Fees and charge-out rates

Advice and links to further resources on the difficult but vital subject of agreeing fees and setting charge-out rates.

Fees and charge-out rates

The best advice the practice management consultants give, whether you agree the fee on the basis of time, on a fixed fee basis or on performance, is to price your work for profit. Anything else is unsustainable beyond the short term.

Improving recovery rates in your firm

Because recovery rates are usually measured as a percentage, practitioners often ignore the true cost of under-recoveries.

Most principals in practice keep a close eye on the profit and loss account for the firm and scrutinise the expenses. The trouble with under-recovering assignments is that they don’t appear in the majority of firms’ P&L accounts. As such, they are largely a hidden cost. Consider a practice with £400,000 fees, but an 85% recovery rate. It’s easy to ignore or to forget that the £400,000 comes after the unrecoverable costs written off. If you gross up the fees raised, the firm has actually done £470,000 of work at full charge out rates. A few practices actually start their P&L accounts with this gross figure and then deduct the under-recoveries to arrive at the amount billed.

Input to fees ledger	£470,000
Written off	£70,000
Fees raised	£400,000
Recovery rate	85%

Now suppose that the firm focuses on recovery rates and succeeds in increasing them to 90%. That can either flow through to increased fees or increased capacity or a mixture of both.

	Create more capacity	Increase fees billed
Input to fees ledger	£444,000	£470,000
Written off	£44,000	£47,000
Fees raised	£400,000	£423,000
Recovery rate	90%	90%

In the first example above (Create more capacity) the fees are fixed, so the improved recovery rate merely means they did the work more efficiently. It has, in effect, released £26,000 of time that can be used elsewhere on other client work or on growing the practice (or on increasing the non-chargeable time!).

In the second example (Increase fees billed) you do the same work as before but manage to charge the clients more. This is not as unrealistic as it may sound. Many firms agree a fee with the client, having first confirmed that the client will do certain tasks (e.g. reconcile the bank; write up the fixed asset register; and so on). When the firm’s assignment starts it becomes clear that the client has not done any of these things. A common reaction is for the staff to shrug and do the work themselves.

Since no one discussed the fee at the time this extra work was done, the firm invariably ends up with the same fixed fee for more work. If, instead, you notify the client that he (or his staff member) has not done the work that was promised you can offer him the choice of getting his staff to do it, in which case you will need to reschedule his work, or you doing it for an increased fee. The best approach is to quantify the cost of any additional work when you agree the fee. For example, you quote £3,000 provided the client reconciles the bank and writes up the fixed asset register. However, if you are required to do the bank reconciliation then you will charge an additional £200; and £150 extra if you need to do the fixed asset register. The total fee is now £3,350. If the £3,000 represented 85% recovery (i.e. total costs of £3,530), the increased fee of £3,350 increases the recovery rate to 95%.

This is one way of improving recovery rates. There are others:

• Review all jobs with poor recovery. Try to identify what went wrong with it. Don’t just think about how to prevent the same mistake on that particular job next year. Instead, consider whether there are any changes you can make to prevent the issues applying to any future job.
• As well as reviewing poor jobs, look at jobs with excellent recoveries. What did you do there that created such a good result? Can you replicate what you did on other assignments?
• Focus on the processes in the office to speed up the turn-around time. Generally, the shorter the period from starting the assignment to completing it the better the recovery rate.
• Similarly, avoid starting an assignment if you do not have all the information to complete it. Every time you pick up a file and put it down again costs time, which is money.
• Make sure that your staff know how long they have to do the work. Give them a budget for their part of the assignment. It need not be a detailed blow by blow budget. Instead it can be a total amount. For example, on a £750 assignment you might tell the staff that they have £500 for their work, leaving you £250 for the review and client meeting. Many staff underestimate how much partner time is required and so overspend on the field work, believing they have plenty of time in the fee.
• Avoid rounding fees down. If you are billing on time rather than an agreed fee, don’t take £765 and round it down to £750. If you like round numbers, then round it up to £775!

If you would like to discuss this or any other practice management issue, you can speak with one of our ICAEW Practice consultants via the Advisory helpline on 01908 248250.

Fee breakdown information

The Fee breakdown information helpsheet contains advice for accountants and auditors who have been approached by their clients for a breakdown of a bill.

• View the Fee breakdown information helpsheet

ICAEW's Code of Ethics states that “A professional accountant in public practice should furnish, either in the fee account or subsequently on request, and without further charge, such details as are reasonable to enable a client to understand the basis on which the fee account has been prepared”.

Lack of understanding as to the basis of fees regularly contributes to a client or former client making a complaint to ICAEW. In order to avoid a complaint that you have not assisted the client in understanding the basis of your fees, you will need to provide reasonable details.

Remember that fee disputes can often be avoided by providing a clear and detailed letter of engagement to your client before commencing work.