February 10, 2010

Clients Want to Talk About Fees!

During this busiest time of year it is very important that CPA firms focus on client service as a large percentage of client interactions will take place over the next few months. Great client service is all about managing your client's expectations about your fees and then doing what you say you will do rather than having them form in their mind their expectation of your services and fees. Why leave this to chance? Most client disagreements involve fees. In this first of several articles on client service I discuss fees and their impact on client expectations and client service.


Most conversations with clients about fee disputes occur after the engagement has been completed which puts many accountants on the defensive. Have you had some of these discussions?

"I had no idea it was going to cost this much".

"You said the fee would be between $20,000 and $25,000 and now you're billing me $40,000".

"My fee was $7,500 last year and now you're billing me $10,000".

Clients don't like to be surprised with your fees just as you don't like to be surprised by professionals you engage. Here are five things you can do immediately to substantially eliminate the confusion and misunderstandings with clients about your fees.

1. Stop quoting fee ranges. The moment you quote a range you are setting your client's expectation for the maximum fee. Rather than say "We estimate our fee will be between $10,000 and $12,000" use the phrase "We estimate our fee could be $12,000 or more". This dialog helps to eliminate the upper limit fee expectation and allows you to have a discussion with your client if additional fees are warranted. In all of my years of practice I very seldom experienced an engagement where we were at the lower end of the fee estimate so why even include it in your quote. If a client insists on a maximum fee be sure to build in the contingencies you might experience during the engagement. Fee estimates always need to be realistic rather than overly optimistic.

2. Initiate the conversation about fees with all of your clients. Draft a general letter about fees that you can include with your engagement letters and in addition formalize and distribute a copy of your firm wide credit policy. The general letter about fees should start with a discussion that you want every client to receive the maximum value for the fees they pay and that there are certain instances where this can occur. Follow with examples of how additional fees are often incurred. These examples might include incorrect accounting records, incorrect accounting methods, failure to provide agreed upon information and starting and stopping work. If you need an example please send an email to Steve@SteveEricksonLLC.com with the subject line Fee Letter and I will send you one.

Another essential document is a Firm Credit Policy. It should cover your receivable policy, interest on unpaid balances and the fact that the firm will stop work if payments are not made as agreed to in your engagement letter (this is not a substitute to having a stop work clause or receivable terms in your engagement letters) simply it is a document that partners can use to take the edge off of fee conversations with long standing clients. "The partners of the firm have agreed to abide by our firm credit policy. I have no ability to override the policy". Of course you want to be sure that your credit policy is in compliance with the laws of your state.

3. Negotiate the scope of work not your fees. The moment you agree to unilaterally reduce your fees you then have lower fees. I'm encouraging my clients to negotiate the scope of services rather than just lowering fees without consideration. If clients continue to insist on a unilateral fee reduction consider calling the reduction a "2010 Recession Rebate" so you don't permanently reduce your fees. I know that times are tough out there but firms really have to look at their pricing decisions strategically for the long-term viability of their practice.

4. Use scheduled billing techniques. The only thing worse than doing work for a substantially reduced fee is doing the work and not getting paid. Firms need to stop extending excessive credit. Get retainers (50% of estimated fee is due before starting work, the balance is due upon delivery of the product) especially for new work. Use scheduled billing techniques for larger engagements (i.e. 30% now, 30% in one month, 30% in 2nd month and 10% due upon delivery of the product) to mitigate your risk. Before discounting your fees please consider how you have to pay just about any service provider you engage. I can't think of too many that don't get some money before they start work. After you deliver the work many clients think there is no rush to pay until they need more services.

5. Call before sending an unexpected bill. The absolutely biggest fee mistake an accountant can make is to send a client a big bill that they didn't expect. I've actually seen cases where clients refuse to pay anything until they have the invoice adjusted in their favor. If you find yourself in the situation where you have cost overruns that have not been discussed with the client rather than just sending the invoice (I call these letter bombs) and wait for the client's reaction make a call before you send the bill. The conversation might go something like this, "Mr. Jones I was just going through the time on your engagement and wanted to explain why we were over our budget estimate. (explanation here) Before I prepare the bill I wanted to make sure you understood what happened". At this point there are three possible outcomes.

a. The client tells you they understand and to send the bill. You get paid.

b. The client wants to negotiate the overrun. You agree on an amount, send the bill and get paid.

c. The client informs you that your engagement letter stated that you would inform them before incurring any fees in excess of the estimate. You did not inform them and they will not pay for the excess. Send the bill for the estimated fee and get paid. Evaluate the client relationship and decide if you want to provide further services.

For many years I have contemplated why it is so difficult for accountants to discuss fees with their clients and have come to the conclusion that most don't like conflict and don't want to risk their client relationships. In my opinion not talking about fees with your clients leads to a much greater likelihood that misunderstandings, hard feelings and the loss of clients will occur. It is very important that both the client and the accountant feel they are getting a fair deal if the desire is to perpetuate a long-term relationship.

It takes a little time to deal with client fee issues but the rewards are well worth the effort. Become not only a great biller but also a great collector of fees and watch your stock in your firm soar. Here's wishing you a prosperous 2010.

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