Fixed Fees Benefits & Risks

fixed price projectWhen delivering a service, product or solution many businesses may offer a fixed fee. This makes it easy for the customer to understand how much they need to budget, and the service provider knows how much money they will receive.

Fixed Fee Scenario

Amelie would like a new kitchen, however she has fixed budget of £10,000. Luckily Gorgeous Kitchens Ltd sell and install kitchens, and Amelie really likes some of the designs. Sam from Gorgeous Kitchens Ltd presents some options to Amelie and she chooses the option that she likes that is within her budget. She places an order, and within 6 weeks she has the kitchen that she wanted. Everyone is happy.

Customer’s Perspective

Benefits for Customer

  • Know how much they are going to pay
  • Don’t have to pay more if the service provider hits a snag, as long as it is in scope

Risks for Customer

  • Need to ensure they understand exactly what is in scope, so that the fixed fee doesn’t start climbing if they request something that wasn’t in the detail
  • Job is rushed and corners cut if the contractor is losing money on elements of the job and they try to recoup from this project

Customer Tips

  • Ask for a detailed plan of works, so that you can see clearly what is in or out of scope
  • Ask for costs of optional items, so that you can ensure you won’t be stung if you alter your specification
  • Be clear that you don’t want any out of scope items unless price has been agreed beforehand
  • Ensure that the quality of the finished job is agreed

Service Provider’s Perspective

Benefits for Service Provider

  • You have agreement from the customer that the will pay the price, so you don’t risk haggling or arguing over the final price.
  • You can budget your price to ensure that you build in sufficient margin.

Risks for Service Provider

  • If prices of products or labour go up you risk losing some or all of your profit.
  • Need to ensure everything works to or under plan/timescales to keep your profit.

Service Provider Tips

  • If there are too many unknowns in the project, don’t agree to a fixed fee
  • Build in a contingency
  • Learn from experience and tweak your pricing model as appropriate
  • Document the full solution agreed, and be clear about what is in or out of scope
  • Notify the customer of out of scope items before providing them.

Goringe Accountants – Fixed Fees

We believe that fixed fees are essential for the majority of our clients, as it enables our clients to budget for a known cost, and know what they are signing up for.

For certain projects however, we still work on a time basis. For example, bookkeeping can vary dramatically from month to month, so for growing or sporadic businesses we bill on an hourly basis. However, we still give estimates, and notify clients before exceeding estimates so that the client is still in control.

For complex projects, such as acquisitions or mergers we also bill via an hourly basis, again with a detailed estimate beforehand.

Fortunately for our clients, we are extremely experienced in the usual annual requirements of businesses. Therefore we confidently provide fixed fees to our clients; that we stick to.

Typical Limited Company Fixed Fee

We would discuss with the client their requirements and then list in their letter of engagement everything that we have agreed to do, e.g.

  1. Statutory Accounts
  2. Corporation Tax Return
  3. Annual returns to Companies House
  4. Director’s personal tax returns
  5. Payroll for the company
  6. Review of quarterly VAT returns
  7. Regular Business Reviews
  8. Telephone and email questions as required

We would then be clear that the following are out of scope:

  1. Bookkeeping
  2. Business Plans

Finally

If you would like to discuss how to introduce fixed fees into your business, and establish whether they could work for you, please contact us.

2016-10-23T16:25:00+00:00 June 16th, 2013|Business Advice|0 Comments

About the Author:

Nicky Larkin
Nicky Goringe Larkin is a Chartered Management Accountant who founded Goringe Accountants Ltd. - British Accountancy Awards 2013 Runners Up and awarded 'Highly Commended' accolade. Nicky is also Chair of the regional Federation of Small Businesses (FSB) as she is passionate about ensuring that Small Business issues are heard at the local and national level.