spent.

Ingrained habits are hard to break away from.  For ages, many professionals quoted jobs by providing hourly rates and possibly a range of expected hours.  Some projects are open-ended in the sense that no one knows where it will take them and what will be uncovered once work commences.  This might include a forensic investigation, litigation where the discovery process becomes acrimonious, unraveling transactions in a complicated bankruptcy, a first-time audit of a multinational corporation or a tax audit for a reasonably sized business.  However, for most work, there is an understanding of what will need to be done and the approximate value to the client.  This could include an annual audit, tax return, setting up a cost accounting or internal control system or a transfer price study.

Many experienced professionals have good ideas of a project’s scope and usually a ceiling is provided which, on some level, becomes a “fixed fee.”  Fees really do not get out of hand since there are competitive pressures that keep fees within a reasonable range.

Pricing an engagement is not an exact science and can never be perfectly done, but regardless of how it is done, things seem to work out for the client and accountant.  A suggestion to better match the fee with the value is for the client and professional to map out the purpose and deliverable, what is expected of both parties, a time table, primary contact person at each firm, the scope of the services, how to determine when there is scope creep and at what time the price for the additional work, if any, will be discussed.

A problem arises when scope creeps past the “little extra” stage and work cannot be halted due to deadline pressures. Depending on how it is brought up, there can be an appearance of the accountant “holding up” the client for additional fees. But, it has to be done and the sooner the better.  If nothing is said and a bill is presented at the completion of the project, the client can complain that they did not either expect an extra bill, one so high or that they should have been told earlier when they may have had alternatives.  In any event, there will be a conflict no matter when it is done.  My suggestion is to mention it as soon as you realize there will or should be an extra billing.  You are a business person that will be speaking to another business person and this is part of doing business for both of you.  Explain that it appears services are needed that is beyond the scope you jointly worked out; explain what the services are; why they weren’t originally anticipated; and that you did some extra work into it but now have to work out a price for it.  In effect, you are issuing a change order.  This works because when done early, the client has some control, can appreciate the value and will understand there is a need for you to be compensated for the extra work.

Setting fees is complicated, occasionally uncomfortable, absolutely necessary and the earlier handled, the better.

3 Comments leave one →
  1. April 22, 2014 1:28 pm

    Great advice, Ed. Thanks for sharing this with everyone. On your suggestion to, ” to mention it as soon as you realize there will or should be an extra billing,” at Deltek we advocate putting systems in place that help everyone involved- from partners to staff to billers- gain that “early warning” as soon as possible. One good way is by making sure time (even if you’re not billing by the hour) is linked to the original scope and actual WIP, so you can see how you’re progressing against the expected budget.

  2. April 25, 2014 2:22 am

    Drew, Great comment about use of time sheet as a control tool. Thanks.

  3. April 25, 2014 7:43 pm

    I have found that the way fees are generated and billed is out of negotiation with the client. If they only want to pay for the work done, it is an hourly fee. Others are more comfortable with a fixed fee knowing the work will get done. It helps them budget better.

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