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HOW TO CHARGE

Legend has it that Pablo Picasso was sketching in the park when a bold woman approached him.

"It's you -- Picasso, the great artist! Oh, you must sketch my portrait! I insist."

So, Picasso agreed to sketch her. After studying her for a moment, he used a single pencil stroke to create
her portrait. He handed the women his work of art.

"It's perfect!" she gushed. "You managed to capture my essence with one stroke, in one moment. Thank
you! How much do I owe you?"

"Five thousand dollars," the artist replied.

"B-b-but, what?" the woman sputtered. "How could you want so much money for this picture? It only took
you a second to draw it!"

To which Picasso responded, "Madame, it took me my entire life."

Even Picasso struggled with the same pricing issues that you face as a future accounting consultant. He
understood that it's the skill, the expertise, and the end result that the customer pays for, not the time it
takes. But customers may need a bit of education to really understand that.

What are you worth? How much do you charge for the wonderful work that you do? How do you
communicate your value to your clients? Do you quote an hourly rate, and then present a tally of hours
and expenses at the end of a project? That's typical of many consultants, who find this the simplest way
to charge their clients. Or do you quote an up-front, flat rate for a project? This eliminates the sphincter-
tightening moment at the end of the job when you present your bill. You run the risk, however, of seriously
undercharging if the project turns out to be more complicated than you thought it would be.

Monola Robison, a management consultant in Atlanta, Georgia, has developed a set of guidelines to
determine which approach is most appropriate for a project. "With pricing strategies, the determining
factor is how well the outcome of the project can be defined," she says. "The less ambiguous the project,
the easier it is to charge by the job. If the scope is broad and ill-defined, then a per-day rate is more
appropriate."

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Time is on Your Side

Charging by the hour, also known as time-and-materials billing, appeals to many consultants because it's
so straightforward. You take your hourly rate, figure out how many hours you've worked, multiply the
two, factor in any expenses, and send the bill off to your client. Couldn't be simpler, right?

Charging by the hour is a good option for short-

term projects with specific goals.

Charging by the hour is often a good option for short-term projects with specific goals. "If a client wants
to pick my brain about a very specific project, like my opinion about a marketing piece, I will arrange a
one- or two-hour phone meeting and charge by the hour," Robison says.

Time-and-materials billing can also be appropriate when you're presented with a poorly defined project -
- say, a new client calls and says, "Help! Come fix my company! Everything's a disaster!" While a project
like this should probably send you screaming in the other direction, accepting it and charging a flat fee
would be a big mistake. You simply don't know enough about the project's scope. What if you grossly
underestimate the time you'll spend implementing your proposal? You'll end up being grossly underpaid
too. Hourly billing is the only way to go in this situation.

But time and materials billing can result in misunderstandings with your clients. A client might ask, "Why
did it take you so long? I had no idea it was going to be so much." Or maybe he'll protest, "I know another
consultant who charges less per hour than you do. I'll go with her next time."

Your customers aren't trying to be difficult. They don't know better! Clients ask, "How much per hour?"
assuming you and your competitors are all the same and that rates are the only way to differentiate
between contractors. But all accounting consultants aren't created equal. There's a big difference
between a consultant with two years of experience and one with twenty years.

When you're offered a long-term project with

clearly defined goals, you should charge by the
project.

To answer questions about pricing, you need good sales and communications skills to demonstrate the
value of your solutions and explain why you're worth your hourly rate. You also need to be prepared to
justify the time you spent on the project, which means accounting for every hour you billed the client.

The Project's the Thing

Of course, charging by the hour isn't the only option -- and often, it's not the right one. When you're faced
with a long-term project with clearly defined goals, charging by the project is the way to go. Gail Gudell,
an independent accountant, uses this approach. "I act as Chief Financial Officer at three of my clients'

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companies. They are relatively small organizations, and there is no need for any of them to have a full-
time CFO. I developed a specific checklist of duties, forms, and reports that I'm going to provide on a
weekly, monthly, quarterly, and yearly basis. And I am paid on a contract basis for performing these CFO
functions." And this means steady income and stability for Gudell, two things that are hard to find as a
consultant.

