What Is A Fixed Price Agreement And Is It Right For Me?

Andrew Lim

Tuesday, 05 June 2018

As an accountant, there are many ways to bill your client. The most popular (i.e. traditional) way is time-based billing, which is a method of calculating billable units (usually in minutes) and charging the client for the number of time units it takes to complete the work they've requested.

Billable hours are common practice in legal and accountancy firms, but it's not the only way to bill effectively and keep your clients happy. The key problem with time-based billing is that the demands of customers are changing. In fact, business clients increasingly want more transparency around pricing in order to give them pricing certainty from the moment they engage you.

So, have you heard about fixed price models?

As an accountant, you're busy enough day-to-day without having to think about building a loyal client base and keeping clients happy. You want to be focused on your core work of delivering quality financial insights to your client by helping them sort through their financial data, meet their reporting obligations, manage their revenue and expenditure, get serious about payroll, and understand how their business is operating. As a result, thinking about your pricing structure can feel like a distraction from your core work.

“When we started looking at what other services we could provide to our clients as accountants, we very soon found that we're going to spend less time in the compliance, which a lot of accountants and bookkeepers are really concerned about because, at the end of the day, that's how they charge,” says Werner Combrinck, Territory Sales Manager NSW, Xero.

However, moving towards a fixed pricing model allows us to diversify the services we offer, visit the client more often, offer regular reporting and provide real-time advice. This is a huge value-add for clients who rely on these insights to make critical business decisions. It also allows accountants to deliver value without their revenue taking a hit, and the client is much happier.

By giving your client advice at the point at which they need to make a decision based on real data, you empower them to make the best decision for their business. If your client doesn't receive business-critical information until end-of-year financials are being completed, they don't get the benefit of acting on that information at the time. This could have serious consequences for your client and could lead to them missing out on a vital business opportunity. There is a limited amount that your client can do with out-of-date data, so moving towards a value-based model rather than a time-based model can help you meet this need.

So what is a fixed price agreement?

A fixed price agreement is when you agree with the client on a particular price for the suite of services that you'll provide, and an agreement is set for a fixed period of time. Alternatively, you might fix a price for a particular service regardless of how many hours it takes to complete the task. This gives the client confidence, as they can be sure that they'll be able to meet their obligations, rather than being hit with an unexpectedly large bill when the work is complete. The client understands, with 100% certainty, what they're paying and what they're going to get for it.

It's important to be clear with your client that they are agreeing to a very specific Scope of Work for that price, and anything outside of that scope will be quoted a separate price. There should be no confusion around why a particular service wasn't provided (although this depends on you being a clear and firm communicator!).

Taking the time to explain the Scope of Work can reduce anxiety in the client's mind that if they call to ask a five-minute question, they won't be hit with a $40 bill. This is a very positive consequence of moving to a fixed price arrangement and goes leaps and bounds towards delivering excellent customer service.

Things to keep in mind

Stick to your Scope of Work

Make sure you stay within the Scope of Work to avoid working for free. Have you been clear with the client? Make sure they understand what's involved in order to achieve what they've asked you to do, and be clear about where the engagement ends. Also, offer them your advice about what work is necessary and urgent versus what services they don't necessarily need right now in order to make strong positive changes in their business. If you feel that a client would benefit from a service that's not included in the current scope, advise them in writing so that you can refer back to it if they ask questions later on.

Switching systems can be expensive

If you are using particular billing software in order to generate invoices, it may be costly to configure a new system and shift your employees to a different way of thinking. However, the long term benefits in staying ahead of this trend range include happier customers as a result of meeting their pricing expectations and delivering a less stressful experience. Keep in mind that your clients are already sharing a huge amount of personal financial data with you, so the more you can make them feel comfortable, the better.

Change the way you think about output

You can still keep yourself and your employees accountable, even if you're not billing by the minute. Create structure around tasks and assess the quality of the work, rather than the time spent on it. Reward quality output and have ballpark estimates for how long certain tasks take so that the fixed price you quote to your customers is commensurate with the time that goes into it, while also delivering value-for-money to the client.

Andrew is the Head of Third Party Distribution at Valiant Finance. He has vast experience in finance, working with brokers, accountants and referral partners.

Related Posts

What Is A Fixed Price Agreement And Is It Right For Me?

Are you billing for client happiness? Or are you time-billing for your convenience? There's a shift in the industry; don't get left behind!