Billing Practices

By Raymond A. Zimmerman and Mary Ann Murray

Knowing how other firms bill clients, for what, and how much, is information usually not readily available. The authors describe and analyze billing practices and statistics related to various size firms, other than the nationals, based on a management-of-accounting- practices national survey.

One of the more demanding administrative functions in any CPA firm is accounting for time and fees. Increased competition makes it imperative that firms be able to justify their billings. Clients are concerned about fees and more likely to change firms if they are dissatisfied. Knowing customary billing practices in the profession helps establish a more comprehensive and accurate billing system, making it easier to justify the fees charged. The following paragraphs and tables review typical billing practices as reported by respondents to the 1994 national survey sponsored and administered by the Texas Society of CPAs. A total of 2,100 firms across the country voluntarily participated on an anonymous basis. Respondents to the survey are broken down into four categories: individual practitioners; small firms (multi-owner with revenues less than $350,000); medium firms (multiowner with revenues greater than $350,000 but less than $900,000); and large firms (multiowner with revenues greater than $900,000). Of the respondents, 1,078 are individual practitioners, 197 are classified as small, 416 classified themselves as medium, and 409 of the respondents are large firms--national firms were excluded. The large number of respondents in each category helps ensure the statistical accuracy of the study. The results provide valuable information which may be used to evaluate billing practices.

General Billing Practices

Computer and Word Processing Expenses. A large percentage of firms do not bill clients for computer and word processing costs; they absorb them as part of their overhead. Smaller firms are more likely to follow this practice. An estimated 71% of the large firms bill for computer time and services. Approximately 63% of the medium firms, 52.5% of the small firms, and 44% of the individually owned firms bill clients for computer time. Of those that do bill, the average rate for actual computer machine time, not CPU time, ranges from a low of $26/hour to a high of $34/hour. The hourly rate for operator time varies anywhere between a low of $31/hour to a high of $39/hour. While it may be difficult to imagine operating a practice in today's environment without the use of computer assistance, approximately 1.25% of the respondents report that they do not use computers in their practice.

The percentage of firms who bill for word processing services is higher. (This information is from the 1992 survey--not available in 1994 survey.) Of the respondents, 75% of the large firms, 63% of the medium firms, 52% of the small firms, and 43% of the individual practitioners bill clients for these services. Generally, the rates charged for word processing are lower than the rates charged for computer services. The average hourly rate for word processing machine time ranges from a low of $22/hour to a high of $29/hour. Operator time averages $30/hour with a low of $29/hour and a high of $34/hour.

Itemized Billing. Only a minority of the responding firms go to the effort of supplying clients with itemized statements. Small firms are least likely to itemize, with only 26.2% reporting that they follow the practice. Approximately 38.3% of the large firms reported following this procedure. The majority of the firms bill by the project. While this practice is less time consuming, it is more subject to misunderstandings.

Many firms reported having clients who are becoming more cost conscious and demanding with respect to accounting fees. These clients are more likely to request, and are entitled to receive, a detailed statement regarding their fees. Firms providing itemized statements find that their clients are much more satisfied than if the fees are based on a per-project basis. Satisfied clients are the substance from which small firms grow.

Efforts to provide detailed billing may prove to be beneficial in the long run. Although initially such documentation appears to be burdensome, computers and modern timekeeping procedures make the task much easier than in the past. One additional benefit derived from providing detailed statements--should the firm find it necessary to initiate legal proceedings against a client for delinquent fees, the burden of proof may be
less onerous.

Write-Ups and Write-Downs. There is probably not a practitioner who hasn't encountered the need to reduce the fee being charged (write-down) from the fee based on actual time. This usually results from the learning process when dealing with something new, or simply to keep a client happy. Some practitioners have occasion to adjust the fee upward (write-up) to reflect the true value of the work product. These two types of adjustments net out, usually resulting in an overall reduction of billed fees. Regardless of the responding firm's size, it appears that the bulk of the firms end up reducing their fees in this manner, with individuals reporting average write-downs of 5.7%, small firms 6.5%, medium firms 8.9%, and large firms 11.5%. Apparently smaller firms are more conscientious about billing for their services, probably the result of several factors. One major factor may be the inability to absorb this type of cost. Additionally, smaller firms tend to restrict their practice to areas where they have achieved a satisfactory level of competence. They do not feel the need to invest large quantities of time to develop the necessary skills and expertise it takes to adequately perform in an unfamiliar arena. Those who provide services, such as tax compliance or tax advisory services, find that write-downs, especially after the passage of major tax reform measures, are not uncommon. In most cases, write-ups or write-downs are made in an effort to ensure that the fees charged represent the perceived value of the service rendered to the client.

Hourly Fee Adjustments. Respondents were also asked whether they charged higher hourly rates for international accounting and tax services than the standard rate charged for like domestic services. Approximately 14.7% of individual practitioner respondents and 14.8% of the small firm respondents reported increasing their fees for these services. As firm size increased, there was less of a tendency to increase fees for international services. Only 8.5% of the medium firms followed this practice, and 6.2% of the large firms increased fees for such services. This may be attributable to larger firms having full time specialists assigned to work in these areas, and their fees already reflect the increased value of their expertise.

The hourly premium charged by the majority of the firms charging a premium is 20% or less. Approximately 15% of the firms charging a premium bill at 30% over standard. Except for individuals, very few firms from the other categories of firms charge in excess of 30% for such services.