Clients usually prefer to pay on a per-project

basis. They're scared of giving consultants free
rein and getting a nasty surprise down the line.

Alternatively, charging by the project works well when you're providing one specific service or product
to your client. Take, for example, an illustrator who's been asked to draw a picture for a company's
brochure. Charging by the hour doesn't make much sense here - whether it takes him two hours or ten
to complete the illustration, it will still have the same value to the company. Why should he be
penalized for finishing the project quickly? He should determine what the illustration's value is and
charge his client that amount.

A Client's Perspective

Clients often prefer to pay on a per-project basis. They like knowing just how much your services will
cost before they sign on the dotted line. They're scared of giving you free rein, and then getting a nasty
surprise down the line.

Al Levi, owner of Oil Services, Inc., a heating company in New York, hires a lot of consultants to help him
with various aspects of his business. He likes to pay them on a per-project basis and tells a story to
explain why.

"I was traveling with my family in Houston, Texas -- cattle country," he recalls.

"We stopped for dinner at a steakhouse. The waitress recommended the off-the-menu special:
Porterhouse steak. She eloquently described its generous portion size and melt-in-your-mouth taste. I
ordered it, and the steak was perfect -- absolutely delicious! But when the bill arrived, I discovered the
price of the steak: $32.00. And the salad, bread -- everything else -- was extra.”

"Now, the steak was great, and $32 may be a fair price for such a nice cut of beef. But the other steaks
on the menu ranged from $16 to $23. The price surprised me, and I don't like to be surprised when it
comes to purchases. Let me know ahead of time, and I can say, 'Yes' or 'No, thanks.”

"That's how I feel about consulting services, too. I want to know what services will be delivered and how
much it will cost before I sign on."

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Determining Your Project Rate

Despite the benefits of per-project pricing, some consultants are reluctant to use it because they simply
don't know how to decide upon a price. Well, here's a hint: every project-based fee is based on your hourly
rate. But instead of figuring out how much time a project took you after the project has been completed,
you estimate how many hours it will take you before it's even begun. To come up with a good estimate,
follow these guidelines.

Assess the project. What's the problem? What is the full scope of the project? How can you measure
results? How will you know when the project is finished?

Then, decide how many hours the project will take. Be realistic. No project ever goes off without a hitch.
Add some hours to account for unforeseen problems. Some people even advise consultants to double
their first estimate. Multiply the total number of hours by your per-hour rate. What resources will you
need? Add these expenses up. Then, before you present the total price to your client, ask yourself, "Should
I discount this price because it involves so many hours of solid work? Am I saving time I would otherwise
spend marketing and selling another job?"

Adjust your total price according to your answers. Then, sell yourself on the price. Do you see the value in
relation to the price? Can you describe the benefits of your service so that it seems like a bargain?

Present your proposal to your client. Don't offer a breakdown of time and materials. Reassure your client
that you will hold to the price until the desired, measurable results are achieved, no matter what it takes.
If you are efficient at what you do, and you bring the job in ahead of schedule, then you and the client
both win.

REFERENCES
Rohr, E. (2000, October 27). How to Charge. Retrieved from 1099 Web Site:
http://1099.com/c/ar/ta/HowToCharge_t042.html

Questions: (3 items x 10 points)

1. What type of cost is expertise? Is it a fixed cost or a variable cost? Defend your answer.
2. How can accounting consultants or auditors minimize the cost of doing business? How is this
different from a manufacturing firm?
3. How can accounting consultants maximize capacity? Compare these with capacity utilization
methods of a manufacturing firm.

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Rubric for scoring:

CRITERIA PERFORMANCE INDICATORS POINTS
Provided pieces of evidence, supporting details, and
Content 6
factual scenarios
Grammar Used correct grammar, punctuation, spelling, and
2
capitalization
Organization of Expressed the points in clear and logical
2
ideas arrangement of ideas in the paragraph
Total 10

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