Art of Accounting: Getting started—how to determine what to charge
Earlier this month I presented a two-hour program on how to start an accounting practice.
It was well attended and almost 400 people requested the 64-page handout.
Note: It can be downloaded by clicking here.
One of the questions I heard was: “How do I determine what to charge?” Here is my response:
A simple answer is that almost every job has a value to the client. Try to uncover this and price the job, considering that value. But it usually is more complicated than that, so here are some ways to determine what to charge. Be aware that I have used every one of these methods depending on the circumstances.
• If you are getting an established client that has been using a much larger firm, i.e., a firm with more than 100 people, quote about one-third less than what they have been paying. This assumes they have been getting the full range of services they need. Tell the client you will review the services and fee arrangement with them after a year and determine if they need additional services, whether it was more involved than you initially thought, whether some services can be eliminated or if it turns out the fee was just too high.
• If the client has been using a smaller firm, i.e., less than 10 people, quote 25 percent more than they are paying, with the caveat you will review it with them in a year.
• If the client was using a firm with between 10 and 100 people, use what they have been paying as a guide, but here you need to define the services more carefully to come up with the appropriate fee. Unless they have been ripped off, never charge a lower fee—they are leaving because they are not happy with the service. If they are going to a “better” firm, why should they pay less?
• Many clients do not like open-ended time-based fees for routine, regular recurring work. I also prefer the fixed fee approach, which is actually a value-based price determined before the engagement starts, along with collaboration with the client.
• When setting fixed fees, it is important to clearly define the scope of what you will be doing, the client’s responsibility in providing information and access to what you need. If that is breached in any manner, it is incumbent on the accountant to issue a change order, an amended-scope memorandum or engagement letter, and price or a proposal to perform those services.
• If you will be working on a project of indeterminable requirements or time length, or if it might be strongly subject to influences from outside sources or circumstances beyond your control, then an hourly rate might be necessary. When doing so, I do not suggest providing an estimate or range. If you were able to do that, then you might just as well quote the fixed price.
• Charge what the market will bear. Most tax return preparations and compilations, and some reviews and audits, can be estimated reasonably accurately as long as the client provides the information needed before you start the work. You should allow for an initial meeting and perhaps a follow-up call, and certainly a call when you have completed your work if there is a balance due for a tax return or a surprise result in any manner.
• An effective way of pricing is to use a minimum fee schedule for individual, partnership, corporate and trust tax returns. For business and trust returns there should be a first-time additional fee to review the members’ or buy-sell agreements or document establishing the trust.
• One way to determine your pricing is to understand your cost structure and how much time you expect to spend on a project. This requires you to recognize the nature of the assignment and your role in it.
• If you have just left a public accounting firm, consider using as a guide what the firm you left would charge the client for that work and your role in it, and then price accordingly.
The above is a guide that should get you started. It is clear there is no one way. Since every job is different, flexibility in pricing is necessary. However, no matter what you need to do, you cannot be wrong discussing the job with the client beforehand, clearly defining the work to be done and the expected output, the time parameters, the use of the deliverable if there is one, and each of your responsibilities. Go for it! Good luck.
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. 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.