Art of Accounting: Checklist for establishing a fixed price

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While there are many different ways to set a fee, the two major ways seem to be using a fixed or value price before the engagement starts and pricing based on time.

I don’t want to get involved now about which way is better, but I’ve used both methods along with other methods as the situation warranted. Here I want to present a checklist of some things to consider and how to proceed in establishing a fixed price, before the project starts.

  • Be totally clear about the work that is requested. This means a full understanding of what the client wants. Let the client talk all they want and only interrupt to clarify something they are saying. I always take notes and repeat what I think the client said to get their acknowledgement.
  • I try to consider whether what the client wants is realistic for that client at that time in the manner they want it done.
  • Prepare an engagement proposal that lists exactly what you will be doing and the total price for the project. I usually do not break down the fee into sections unless there are different phases of it (see next bullet).
  • If the project is multifaceted, then quote each part separately, remembering to be crystal clear about what you will be doing at each step.
  • If the project is of dubious duration or parameters, then do not put a quote on it, but limit your proposal to the beginning part that will define the entire assignment. Consider that an exploratory assignment and explain it that way to the client. I believe clients will understand that and also get value even if they decide not to proceed, or, ugh, not use you for it.
  • Cost out your services. Prepare a worksheet of each service you will be performing with a time estimate and the identity of which staff or partner will be doing that work.
  • Assign a dollar amount to the total hours that you think are reasonable for that assignment. You can use “cost” hourly rates for each staff person (discounted at some factor to arrive at your cost) or simply use the hourly rates for each person. This is not a science, but you should be trying to determine a relative fee based on the time that will be expended. This is quantifying your inputs in a way that you could relate to them.
  • Next reexamine what you came up with, taking into account expertise, timing, staffing, difficulty of work, responsibility, availability, apparent cooperation and responsiveness from client’s staff, ease of access for that type of service from other accountants. Determine if the total fee seems reasonable and if the client could easily “afford” it.
  • Now review the total fee and try to determine the value to the client. Compare it to what other similarly qualified firms (if there are any that the client would have access to) might charge. If the value appears to be much greater than your estimated fee, then quote a higher price. If much lower, pass on the assignment.
  • In my experience, unless it is a totally unique situation, my fee calculations come pretty close to the value on the low side considering all circumstances; or much lower than the value, but I am constrained by “competition” or the client’s mindset. Being constrained by competition is an external situation that I usually would not have control over, assuming the “competition” is equally qualified, which I doubt in many situations. If the constraint is the client’s mindset, then it is a weakness on my part in not being able to convey the value, as I see it. If it is an added service for a continuing client, then I would also need to consider the totality of the relationship and price the project with that in mind. However, in that case, my value in all things I get involved in should be evident based on the proven value and benefits I have delivered many times for that client.
  • Keep in mind that many new types of projects are unique to that client and can lead to many directions, which cannot be counted on when scoping the job. This has occurred too many times to say it is an aberration. It is more of a rule. In new projects where we spot an opening to expand the scope — to the client’s complete benefit — we need to be able to pursue it unconstrained. Locking ourselves into a fixed fee and then presenting a change order before we can see any clear ending or result doesn’t work. Further, even pricing on a time basis needs justification when our time charges will exceed any reasonable estimate determined at the beginning of the assignment. In these cases, these projects need to be done on trust and confidence with a client who is sophisticated enough to understand how the creative and innovative mind works. I have not had many problems justifying the time afterward, even occasionally when there was no positive benefit to the client (not every idea works) to a client who is fair and reasonable and understands the value of the relationship.

The above is a checklist of a method I follow. As I get older, I tend to rely more on checklists to guide me and find the above to be pretty workable. This column was precipitated by a call from a colleague and what I told her. Her reaction led me to share my thoughts here.

Do not hesitate to contact me at emendlowitz@withum.com with your practice management questions or about engagements you might not be able to perform.

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, and “Managing Your Tax Season, Third Edition.” Ed also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com along with the Pay-Less-Tax Man blog for Bottom Line. Ed is an adjunct professor in the MBA program at Fairleigh Dickinson University teaching end user applications of financial statements. 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) 743-4582 or emendlowitz@withum.com.

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Client strategies Client relations Practice management Ed Mendlowitz Value pricing