Charge Out Rates and Your Engagement Pricing

We don’t have charge out rates – we value price.” I have heard that said by some, but not often. Let me declare my position upfront – accepting that you may not necessarily share my viewpoint. I believe in having charge rates and time sheets because, on balance, they provide valuable insight into efficiency and costs.

Having made this view clear let me go on by making some relevant observations:

  1. Clients do not buy your hours they buy solutions to their problems
  2. Clients do not care how long your work takes, all they want to know is, “What is the cost?”
  3. The relationship between your accumulated time costs and the price may well only be coincidental
  4. Surely, you need a costing system? You would normally recommend this to many of your clients in, for example, manufacturing
  5. I consider that value pricing may be appropriate where you are offering specialist service or advice that is not readily available ‘locally’
  6. Time recording is simple to explain and is a long standing system that everyone understands – even if clients are perhaps a little cautious about ‘time.’

To unpack each of the above points would take longer than I think you are prepared to dwell reading this blog. But please allow me to make four observations:

Observation 1:

What work do you carry out for which the client is not aware, in advance, of the price? Let’s take the most common service – compliance. When a client first engages your services, do they not enquire regarding the price? Surely most do?

Mistake 1: If the client is coming to you from another accountant it is important NOT to base your price based on the previous accountant’s. Why not? Well, you probably have no idea what the previous accountant’s rates are or, more importantly, what time costs may have been written off. More importantly you should establish why the client is seeking to change service provider. If it is cost then maybe, unless their current accountant is known to be more expensive, you perhaps should pass on this engagement opportunity. It may well be down to poor service – in which case quoting around about the cost of the previous accountant may well have the prospective client wondering if there is going to be any improvement, despite your assertions that “of course our service is superior.”

Mistake 2: Quoting without caveat. Think carefully about quoting a fixed price without setting out what that price includes. What if the records are not as described? Maybe not all the control accounts are balanced? It is important not to set yourself up for a time overrun at the outset.

Observation 2:

Time recording vs value pricing – I am not so sure that the days of telling a client the price will be based on time still exist. If they do in your firm, well good luck to you, but if that is the case then your recovery is 100%? Most unlikely. The fact is that we accountants have been making adjustments to our ‘time costs’ for years – time-based pricing is maybe something of a myth.

Fact 1: You and your client will probably have an understanding regarding price before the engagement is performed. If it is a new client you may well have quoted (1) a fixed price or (2) a price range. If an existing client, is it probably likely that this year’s price will be last year’s plus an adjustment for inflation. I have worked in offices from small firms to the global branded firms and I can assure you that this approach rules.

Fact 2: With a new client you should never agree a price for the first year’s work without giving yourself the right (verbally and in your engagement letter) to review the price for subsequent years. This leads onto my next mistake:

Mistake 3: If the amount of first year work input turns out differently from that which was expected (so long as this is down to the client) that may well result in you facing the prospect of ongoing and unwanted write downs. It is real easy to avoid this trap by inserting a sentence into your engagement letter giving you the right to review the ongoing price. That is fair and a reasonable client will surely not object? The key is to raise this with the client when the extra work arises, not after the work is completed.

Observation 3:

“We don’t have charge out rates – we value price.” You might recognise this from the commencement of this blog. Let’s look at this more closely…

Fact 3: AccountingWEB and Sage undertook a survey – sorry, but I cannot find the results now as it was at least 10 years ago. In this survey they asked a number of time sheet billers what they would charge over a range of 6 or so services. The same set of services was given to the value pricers. The results? There was next to no difference between what the time sheet billers said they would charge compared to the value pricers. Which leads onto my next onservation…

Observation 4:

Here is how I reconcile the apparent different approaches. The fact is that unless you tell your client, somewhat unfairly I think, that the price will be based on time (which is a very mid to late 20th century approach) you will agree a price or price range with your client. Your time sheet then enables you to capture the time taken to complete the work (subject to everyone capturing their time correctly – another two blogs on that one!). You will then be able to review your performance which will then inform you regarding any changes that need be made to your future pricing.

Up next: My second blog will in a couple of weeks will take a closer look at setting charge rates.