The accountant’s guide to charging fees
Over the years, accountants have used many different means of deciding how much to charge clients for the work that they have carried out.
The starting point must be the engagement letter, which is considered in more detail in the article on Communication later in the series.
One of the banes of most accountants’ lives is the completion of timesheets. In the past, these were literally sheets of paper although nowadays technology has taken over, making the job much easier.
Software also helps to integrate time and charge out rates, another tricky area. Having said that, even some of the largest firms struggle to find software to provide all of the data that they ideally require. A recent conversation with a partner in a firm’s solicitors indicated that they had spent several million pounds on a fees and billing system that is not fit for purpose.
In theory, the calculation should be simple. You add up all of the hours that people have worked and multiply them by pre-arranged charge out rates to come up with a fee.
That is only the start of the process, since you may need to factor in
- The failure of individuals to charge all of their time if they don’t think that they have been efficient or believe that clients won’t pay for the work.
- Time charged that is not justifiable, eg travelling, training and receiving training.
- Premium work that would support a much higher charge out rate.
The last point is something that accountants seem reluctant to take on board. In many cases, common or garden compliance work is not worth the charge out rates that they seek to impose, while highly specialised technical analysis has far greater value.
The obvious solution is to have two or more charge out rates depending on the nature of the work to be carried out. Whether the reason is underlying computer systems or lack of imagination, few firms seem to build this into their programming or business models.
These days, many clients require the certainty of a fixed fee, which can be agreed in before starting the work. This is particularly popular for audits and other compliance work, although it is becoming increasingly prevalent in all areas of practice.
Mix and match menus
Sometimes it is appropriate to present clients with a choice of services, some of which may be fixed fee and others variable.
In some cases, for example, when dealing with tax investigations or the introduction of tax-saving schemes it may be beneficial for both sides to agree payment based on the accountant’s ability to make or save money for their client.
A number of issues arise here, particularly the need to ensure that no ethical guidelines are overstepped and also very careful delineation of how the fee is to be determined.
The sensible accountant will also wish to consider the likelihood of getting paid and the timing, since quite often these projects are open-ended and may drag on for far longer than originally anticipated, particularly where HMRC is involved.
Particularly in the larger practices, it is common to carry out a massive budgeting exercise to ascertain what the likely cost of the project will be. However, more often than not the calculations end up miles away from the actual outcome, making one wonder whether such exercises are worth the effort.
Another important factor is the desired recovery rate. In an ideal world, all accountants should be able to recover time at rates of at least 100% of time charged. In reality, many audit departments will be delighted to get up to 50%, while even specialist teams adding great value may be willing to accept 75% to 80%.
Additionally, you are in a market. Therefore if you try to charge too much then you will lose projects or even clients, which is never good for business.
Then there is the good old loss leader. For example, most firms seem willing to sell their audit services at a massive discount, in the expectation that consultancy work from key clients will more than make up for the shortfall.
The greed factor
Some firms seem to believe that in addition to what many would regard as outrageous charge out rates they can also bump things up. Methods that the writer has seen in practice include
- Obliging employees to record time on the basis of say an eight-hour day when they are contracted to work seven (and do so).
- Charging an “admin fee” of say 2½% to cover the costs such as photocopying and support staff, which clients would expect to find included in the charge out rate.
- Charging notional expenses such as photocopying or support staff time.