Explaining the Sample Fixed-Price Agreement

BY RONALD J. BAKER
June 1, 2009

Editor's note: This is a Web-exclusive sidebar for " Pricing on Purpose: How to Implement Value Pricing in Your Firm ." Also see Exhibit 7 , a sample fixed-price agreement.

 

Date of the FPA
The fixed-price agreement (FPA) shown in Exhibit 7 can be either for a calendar or fiscal year, depending on the client. You may want to stagger your FPAs so the firm will not be rushed to draft new FPAs at one particular time of the year. Some firms use multiple-year FPAs, as well as perpetual FPAs that cover all the compliance work for the client, leaving a second FPA to outline those services that change from year to year.

Professional Services Provided
Obviously, you will describe each service to be provided by your firm, and you may provide additional scope detail to the degree necessary to have no misunderstandings between you and the client. This requires professional judgment. For example, with the audit service in the sample FPA you are specifying the client provide PBC schedules by March 15, 2010. If the client does not deliver by this date, the scope of the audit changes, and a Change Order should be issued.

Unlimited Access
This service is included in the bundled price to the client and will break down the communication barrier that may arise if you charge for each meeting and phone call. The more you talk with a client throughout the year, the better able you will be to provide additional value, especially before the client enters into various transactions.

Do clients abuse this service? Overwhelmingly, the answer is “no.” Any client who enters into an FPA with your firm is usually an “A” or “B” client, and a high level of mutual trust, respect and understanding already exists. If they do need to call you at home on Saturday evening at 11:00 p.m., it is usually for a very good reason (a death in the family, accident, etc.), and you want to talk to them. Any additional work that results from these contacts is priced separately, using a Change Order. Also, if a client did contact your firm excessively, you are obviously adding value and can readjust your price accordingly for this access. If they are abusive, or unwilling to pay for your value, you should terminate them.

Unanticipated Services
This clause offers many advantages. By specifying the services that you are aware of at the time of drafting the FPA, you are leaving many opportunities for providing additional services. Because clients are paying you for unlimited access, they are more likely to select you to provide those additional services, thereby effectively locking out the competition. Another advantage is that, by their nature, Change Orders deal with marginal services that the client wants, rather than what the client needs (because the FPA has taken care of their basic needs), and can command premium prices.

Service Guarantee
This policy reduces the risk to the client of working with your firm, as well as sticker shock and buyer’s remorse. Why should the client bet on your firm if you won’t? A service that is guaranteed is worth more than one that is not, so this clause will allow the firm to command a premium price over the competition. (For more information on this policy, see the book Extraordinary Guarantees, by Christopher W.L. Hart, Spire Group Ltd., 1998).

Price Guarantee
This clause ensures that your firm sets the price when you have the leverage, which is before the engagement begins. If there is no client-signed FPA or Change Order, no work will be performed—period! This will inculcate the “no surprises” culture within your firm, something clients will value highly, providing an excellent competitive differentiation, and another opportunity for premium pricing.

Payment Terms
The sample FPA shows 12 monthly payments, but this clause can be designed for quarterly payments, semiannual payments, or with a deposit made upon signing the FPA. For personal tax returns, many firms require payment upfront or upon delivery at the latest.

One value-added idea for business clients is to offer the client the ability to structure the payment terms around their cyclical cash flow rather than the firm’s workflow. (Who knows this cycle better than their CPA?) Since the client has input into these terms, it will negate payment resistance.

Revisions to the FPA
This is a good clause to add, especially for new clients, since it reduces the risk the client is taking. It also ensures the firm will remain in communication with the client and continually solicit feedback on their level of satisfaction.

Termination Clause
This clause also removes risk from the client, lowering buyer’s remorse. By utilizing bundling and offering just one price for all the services in the FPA, the question arises about what to do if the client terminates the relationship before all the services are performed. In that case, you will simply have to agree upon the value compared to the payments made, and one party will owe the other. The client already has the option of paying whatever they believe the value is due to the Service Guarantee, so don’t let this detail prevent you from bundling your services into one price.

The Words You Should Use
The word price is a better word than fee, since it conjures up no negative feelings, as is invoice rather than bill. The word agreement is preferable to the word contract, which conjures up images of disputes, lack of trust, courts and lawsuits, while agreement has a much more positive connotation to the client. The word authorize is preferable to sign for the same reasons, and it puts the client in control.

 

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