Accounting Today - July 2012

accountingtoday.com
July 2012 | accounting today 37

Capturing out-of-scope work
Is your firm doing extra client work for nothing?

BY lee eisenstaedt and tom sniders

CPas often face the dilemma of how to bill for work they do outside the
scope of the engagement letter. this work can cost firms as much as 20
percent of their billings.

Evidence from our 2012 annual survey of accounting firm leaders shows that this age-old problem is still relevant. More than 80 percent of respondents told us that they need to get better at identifying, billing and collecting for out-of-scope work. So it’s worth taking a look at how firms can recapture some of the lost billing.

COMMON CAUSES OF OOSW Before discussing solutions, we need to establish how OOSW is created. The most common reasons we see (in no particular order) are:

;Poorly written engagement letters that fail to correctly outline the work to be done; omit a provision for the extra costs involved when the client doesn’t perform as expected; and don’t include a process for handling changes in scope.

;Fear of losing the business by telling the client there will be extra cost for additional work.

;Erroneously thinking that not billing for OOSW is a way of providing great client service and gaining client loyalty.

;Underestimating cost. Using a best-case scenario to budget an engagement is unrealistic; it is far better to base your quote on historical facts and figures or, in the case of a new client, on the basis of your experience with similar clients.

; The most common cause for OOSW may simply be a lack of discipline in updating actual versus budget during the engagement.

CONSEQUENCES
The consequences of not billing for
OOSW are compelling. First, finan-
cially, not collecting the fees you are
rightfully owed leads to lower real-
ization, profit margins and profit-
ability. Second, it can lead to the
market perception that the firm has
cheap pricing; to clients becoming
trained to expect that they will get
something for nothing (or, worse,
not even realizing they are getting
something for nothing); and to di-
minished employee morale.

CAPTURING FEES FOR OOSW Here are 10 of the best ways we’ve seen to do this:

1. Make sure you understand the details of the assignment and that your engagement letters reflect your understanding of:

; What you will do for the client;

;What they must do for you, including due dates for work papers and other documentation;

;What is excluded from the project; and,

;How much additional work outside of the scope will cost. Include a chart with the specifics so no one is surprised later on.

2. Create a project plan with a de-
tailed budget — and follow it! You
should include realistic milestones
and key deliverables for each stage
of the project; set priorities; and es-
tablish what is “nice” to do and what
“needs” to be done in the event an
adjustment is necessary after the
work has begun. Then share the
plan with the client, and continu-
ally monitor progress against it to
avoid surprises.

client is a very different decision.

9. Bill OOSW on a separate invoice, so clients understand what they are being billed for.

10. Communicate early and regularly with the client on the status of the engagement. Good communication can’t be stressed enough. We know a firm whose high write-offs and write-downs are due to its “delay and pray” approach: It “ delays” telling clients about OOSW, “praying” that another part of the engagement will come in below plan to offset the overages.

You won’t be able to recoup all
of the costs related to OOSW. There
are some circumstances where it is
better to write off the OOSW in fa-
vor of a more lucrative engagement.
Still, having a process in place for
establishing with the client what is
considered OOSW and tracking the
time internally puts your firm in a
better position to recapture some
of the costs. AT

Lee Eisenstaedt and Tom Siders, CPA, are partners with L. Harris Partners LLC ( www.lharrispart-ners.com), a firm dedicated to helping CPA firms build value.