Art of Accounting: Reverse Value Billing
IMGCAP(1)]Working out how to set fees and using value pricing or value billing can sometimes be daunting.
We are in this business to make a living, so we have to become adept at pricing, billing and collections. One thing that vexes me is colleagues who tell me they never would value price or bill, and then they engage in what I refer to as “reverse value billing.”
This is where the accountant marks down the bill before even presenting it to the client. This seems to occur in situations where our costs and efforts greatly exceed what we feel we can reasonably charge the client or the value to the client, and we routinely mark down the bills on our own. I have done it and occasionally still do it. However, now I also look for opportunities to increase my fees on other projects based on the value created. So should you.
Some of these “reverse value billing” situations are:
• Multi-state kids’ returns: A typical situation is where we prepare a client’s college-age child’s return as an accommodation, and the child had three jobs in three different states. The net refund comes out to $42, and we charge a nominal amount, say $75 or $100, in spite of a substantial cost due to the multi-state returns. Clearly our costs greatly exceed the bill. Actually, it would be less expensive for the client to simply not file and forgo the refund if the child was not required to file.
• Tax notices: A client can receive a notice through an error of the tax agency, i.e., through no fault of the client or us. Yet, we can spend a couple of hours researching it, checking it out and responding by mail or telephone to the agency and client. Can we charge our full rates for this work? Often the client has no expectation of paying us, and certainly there was no perceived value to the client. (There was a value because if we did not respond and resolve the matter, the client would have been billed and would have made a payment for amounts they did not owe).
Other times the notice is for a relatively small “penalty” amount, yet we need to deal with it since there is a perception that we made an error (until we prove otherwise) and that is upsetting to the client even if that is not the case. That is also time usually not compensated for.
• Amended returns: These are usually filed when an error or omission is discovered. Many times the client receives corrected 1099s and K-1s after their return was filed. This is certainly not our doing, nor the client’s, and we should be compensated for the amended return, which again really adds no value to the client.
• Client handled and caused screw-ups: How many times does a client attempt to handle a notice, an incorrect bill or an audit by themselves, totally screws it up and then asks us to “fix it,” which we do after spending an inordinate amount of time because of the client-created mess, and the actual savings are less than our time charges?
• Extra copies of returns: This gets me. Clients call during the year for extra copies of their returns, even though a copy, CD or portal access was provided when we did their return, because it is easier to call us than make the copy themselves. I have found that when I tell them there is a charge, they miraculously become able to make their own copies.
• A project that turned out to be substantially bigger than it originally appeared: The work is done, done diligently and thoroughly, done as efficiently as can be, done to the client’s satisfaction, and then the accountant writes down the bill because he thinks it is too high and the client would complain if the bill was for the entire “unmarked down” amount. The effort, attention and results were not discounted, so the fee shouldn’t be discounted. Here the accountant is negotiating against himself and is assuming the work wasn’t of noticeable value to the client. You sometimes can be your own worst enemy. What could have been done during the work or work creep phase is to keep the client informed of the added services or scope change, so the totality of the bill would not be a complete shock. But that is still no excuse for you to pre discount your fee or accept a lower amount.
A comment on billing: The above illustrations assume you do not charge the client on a time basis. If you did, you would be compensated at your regular rates for these efforts. Did it ever occur to you how the client would feel if they knew what they were paying for some of this work? Would that be good business?
Another comment for those billing tax returns strictly on a time basis: When an inexperienced or untrained staff person makes excessive errors, causing way more review and correction time, you make more than the accountant who charges on a fixed fee or “right fee for the right service” basis. The latter accountants have to “eat” the extra time due to their poor quality. It would seem the incentive to improve processes and training would be greater for the accountant billing on a fixed-fee basis than the one who bills on a time basis.
One final comment: With small balance due tax notices or refund returns where there is no obligation to file, it can be a lot less expensive for the client to just pay the bill or forgo filing. In these situations you need to be careful you don’t appear flippant. Flippancy toward important matters such as IRS notices can cause a client to lose confidence in you. Take care and be patient in explaining the cost/benefit of not fighting the notice and making the payment or not filing solely to get the refund.
Edward Mendlowitz, CPA, is partner at WithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People List. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, published by www.CPATrendlines.com and “Managing Your Tax Season, Third Edition,” published by the AICPA. Ed also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com. Art of Accounting is a continuing series where Ed shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. Ed welcomes practice management questions and can be reached at (732) 964-9329 or firstname.lastname@example.org.