Should CPAs Dump the Billable Hour?

Filed under: The Advisor's Blog

stopwatchAs a CPA, one of your top priorities is your relationship with clients. Yet, bills and dollar signs can interfere with that relationship, because the focus shifts away from the work you do and onto your bottom line. As an answer to this common problem, many accounting firms are dumping the billable hour and moving to a flat rate system instead. According to the 2012 National Management of an Accounting Practice survey, three quarters of US accounting firms now use some form of fixed-fee pricing. The billable hour is far from dead, though, and 86 percent of firms still utilize some form of billable hours. Yet, the myriad of problems associated with billable hours suggests that dumping the system altogether might be a smart move for most CPAs. So what’s wrong with the billable hour? Firms report problems such as:

  • unexpectedly high bills can damage the CPA-client relationship
  • the billable hour places the focus on your input, rather than the results received by clients
  • it limits your revenue stream, because too much emphasis is placed on your hours (which are limited) rather than the value of services provided (which is much more flexible)
  • tracking time sheets creates a more complicated billing system, which takes up more of your valuable time

By contrast, a fixed-fee pricing system offers various benefits:

  • clients are happy with a consistent, predictable billing schedule
  • the focus in placed back on the services you provide, rather than the hours you put in
  • the potential for a better revenue stream for you, as you now focus on value rather than the limited number of hours in a day
  • you save time by moving away from tedious billing procedures
  • a higher rate of client retention

Plan before executing. Dumping the billable hour and moving to a fixed-fee system comes with its share of complications, however. You will need to figure out how to price various services, according to the amount of work involved and the value of the service to clients. This can lead to miscalculated rates as you spend more time working on a project than initially planned. Conversely, quality of work could decrease as some CPAs attempt to stay within budgeted hours. This underscores the importance of careful analysis of rates before switching to the new billing system. In a value-based pricing system, clients help to determine the rates they pay based upon services selected. CPAs offer a variety of service options, such as:

  • the scope of work being performed
  • timing and payment terms
  • change orders – upgrades and add-ons to the original work requested

This type of pricing system gives clients greater control over the final price tag of the project, because they select the options that fit within their own budgets. In some cases, the final cost may be less than what it was under the hourly billing system. How do clients react? Long-term clients may resent the change, suspecting it conceals a rate increase. Billing confusion can also erupt, as clients receive invoices for completed work at the same time they receive a bill for the next month’s work on the new upfront pricing system. Speaking to clients individually to explain the switch and address their concerns will usually help to allay their fears. Source:

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