How do you calculate charge out rates?

Is there a common method that practices use to calculate their charge out rates?

Ours is a small practice (five staff) and our work is all on a fixed price basis.

I work out my quotes based on what is expeced to be involved, how long I think the work will take, and an hourly chargeout rate dependent on who will be doing what.

I don't really look at 'what is the work worth to the client'. 

However the chargeout rate I use in these calculations may be well short of the mark.

So I'm interested to know how other practices calculate their chargeout rates please.

Also do you use a different forumula with trainees, who may be away on study leave for six plus weeks a year, as well as having significant additional training costs?

Thanks for any advice.

 

Comments
Bob Harper's picture

What is desired profit?

Bob Harper | | Permalink

@David - a well known method is 1/3rd for wages, 1/3rd for overheads and 1/3rd.

The danger with using time/cost plus pricing mentality combined with fixed fees is that you can be caught out with cost over runs and not getting the right price. What I mean by this is trying to charge too much because of ineffective working practices or not charging enough for all the good work you do.

One option is to embrace Value Pricing and introduce project management along with setting the price on the value rather than costs to ensure you are really capturing the full value of what you do.

If you are open minded, I have a mini audio prgramme on this with Ron Baker I can send you. Drop me an email with your address bob@portfoliomarketing.co.uk.

Bob Harper

Portfolio Marketing for Accountants

 

petersaxton's picture

Some ways

petersaxton | | Permalink

You can work out the costs of wages and allocate reasonable overheads to each staff member. Consider a reasonable profit - Bob mentions the 1/3 of charge out rate which would mean that wages and overheads needed a 50% markup. You then need to compare these rates with your prices. Are you achieving that? Should you change your charge out rate or your prices? Are you happy with the profit? Should you change your mix?

davidwinch's picture

Dictated by the monopoly purchaser

davidwinch | | Permalink

Since the only 'buyer' of my firm's services is the Legal Services Commission they are in a position to dictate maximum hourly rates which effectively are as follows:

Partner: £144. Manager: £108. Accountant: £81. General Staff: £50

See page 205 of

http://www.justice.gov.uk/consultations/docs/legal-aid-reform-consultation.pdf

It makes my 'decision' an easy one!

David

Accounting Evidence Ltd

Bob Harper's picture

How long

Bob Harper | | Permalink

@David - do they tell you how long to take?

If not then I suppose this work rewards to slowest and penalises the fastest.

Bob Harper

Portfolio Marketing for Accountants

davidwinch's picture

Lowest quote

davidwinch | | Permalink

Bob

On most jobs the standard procedure is to require the solicitor to obtain 2 or 3 quotes for completing the task and then authorise him to instruct the cheapest firm (i.e. the LSC pick the lowest quote).

I'm sure you can quickly see circumstances in which that may not produce an ideal outcome for the solicitor, or his client, or indeed the LSC and the interests of justice (or even the accountant) - but that's how it's done.

The system could of course be abused by solicitors and accountants in various ways.

The LSC are prepared to listen to reasons why they should depart from this procedure in a particular case and they will authorise higher hourly rates in 'exceptional' circumstances.  But then there is also the issue as to whether the solicitor wants to get involved in debate with the LSC or not.

David

Bob Harper's picture

Quotes and final prices

Bob Harper | | Permalink

@David - is the "quote" a fixed price or an estimate which can be exceeded?

Bob Harper

davidwinch's picture

Exceeding the price

davidwinch | | Permalink

If the authorised amount is to be exceeded then the proper procedure is to seek (an additional) LSC authority to spend hours in excess of the (currently) authorised amount before those hours are spent.

An alternative is to spend the time and then bill the hours spent in the hope of persuading the LSC to pay for them.

In either case one would have to justify the additional hours, either on the basis that the task was taking longer to complete than anticipated for some reason or that the scope of the work had changed so that issues or evidence had now to be addressed which had not been in mind when the original fee was quoted.

Of course the LSC are conscious of the possibility that the accountant may be seeking to take unfair advantage of the fact that he is now part way through the task and it would be uneconomic (and a cause of delay) for a different accountant to be instructed at that stage - so there is no longer any 'competition'.  If the LSC refuse a justified and reasonable request the defence may claim the trial will be rendered unfair, but on the other hand the LSC are not going to want to be signing any blank cheques!

David

sparkey999's picture

Value pricing

sparkey999 | | Permalink

@Bob

I have started reading Ron Baker's new book on Implementing Value Pricing and I'm a big fan of this kind of thing. I have also read "Life Without Timesheets" and most of the new Michael E Gerber book "The E Myth Accountant".

