This resource has been developed for the UK market – if you are not based in the UK then you should consider how the information and advice can be applied in your market.

Accountant and client looking over a contract proposal

Too little and the work will not be profitable, too much and the client will not sign up. It’s a quandary that all new practitioners face. Our Secret Accountant based in the heart of England provides some advice and tips.

Traditionally there are two methods of formulating a fee - charge out rates and fixed fee.

Charge out rates 

This involves calculating the costs of the practice, adding a profit margin and then applying this to an hourly rate. The client is then quoted based on the estimated time to provide the services multiplied by the deemed charge out rate.

For instance a very common scenario was known as ‘1/3, 1/3, 1/3’. This represented a charge out rate that was based on an equal proportion of staff costs, overheads and profit margin.

Advantages

  • In reality there are very few! It makes it clear to the client how the quote is calculated but…

Disadvantages

  • Hard to predict the costs of the practice and needs a subjective view of what profit margin to add in;
  • Does not take into account under-recovery, ie the charge out rate would take into account a fully charged out working week/month but in reality we all know that a much lower percentage of practice time is actually chargeable;
  • Hard to predict how long each service would take and does not take into account ‘premium’ services etc; and
  • Charge out rates for firms differ very widely so there is no ‘norm’.

Fixed fee

This has been much more popular over the last few years and has been widely adopted by small practices. Basically the practitioner quotes one fee to cover all of the main services and clients pay monthly by direct debit. 

Advantages

  • Crystal clear for the client.  They are not interested in hours and rates etc, they just want to know how much they will pay per year;
  • Simple to compare against other firms;
  • Ignores costs and hours etc; and
  • Possibly makes it easier to quote higher fees for specialisms such as audits or added value work.  

Disadvantages

  • You take the risk - you are quoting blind and if the work turns out to take a lot longer (maybe the records are not kept as well as they initially appeared to be) then it may be unprofitable; and
  • Once a quote has been given it is often problematic to increase the fee in later years.

Does ACCA have any rules on fees?

The ACCA rulebook (starting page 334) has a section on fees (section 330) but subject to these, our view is that a professional accountant in public practice may quote whatever fee is deemed appropriate. The fact that one professional accountant in public practice may quote a fee lower than another is not in itself unethical.

So what’s the best approach?

Each practice will have a different view on how it will set out to quote fees and charge them on an on-going basis. Fixed fees are the most popular but whichever method is chosen, the following golden rules need to be followed:

  1. Never under sell yourself particularly at the start - start as you mean to go on;
  2. Remember that the clients who will only join you for a low fee will tend to be clients that give you most on-going problems. The 10/90 rule (this means that 10% of the clients will give you 90% of the problems) is not a myth and is very relevant;
  3. Once a client has accepted a quote, and is used to paying that fee, it is very difficult to increase it in later years, so get the quote right in the first instance!;
  4. Make sure all terms and conditions are incorporated into an agreed engagement letter. This will make it clear that the fee you quote is based on certain conditions like good accounting records and being able to obtain all necessary information easily. Where you find this is not the case it will give you leverage to increase the fees. A separate letter would be needed for any ‘one off’ work to ensure that the fees for recurring and non-recurring work are clearly transparent;
  5. Be as pro-active as possible when advising on improvements to the client’s accounting records. The better they are the easier and more profitable the work will be, so get the bookkeeping improved as soon as possible; and
  6. Don’t be hesitant to disengage from non-profitable work. If the client will not improve their records or there are other inherent problems that cannot be overcome then polite disengagement is the best way forward. It may be the case that spending a lot of unprofitable time on this client means that you do not have time for other, better clients to the detriment of the practice overall.

Additional reading - UK articles: