When an accounting firm’s business client faces an IRS audit, the stakes of having qualified advice from their accountant are clearly higher than if the client needed help on a simple IRS inquiry letter or notice. The client is also likely more anxious about the audit than they would be over a simple notice. Chances are the client would recognize the different risks as well as the varying levels of complexity involved in both potential engagements.
Many accountants, however, will calculate the fee for providing both services in the exact same way: An hourly rate multiplied by how long it takes to handle the engagement. “This hourly billing undervalues the accountant’s expertise and service and shortchanges the firm,” says August J. Aquila, founder and CEO of Aquila Global Advisors LLC.
Aquila, who has been ranked several times as one of the “Top 100 Most Influential People in the Accounting Profession” by Accounting Today, says that accounting firms should consider value-pricing alternatives by looking at each service provided and determining:
• how valuable it might be to the client
• how much complexity and risk is involved for the firm and
• how to price out the service so that the profit or gross margin of the engagement is maximized.
“The accountant sometimes is so concerned about winning an engagement that they really don’t look at what the work that they’re doing is really worth or what the client really wants,” says Aquila. He recently led the Sageworks webinar “How CPA Firms Should Price Their Services,” where he covered examples of various pricing methods, how pricing can impact operations and marketing and how to get clients and partners to buy into new pricing systems.
Aside from hourly pricing, some of the models for pricing accounting and advisory services include:
Fixed fee: Sometimes called the menu approach, fixed-fee pricing is often used for repetitive services, such as tax preparation. It allows the accounting firm to develop and explain upfront the varying levels of services and fees. Fixed-fee pricing is based largely on the firm’s known costs for providing those services and for providing various upgraded services (i.e., more forms involved in the tax return).
Contingency fee: Consulting work that determines some sort of outcome is often billed using this method, according to Aquila. For example, a firm trying to sell a client’s business can say upfront that if it sells the business for $10 million, the firm’s fee will be 1 percent. If the firm achieves a higher sales price than that, however, it will receive a higher percentage on any amount over the $10 million targeted sales price. In other words, the fee can vary based on the outcome.
Blended hourly rate: Often used when a project involves a team of staff with varying degrees of experience and scarcity, this method bills each hour of work at a rate “blended” from the hourly rates of each team member. This is in contrast to billing for each team member at their respective hourly rates. Therefore, if the firm can manage the engagement efficiently so that the partner and manager, for example, spend less time on it, the effective margin can be higher for the service, according to Aquila.
Working conditions and customer relationships also influence which pricing method might be most appropriate. Does the engagement require three months of travel to Alaska or is the work near to the firm? Does it add a complex audit to an already busy audit season, or does it involve working more closely with a client who is disorganized or is always late with their end of the paperwork?
Even if some of these aspects cannot be quantified in terms of what they contribute to the price of the service, it is still valuable to consider them, Aquila says. “This is part of the process of talking to the client up front to understand what they’re willing to pay.”