How do you price a first-year engagement?
This is a question I received this afternoon from another CPA firm, but I’ve bumped into this issue several times through the years. In this post I’ll give you tips to assist you in estimating the time it will take you to complete a new project.
Why is this hard? You don’t know how much time you’ll have in the engagement until you’ve done it—and you don’t have a crystal ball. Plus, you know you’ve bid on projects before and underestimated the time it would take (CPAs almost never overestimate); consequently, you took it on the chin. You don’t want that to happen again.
To state the obvious, the key is estimating the time it takes to complete the engagement and by what level of personnel.
So, how do you know? In short, you don’t, but here are some tips.
Ask what the present pricing is. This may be the most awkward part of initial conversation with a potential new client. Some CPAs don’t ask this question, but it’s one of the best gauges of the time it takes to do the work. If the client says, “We’re not providing that information,” then so be it. But you most certainly will not know if you don’t ask.
Another method is to do what builders do. Break the project into pieces and estimate the time for each part. So create a summary of each action necessary, and place an estimated time next to each part. Then compute the estimate price using your standard billing rates by personnel levels.
Finally, compare the project to similar projects in your firm. Similar projects are a great proxy for the estimated time.
Once you’ve documented the above, let someone else with experience review and give you feedback. Two eyes are usually better than one.
Also, consider when the project is needed. Is it a busy time of your year? If yes, then you may not want to lower your price (you may not want to bid on the project at all). If not, then maybe there’s some flexibility.
Is the project something you’ve never done before. Then consider the additional cost of getting into the new area: CPE, consultations with someone outside your firm, research materials, electronic workpapers.
The last thing I’ll say is you usually have a great deal more time in the first year of the engagement. I’d say, most of the time, you’ll have at least 50% more time than you estimated. Then, in subsequent years, the project should be more normal. Invariably, there are things you were not aware of in the bid stage.
Any way, there’s some ideas to consider in estimating new project time in a first-year engagement.
Remember to (1) ask what the client has previously paid (and back into the estimated hours using hourly rates), (2) estimate time for each part of the project, and (3) consider similar projects you’ve previously performed. Additionally, know that most people underestimate the hours it will take to complete a new project.
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Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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