The Art of Billing a Fixed Fee
By Tom C. Davis (November 20, 2008) 

How many time over your years of practice have you gotten to the billing phase of completing a fixed-fee service and been floored by the amount of time that has been accumulated in your work-in-process /  billing info?  Don’t you just love it when this happens? It is interesting to me that many of the firms I work with do a poor job dealing with this situation and in most instances the resolution of this problem is a write down.   

The first thing we need to do is to define what a fixed-fee service is.  I feel that there are two types of fixed fees: those fixed by agreement and those that are essentially recurring services with no stated fee agreement.  The fixed-fee by agreement is straight forward:  the firm and its client enter into an agreement where the service to be performed is specifically identified, along with the assistance to be provided by the client and the fee that will be charged.  The recurring services fixed-fee is fixed within the mind of the client: since the firm has provided the service in the past, if there are no substantial differences in the client’s circumstances, last year’s fee amount is the expected fee for this year’s service.   

Now, what can go wrong?  First of all, there could have been a screw-up in the process.  The plan that was used to develop the fee proposal could have been faulty.  There could have been preparer mistakes during the process that could not have been anticipated and factored into the proposal.  The firm may have had to allocate different resources (less experienced or more expensive) than had been planned.  There is almost an infinite number of ways to miss your estimate. 

The cure for the bad plan / performance screw up is a better plan.  There are two tools that can help in this regard.  Almost every firm has a time and billing system that has features for documenting a plan (budget) and then comparing the actual results with the plan.  The primary benefits of these T&B budgeting tools is to communicate to the firm members what the plan is and to promote a learning process for analyzing the plan differences so that better plans will be created in the future.  Try to build as detailed a plan as possible.  Many firms are still building audit budgets using the traditional balance sheet and income statement approach.  Wherever possible, build the budget detailing as many actual steps as possible.  This will initially take more effort but a detailed engagement-step budget will result in a much more efficient job. 

Another budget suggestion is the timing of creating the budget on recurring jobs.  Budget next year’s job as part of this year’s engagement wrap-up.  Problems will be easier to recall now compared to a year from now.  A budget created in this manner will still need “tweaking” next year, but it should require too much additional work. 

Finally, create more budgets.  Most firms only create detailed budgets for big jobs.  However, even a simple job that contains a single “preparer” budget line will improve communication and will provide a benchmark for evaluating staff performance.    

Fixed fee jobs are certainly susceptible to the bad plan, and both fixed and recurring fee jobs are susceptible to a performance screw-up.  However, there is a third type of event that can impact a “recurring” fixed-fee service: a change in the service.  The amount of information and or its complexity may increase from one year to the next or the client does not provide the assistance that had been previously given. 

Here is where firms can really make some money: use change orders.  A change order is simply documentation that the service has changed from the agreement or prior year.  Here are some of the important aspects of the change order process: 

Written: It is important that there is written evidence that the client has been informed that the service has changed.  This can be very formal like an engagement letter or very simple and brief like an email send memorializing a discussion and the agreement by the client that a change has occurred in the service.  

Timing: It is critically important that the change order be communicated to the client before the changed service has occurred.  If you wait until the final billing for the service to notify the client that the service changed, you may create an adverse situation with your client and you will tend to bill less that you would if you negotiated the changed fee before the service occurred. 

Again, the form’s time and billing project capability can be very helpful in tracking and accounting for change orders.  If you create a separate project for each change order, staff will key their time more accurately and it will be easier to bill for the change order as soon as it is completed rather than waiting until the original service has been finished. 

Another very important aspect of the sales order culture is that it makes it easier for staff at every level to be part of the firm’s sales process.  While typically only partners and owners sell services to prospective clients, almost everyone in the firm can “spot” the opportunity to sell additional or changed services to existing clients.  The firm can further promote the selling process by providing incentives for obtaining a change order.  Paying a 10% finder’s fee can greatly increase the involvement of firm members in this selling process. 

Tom Davis CPA is owner of Tom C. Davis, CPA LLC and president of Knowledge Concepts, Inc., the developers of FirmWorks.  Contact him at tdavis@tcdcpa.com and at 229.247.9801.  

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