Work-in-Progress. Respondents were asked whether they maintained records of work-in-progress, i.e., accumulated charges for hours and expenses not billed at the end of the year. The smaller the firm, the less likely that it maintains records of work-in-progress. Only 56.6% of the individually owned firms reported keeping such records. Approximately 73% of the small firms, 88.3% of the medium firms, and 95% of the large firms account for work-in progress.

Hours Worked and Billing Practices

Billable and Worked Hours. Table 1 reflects the average billable hours worked as reported by the responding firms.

Table 2 reflects total hours worked, both chargeable and nonchargeable, to achieve the Table 1 average chargeable levels. Nonchargeable hours include such items as vacations, sick leave, holidays, and other "nonpresent" hours.

A comparison of the statistics shows that as firm size increases, the percentage of time billed by active owners decreases. Active owners of individual firms bill approximately 62% of their total hours. In larger firms the active owners are able to bill an estimated 53% of their total time. This differential may be attributable to two different factors. For individual firms, the owner must bill out his/her time to make the firm profitable and cannot rely as much on the billing of other professionals to help cover the cost of overhead. As the firm grows larger in size, however, the role of the active owner changes somewhat from being a "producing accountant" to being a "marketing accountant." Owners in large firms frequently spend more time generating new business while the nonowner professionals take care of the accounting routine. Overall, professional personnel are able to bill approximately 74% of the total time they work. The remaining time, the nonbillable hours, are spent in various functions, such as continuing professional education, assigned administrative functions, firm meetings, activity in various professional organizations, as well as a multitude of other duties.

Hourly Fees. The average net fees realized per charged hour ranges from a low of $46/hour for small firms to a high of $64/hour for large firms. The average net fees realized, based on total hours worked, are substantially lower, ranging from $26/hour for small firms to a high of $36/hour for large firms.

The average billing rate per hour for a person with an annual salary of $30,000 is $52/hour. Billing by large firms for professionals of this caliber averages $55/hour. Individually owned firms bill an average of $53/hour for this type of professional, small firms average $49/hour for comparable services, and medium firms bill these professionals at an average of $52/hour.

The standard billing rates reported by the firms appear to vary greatly in their fees charged for less experienced professional personnel. Fees charged for the least experienced professional--less than three years experience--range between $42/hour to $49/hour; for those professionals with three to six years experience, the fee range is from $52/hour to $65/hour. For services rendered by paraprofessionals, such as bookkeepers, fees range between $38/hour to $44/hour. Clerical assistants are billed out at between $27/hour and $34/hour. As expertise increases, fees increase.

Similarly, the hourly rates for more experience follow a pattern. Supervisors and managers are reported at anywhere between $61/hour to $87/hour. Partner's are billed at anywhere between $84/hour to a high of $130/hour. Table 3 lists the standard average billing rate categorized by firm size. The figures cited are merely averages as reported by the respondents. The actual fee rate may vary within a firm. For example, fees for less experienced professional personnel range between $40/hour to $51/hour. These rates represent the low and the high average as reported by the responding firms. A new professional may be billed at $30/hour while a veteran professional with two years experience may billed at $50/hour, thereby averaging $40/hour as the reported figure for that particular firm.

Individually owned firms show consistently higher standard average billing rates than those reported by multiowner small firms. Except at the owner level, individually owned firms bill hourly rates which are more comparable to those firms categorized as medium-sized. Small firms bill at lower rates in every category of personnel. Exactly why this tendency exists is difficult to explain; however, it is believed that the reported figures are accurate based on the large number of responses received.

Net Fees Billed

By Firm. Table 4 provides a breakdown of the net fee range per firm. Approximately 84% of individual practitioner respondents have billings less than $300,000. Some individual firms reported fees in excess of $1.5 million. Table 4 provides a breakdown of the fee ranges of the various firms by category.

By Owner. Table 5 provides a breakdown of the net fee range per owner. The pattern reported there is very similar to that reported for total fee range per firm. Approximately 75.5% of the small firms report net fee ranges per owner of less than $150,000. Only 55% of the individually owned firms report fee ranges less than this amount. An examination of the table reflects that the net fee range per owner generally increases as the firm size increases, probably due to fees generated by nonpartners and the economies of scale associated with increased size.

An additional factor which contributes to this correlation is the ability of large firms to offer, or make available, more diversified and specialized services than smaller firms are able to offer. These specialized services are generally billed at higher rates.

Results Will Vary

The results reported in this survey are representative of averages across the nation. Geographical differences, firm specialization, and firm size will cause individual firms to vary from the reported average. *

Raymond A. Zimmerman, PhD, JD, is an assistant professor of accounting at the University of Texas at El Paso. Mary Ann Murray, PhD, is an assistant professor at St. Mary's University of San
Antonio, Texas.

TABLE 1

AVERAGE CHARGEABLE HOURS WORKED

(BY CATEGORY)

TABLE 2

AVERAGE TOTAL HOURS WORKED

(BY CATEGORY)

TABLE 3

STANDARD AVERAGE HOURLY BILLING RATE

(BY CATEGORY)

TABLE 4

NET FEE RANGE PER FIRM

(PERCENTAGE OF FIRMS IN THAT FEE RANGE BY CATEGORY)

TABLE 5

NET FEE RANGE PER OWNER

(PERCENTAGE OF FIRMS IN THAT FEE RANGE BY CATEGORY)