I really love this stuff but I always seem to confuse myself on "setting the price on the value". I get the whole deal with better project management, monitoring scope creep etc. But when a client sits down in front of me and needs a set of accounts and a tax return, how do I assess value?

Lets say we're talking about a man with a shop who sells carpets. He struggles at the moment to keep the place going. Cash is tight and profits are minimial. The value to him of accounts and tax return work is low. So he will want a fairly low fee. But his records are not great and it will take 4 days to do this job.

Based on this, should I set the price on the value on either:

1.   His perceived value (which could be say £500)

2.   My professional judgement on a fair fee (which could be £750 assuming I decide to reduce work in certain areas, so that he provides answers rather than me preparing analysis for messy records)

3.   My estimate of hrs x £charge out rate (which really goes against value pricing)

4.   Some other way

I undertand in value pricing that part of the thrust toward moving away from cost-plus billing and timesheets is to allow more value added services to be provided without the fear of watching the clock. In the above example, the client would probably benefit from help in managing cashflow or reviewing margins, and would be prepared to pay a premium for this, however may not be in a position to take on this service due to lack of cash. I'm guessing that value pricing may not really apply to clients who simply want bog standard services.

 

Minimum pricing

johnhaylock | | Permalink

Sparkey999 - you are obviously very interested in going down the value pricing route.

Sometimes value pricing allows you to charge more than you would have than if you were charging on the basis of the hours involved x a charge out rate. That's great when it occurs. Sometimes the value price is much the same and sometimes it will be lower.

When it is lower you need to decide if the job at that price is worth it to you. Is there "value" to you at the same price at which there is "value" to the client?

There are circumstances where a low price may be worth it to you.  For example the client may show long term potential  and helping them through this period could be valuable to you in the long term. Or you may have no other work to do at that time - so earning some revenue could be better for you than no revenue.

On the other hand you have to be very careful about setting precedents with low prices. You may find it difficult to raise prices for that client in future, or you may find it a habit you slip into and you lower prices for other clients too.

You've already commented on reducing your service provided for a lower price by getting your client to do more work - that's a sensible approach to take.

However, if you don't get value at the lower price then you should stick to what you consider to be your minimum price - which in this case sounds like £750. You may get the job at that price or you may lose a client but in most cases when this happens you will replace that client with another who is prepared to pay a fair price.

There is nothing in the value price regime which says you have to do jobs at a price lower than you are prepared to accept.

You are obviously interested in reading more about this. You may want to check out my book "Absolute Certainty - how to give your clients exactly what they want".  It has been widely read in Australia and New Zealand and has just been released in the UK (and other countries) in e-book version.  You can check out some information on it at www.absolute-certainty.com or buy it via Amazon.co.uk or Amazon.com. 

The key focus is about providing your clients with certainty - and in particular certainty of price and certainty of delivery - and showing you how to achieve these outcomes.

Regards

John Haylock

 

sparkey999's picture

How to construct price based on value

sparkey999 | | Permalink

@John

Thanks for your reply John. I am still a little in the dark on how I actually work out a price based on value.

I understand the need to give clients what they want, to be timely, to keep them informed on job progress, to throw in a few freebies etc..........

But is value pricing really a nice wrapper around a traditional method of calculating a fee?

Do I still look at number of transactions, quality of records (manual/excel/Sage/Xero), quality of client, ability to pay etc? Or is there a secret formula?

I know I am being a typical accountant here, but I really want to know the methodology? I'd say it is different from person to person, from firm to firm, but where do I start? Is there a value pricing template as such?

Value Pricing

johnhaylock | | Permalink

Sparkey999

There is no secret formula.

There is only a process of talking to clients, listening to what they say, making an offering, listening to what they say again, perhaps modifying your offering - with the aim of ultimately reaching an agreement with the client on a price that is acceptable to both parties. 

The process is initially driven by the client's perception of value, not by your costs. The process is quite different to cost-plus pricing which leads with your costs.

Remember though that the client's perception of value is only one part of the pricing equation - though it is the part that should be assessed first.

You have to be getting value as well. There is a wide range of factors you should take into account and issues such as quality of records, quality of client, ability to pay etc affect the price that you are prepared to accept for the job. 

I just noted you had said you had started reading Ron Baker's latest book.  I suggest you keep on reading.  There is plenty of practical advice in later chapters on implementing the value pricing process.

Regards

John Haylock

Bob Harper's picture

Keep going

Bob Harper | | Permalink

@Sparkey999 - first, understand that the price comes after strategy, marketing and sales. You cannot value price without first having a strategy, value marketing and value selling. So, my suggestion is that you take a few steps back.

As John says, pricing on value is not about getting a higher price but a price based on value. You then decide if and how you do the work.

Be careful when lowering prices and reducing your service because what you do and how you do it determines your brand.

