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Practice Tip - Standard unit charging

7th Nov 2005
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It's a truth universally acknowledged that people lie to their time sheets.

And it's a fact that everyone who relies on time sheets for billing know that this is the case.

But it's also the case that a lot of people who charge fixed fees have no ideas about the cost of supplying their services.

All of which presents a conundrum. If time sheets are to be the basis for billing, what good is that if the data used is knowingly wrong? And if fixed fees are to be the basis what chance of a good profit if there is no cost control mechanism in place?

It so happens that both Nigel Harris and the West Country Practitioner seem to have hinted at these issues in varying ways of late. Let me add my tuppence worth, based on experience.

I readily acknowledge I lied to my time sheet for years. And then I used them as the basis for billing, quite often, and for costing always. But I lied in an entirely constructive way. Rather as Nigel Harris has hinted at in a comment on his own article on value pricing, time can be an analogy for something much more significant ' which is standard unit charging (SUC).

SUC works like this. You work out the things you do most often. And you then determine how long you think they should take. And then you set that as a standard time for doing them. And then you charge that standard time whenever you undertake the activity.

The most obvious case in point is the time spent in doing some very routine things such as:

1. a routine letter on a routine compliance issue is charged at 0.3 of an hour, ideally at a fixed rate whoever does it;
2. a phone call plus note on a routine issue costs 0.3 of an hour at the rate of whoever did it;
3. billing people is charged at 0.2 of an hour at secretary rate (because secretaries should do your billing and you charge to record on the system that the work has been done because even if you don't recover the charge it is still a cost);
4. sending a statement costs 0.2 of an hour at secretary rate (why not ' it's work done after all ' and entirely the client's fault because they have not paid on time ' and again you may not recover it ' but at least you have a record of what they're costing you).

And so on.

Then look at a more complex example. Suppose you take on a new tax client. It's a bog standard case. You're going to do the following:

1. Meet them, do money laundering clearance, know your client forms and all relevant notes. Standard charge, one hour;
2. Ask for information from previous accountant, standard charge 0.2 of an hour (basically a notional charge to record that you've done it);
3. Issue an engagement letter, standard charge 0.2;
4. Set up file, standard charge 0.2;
5. Check last year's data when received, standard charge 0.4;
6. Confirm to client that records have been received from the previous accountant and have been reviewed and provide comment on any immediate issues e.g. unused tax opportunities. Stick to the obvious e.g. pensions, gift aid, ISAs, and it will still look like good value. Standard charge; 0.5.

Add these together and you come to 2.5 hours. The first hour is at partner rate. All the rest should be delegated, so it's cheaper. Together these tasks are billed as a one off setting up fee. I've never had a problem in doing this. If the client is satisfied with their choice to use you they'll be willing to pay it as well ' especially if you can add some value in your letter concerning the review of the previous year. In itself this proves the value of standard charging ' recovery increases simply by recording things are done.

But it's also the case that the record of doing the thing is in important action in itself. It can then be part of the quality control system since recording them on the time sheet proves the action has taken place. In this case whether the actual task takes more or less time is of little relevance ' it's rare people can fully recover the cost of the time taken to set up a new client but any contribution helps.

Then what happens? Well, for the same client in a bog-standard year when they do all that is asked of them it's something like the following:

1. Write to client for tax return information; standard charge 0.3;
2. Assess information received; standard charge 0.4;
3. Open current year tax file, physically and on computer; standard charge 0.4;
4. Enter data; standard charge 0.5;
5. Check computation; charge 0.1
6. Compare to previous year; charge 0.1
7. Check to payments on account; charge 0.2
8. Print everything; standard charge 0.3;
9. Write letter to client explaining the return, telling them tax due and setting out any obvious planning issues; using standard letter standard charge 0.5;
10. Review by manager / partner, standard charge 0.3;
11. Get tax return back and file with HMRC, however you chose to do it; standard charge 0.5;
12. Confirm submission to HMRC and bill; standard charge 0.3;
13. Monitor payments on account; standard charge 0.5.

Total standard charge by tax senior, 4.1 hours. Total partner time, 0.3 hours. Multiply up and you have a standard fee.

But the trick then is to compare that with actual time. Personally I suggest the standard time is used in the time records ' because that's what you should be billing from, and because you want a control sheet on the file to review when the person preparing the work presents it to you so you have an immediate way of appraising what is going on with the job's profitability. If you do that you will then know these things:

1. whether the tasks have all been done ' which is essential on review;
2. whether the actual time taken was more or less than budget;
3. whether charge rates produce time charges the market will bear;
4. whether one person is better than another at recovering time;
5. whether this client is likely to be profitable or not in the long run;
6. what benefits systematising tasks might bring by reducing the time spent on them.

I found beating target to be a routine opportunity ' but billed for standard time all the same as I felt the task had fair value attributed to it. The result was I (and my partners) used to regularly generate time sheets with well over 2,000 hours of chargeable time a year on them ' at least 98% of which was recovered. The recovery rates might have been lower than standard partner time ' because some tasks were priced at a rate independent of who did them ' and partners are always inclined to do tasks they should delegate, but if you can charge 2,000 hours a year and get paid for them you're sure of a good profit.

That's why I recommend standard unit charging. Or at least that you SUC it and see.

Richard Murphy
AccountingWEB contributing editor Richard Murphy is a sole practitioner chartered accountant but was previously senior partner of a firm for 11 years. He has also been chairman, chief executive or finance director of 10 SMEs. A collection of previous articles by Richard on practice management themes is available in Practice Management Zone


Replies (3)

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By Swimmingagainstthe Tide
09th Nov 2005 14:26

Engagement letter
Interesting article Ricahrd with useful ideas. Just out of interest what does you engagement letter say about how you charge?

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Richard Murphy
By Richard Murphy
10th Nov 2005 15:09

Thanks for the comments
Two interesting comments

When I ran a much larger firm we had our own database built for us to accommodate ideas like this - nothing available in the 90s covered the option.

Now I am a sole practitioner life is easier on such things - and I use the time module in MYOB for such purposes - and can thoroughly recommend it to any sole practitioner. I suspect it has uses way beyond the one man band too.

With regard to my engagement letter - it says I bill on the basis of time expended. But - and I always make this clear to clients in discussion, the charges are based on what is in effect a menu system. I also encourage them to discuss concerns and will always make my time records available to any client who asks - which has satisfied almost any query I've ever had. This, by the way is true even when a fixed price is quoted - because I don't like anyone to think I'm unreasonably abusing such arrangements so time records are still mainatined whatever the agreed basis for billing because I do use the system for costing in that case - and it's invaluable.

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By Malcolm Veall
09th Nov 2005 14:34


What software do you use to record the standard unit times - is it one of the usual suspects or is it one geared to link the standard unit times directly to billing?

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