Strategy Debate: Value Billing versus Hourly
I began noticing the conversations discussing the pros and cons of value pricing versus traditional hourly billing in CPA firms about four or five years ago. As a small firm practitioner, the debate intrigued me. Asking myself the following questions prompted me to dig deeper:
- Are the traditional hourly rates intimidating to small business clients?
- Should hourly-rate pricing be reserved for larger companies where management is accustomed to paying other professionals, such as lawyers, at a price point that is usually higher than accountants?
- Is the idea of value pricing too vague for smaller, maybe less-sophisticated clients?
Traditionally, firm management would look at billable hour reports to assess profitability, the adequacy of current staffing levels and professional staff utilization. In some firms, the number of billable hours a CPA individually logs could even affect their compensation. This method is tried and true, but there are some downsides to the hourly billing framework:
- Slower work. When staff members are obsessed with hours charged to clients, it can slow work down. They become preoccupied with how many hours they are posting instead of working efficiently to complete a project for the client.
- Reduced profit margins. As technology advances, the time needed to complete tasks inherently lessens. If we are billing based on hours work, our invoice must be lower. It’s simple math.
- Unhappy team members. We are CPAs. We can add. Staff may not understand what the firm’s hourly rates represent, but they clearly understand their salary. Therefore, a young staffer can understand their annual salary is approximately x dollars per hour; the firm bills me at y dollars per hour; the firm is making a lot of money off me. Many managers do not educate staff on what the hourly rates represent or how they are constructed. It’s kept a mystery. Management may think this is not important, but it is. I left a firm for that exact reason.
As CPAs, we assess value. When we audit, we must value accounts receivable, fixed assets and liabilities. So, why is it difficult for us to calculate our value to our clients? It’s not. Just like hourly rates, value billing has its pros and cons.
I see value billing as a way to increase overall revenue and the profit margin. As mentioned above, with improvements in technology, it takes less time to complete audits, tax returns and other services. With hourly rates, less time equals lower client invoices. But has the value of that project decreased? Most likely no, so billing the value of the project as opposed to the time expended makes tremendous sense.
Our firm moved to value billing during the COVID pandemic. Since making the switch, I have seen a significant increase in gross revenue and profit margin. With value billing, our cash flow has increased and become more stable. The client knows the cost of the project in advance. Since we have an agreed-upon price, the invoice that is presented is not a surprise. Clients often have our fees already budgeted/allocated and ready to be disbursed when they receive our bill.
If there is a downside to value billing, it has to be the time and effort expended to make the change. Moving to value billing is a change in mindset. It forces you to take time to look at your practice and honestly assess your value as an accountant. This is something many CPAs have never really done.
The Bottom Line
If I had to declare a winner, I would say value billing is the victor. Hourly-rate billing is the tradition that accountants and clients know and understand. But, for firm management, value billing is the way to go. It increases profits and productivity and truly assesses how valuable our services are in the marketplace.
David A. Lopez
David A. Lopez, CPA, PSA, is the managing director of David A. Lopez and Company, LLC. He is a member of the NJCPA.
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This article appeared in the winter 2022/23 issue of New Jersey CPA magazine. Read the full issue.