It is possible to add value and charge more for compliance. One way to do this is to think about how you deliver the work. There are clients that value high service levels and are willing and able to pay a premium. It sounds like this client is not one of them even if he wanted to be because he doesn’t have the money.

If there is a secret to value pricing I think it is appreciating that there isn’t a secret formula. Sorry, it is not something you do on a spreadsheet; you need to get intimate with clients.

What happens if this client goes bust? What impact will that have on him? How will he feel about that? Perhaps that is where the value is.

I have just set up a group on LinkedIn called Profitable and Sustainable which will discuss this type of issue and Ron Baker is a member. I’d invite you to join because over the next few months I will be researching the market and inviting many other accountants to join so later in the year we can kick off some high quality discussions.

I agree with John, keep reading the latest book, there are many answers in there about how to implement.

Bob Harper

Portfolio Marketing for Accountants 
 

Bob Harper's picture

Rewards

Bob Harper | | Permalink

@David - two thoughts:

  • Where is the reward for innovation?
  • 1,500 hours a year @ £144 per hour = a nice living. I suspect you are happy. Where does the LSC commission get the money to pay you?

Bob Harper

Portfolio Marketing for Accountants 

sparkey999's picture

LinkedIn

sparkey999 | | Permalink

Hi Bob,

Just getting me website finished at the moment and will be setting up a LinkedIn page too, so I will make sure I join!

Paul Scholes's picture

Another vote for valuing the work

Paul Scholes | | Permalink

I dumped timesheets 3 years ago this week and, whether I have earned more or less money through doing it is not really an issue for me.  By far the biggest benefit is in far less administration, no bad or doubtful debts and in being able to tell a client in advance what the fee will be thus avoiding the ticking clock sitting over me and the client.

In the Sparkey999 & John exchanges, my experience matches John's explanations, in that there is no procedure, checklist or formula in deciding on a price, it's down to intuition, experience and gut feel.  Some you will win & some you will not but it frees you up to make snap decisions on new work and to take opportunities.

I would add one extra consideration to the example discussed and that's the client's potential to recommend new clients.  I had a similar case last year where the client's business had taken a downturn.  I told her that the fee for the next year would normally be £950 but that, in the circumstances, I was OK to discount it for that year to £600.

This meant that the client knew what the real value was and so would be OK the year after, when the business built back up, for me to bring the charge back up to "market" rate.  My reason for doing this was that I valued her as a client, ie she is "as good as gold" and that she had recommended me to 2 other great cliants in the past couple of years.  Yes you take a risk but that's business, isn't it?

sparkey999's picture

Assessing the value

sparkey999 | | Permalink

@ Paul

Thanks for that input Paul. For a few months now I have not prepared timesheets (sole practitioner) and I have based pricing on gut feeling and experience. I started up my practice last year and have NEVER billed on time, and the clients love it!

I considered keeping timesheet records to check recovery against the fixed fees I was quoting, but I have only managed to do this for two clients. In both cases, my fixed fee was about 50% of what it would have been when set against hrs x £charge out.

But I wasn't concerned about this. In both cases, I knew this was the case even before I crunched the numbers, and the clients were given a few freebies to help with small compliance issues. Both these clients were made aware of the true commercial market-rate fee but that the fixed fees stands. They have both made several referrals to my firm.

I still quote fixed fees based on gut feeling, sometimes I use a small quotation template I devised with my computed charge out rate and time estimate. However if I feel the quotation template either understates or overstates the value of the job (e.g. if a client wants something very quickly), then I adjust my price accordingly.

So it looks like I'm on the right track all along! Perhaps I just needed some reassurance......... :-)

ShirleyM's picture

We all have exceptions

ShirleyM | | Permalink

We can all quote exceptions, where we have drastically reduced fees (or worked for free) in exceptional circumstances, but it doesn't really give an explanation of pricing methods. It just proves we are human and are willing to lose in one area if we gain in another.

With regards to clients knowing in advance the fees they will pay this is totally irrelevant. This can be achieved by any fixed price agreement and is not restricted to 'value-pricing'.

Isn't it just another way of putting a higher value on your services for some clients, but not all? The criteria being willingness to pay. If your clients were aware they were paying more than other clients would they then be so willing? Maybe they would, maybe they wouldn't? Can any of us be sure?

What would you do if they came and asked for a reduction? Maybe a reduction would still give you a decent margin but how can you explain that without admitting you have been doing very well indeed from the current fees? What would you do if they asked for a breakdown of fees?

Any responses would be appreciated. I understand the principles behind value pricing, but I struggle to understand the practicalities and the potential knock-on effects.

 

Add comment
Log in or register to post comments