Ask Ron Baker: Fixed Price Agreements and Engagement Letters
This question is from Paul in Kentucky:
Good morning, Ron!
Our firm is on the journey of switching from the old accounting pricing model to using Fixed Price Agreements (FPAs). We started two years ago when we read The Firm of the Future, and we’ve taken additional steps now that we’ve read Implementing Value Pricing.
One opportunity for improvement we have come across is determining whether we can combine the FPA and the engagement letter. Have you encountered this topic in any of your seminars, conferences or discussions with other accountants that have read your books and changed to FPAs?
I would greatly appreciate any insight you could provide on this topic. Thanks for freeing us from the shackles of the cost-plus pricing model!
Thanks for the kind words. We have encountered this question many times, and have seen firms try to combine the FPA with the standard Engagement Letter.
I don’t recommend you do this. Mostly because the Engagement Letter was written by two groups of people who can’t write: lawyers and insurance companies. It’s chock-full of legal terms, such as what happens when we have a dispute, lack of payment and arbitration. It’s not a friendly document.
The FPA, on the other hand, is meant to communicate value. It’s really nothing more than a memorialization of the meeting of the minds between the CPA and the customer. It’s deliberately written in very simple terms, spelling out what is to be done, the scope, the price, the payment terms and the value guarantee. However, it is still an “At-will” agreement, and conforms to the requirements of a binding contract.
We suggest amending the Engagement Letter where it discusses price, (usually in terms of hourly rates), to state: “The price for this service is as agreed in our FPA, dated xx/xx/xx.” Be sure to remove all references to hourly rates from your Engagement Letter.
You may have an FPA that requires multiple Engagement Letters, which is fine.
Even if you are doing an individual tax return for a once-a-year customer, I still suggest you convey and communicate price in a format other than simply the standard Engagement Letter, again for the reasons stated above. Price is far too important to be communicated in such a legalistic manner.
Let the Engagement Letter conform to your insurance company’s and professional requirements. Let the FPA communicate value in a friendly, non-threatening manner.
This is why I use the term “agreement,” not “contract,” and suggest you always say, “Authorize the agreement,” rather than “Sign the contract.” Words matter.
I hope that helps. Congratulations on your journey to becoming a Firm of the Future.
Editor’s note: This is part of an ongoing series called "Ask Ron Baker." Please send your questions on value pricing and practice management to AskRonBaker@gmail.com.