Consulting Engagement Letters

In a perfect world we'd be covered by an engagement letter for every minute of billable work...

I require an executed engagement letter for every compliance engagement I enter into. BUT -- when it comes to consulting, I'm more lax about requiring engagement letters, particularly if the consult was spur of the moment and does not have a concrete deliverable. Same for year-end planning. Each bill for these consults usually only amounts to a hundred dollars or a few hundred.

What are your thoughts and practices? Do you have some kind of running consulting engagement letter in place for these kind of situations or do you just bill for your time without an engagement letter?

For my small practice, my engagement letter typically only covers tax return preparation and basic tax planning, e.g. "safe harbor" estimated payments assuming prior year withholding. If I start providing more sophisticated tax planning, I typically won't initiate a fresh engagement letter, but will bill the client either at the time of delivery, or carry the fee forward to next year's tax return prep. By design, my clients are going to pay me if I ask, since I don't over-charge them.

I guess it depends on what you consider "consulting"? In my practice consulting generally involves tax planning and answering tax related questions on a broader scale. I provide one hour of that activity as part of my base fee for return preparation.

I do not provide that particular service unless I am also preparing the return. My engagement letter has a paragraph regarding that. I learned from my mistake early on when I used to do "consulting" without tax return preparation and soon found out that my brain was being picked at a lower billable rate all year round than the fellow who was preparing the returns

I require engagements for three services, otherwise I am pretty lax and I make my fees very clear every year, including minimum charges if I do anything for a client in a given month.

-Tax compliance
-Prepared Financial Statements
-Contractual fixed-fee, defined-scope services

My money makers are from fixed-fee contracts, so if I do not have engagements that clearly outline what is in-scope (anything not listed is therefore OUT-OF-SCOPE, and BILLABLE), it would result in a lot of arguing with clients. The way I do it, they cannot argue that something should be included because it is clearly outlined what IS included for the recurring fee.

As for minimum charges, I am done with the one-time 20 minute crap...it's being bumped up to a full hour and billed same month and I am not going to carry forward until I hit a full hour before billing. I have already alerted clients to this, and have not received any kickback, so I do not expect any lost clients for 2020.

Thank you for your responses all. It sounds like everyone that has responded thus far treats it pretty much the same as me regarding a little bit of time here and there.

By design, my clients are going to pay me if I ask, since I don't over-charge them.

By design, my clients also pay me if I ask. If they didn't, they would soon discover they are no longer my clients.

I guess it depends on what you consider "consulting"?

My personal definition may be pretty broad in comparison. I only offer income tax compliance and consulting services at the moment. So, anything not related to a compliance engagement is consulting, although I do include roughly 60 minutes of back and forth, phone calls, etc for compliance engagements. During many of these "closing" phone calls for compliance engagements I mention planning opportunities that came to my attention during the engagement, but it is clear in my compliance engagement letters that tax planning is not within scope of the engagement, and if clients want to further investigate any planning opportunity I bring up during the course of the engagement, it will be billed separately.

I also do not offer consulting services unless I handle the compliance. There's way too much synergy involved.

As for minimum charges, I am done with the one-time 20 minute crap...it's being bumped up to a full hour and billed same month and I am not going to carry forward until I hit a full hour before billing. I have already alerted clients to this, and have not received any kickback, so I do not expect any lost clients for 2020.

All of your clients seem to understand and respect your value. That's a really harmonious spot to be in.

I'm going to be sending out expected 2019 tax year compliance fees to existing clients soon... For one particular client, I'll be almost doubling her compliance fee year-over-year. She is a legacy client who is very fee sensitive and has enjoyed below market rates from me for the past year and a half. I have provided excellent client service and executed very well on her returns IMO.

I expect her taxable income to increase significantly for 2019. I have advised her multiple times to start making estimated quarterlies during the year (she had no obligation for 2017 and 2018). To my knowledge, that advice has gone in one ear and out the other. She also is on the exchange and receiving the premium tax credit so she's going to get clobbered on her 2019 return. She did not take me up on year-end planning so I could run a projection. You can lead a horse to water...

Her realization is extremely low, and every time I bill for time used here and there outside of the low-realization compliance engagement she b****es like there's no tomorrow. I am going to be very professional and calm in my email and outline my value and the exact reasons for the increase, but I imagine she is probably going to leave either way.

It may be for the best. 80% of one's problems come from 20% of one's clients. If she leaves it will open up capacity for someone new.

Her realization is extremely low, and every time I bill for time used here and there outside of the low-realization compliance engagement she b****es like there's no tomorrow. I am going to be very professional and calm in my email and outline my value and the exact reasons for the increase, but I imagine she is probably going to leave either way.

That is the type of client you want gone! No amount of billable hours will give you back the sanity. Every year I mark clients that have either become to "problematic" to deal or just simply don't listen to me anymore (Quarterly estimated payments or W4 correction) and then complain about how much balance due they have. These types of clients are to be shown the door!

As for minimum charges, I am done with the one-time 20 minute crap...it's being bumped up to a full hour and billed same month and I am not going to carry forward until I hit a full hour before billing. I have already alerted clients to this, and have not received any kickback, so I do not expect any lost clients for 2020.

All of your clients seem to understand and respect your value. That's a really harmonious spot to be in.

Indeed. If a client begins to complain about a fee, and it is not a mistake of my own, they are not likely to remain a client much longer. It is part of my client quality control. I function in a way most CPA firms do not, am readily accessible, very responsive, and it is all worth a lot more money as a result. I already have a couple clients in mind that may be receiving disengagement letters in early 2020.

As I have said before, I am not the cheapest. I am not the most expensive. But I am very fair for the quality of services and overall client experience I provide. It was reiterated when one of my largest client's Treasurer made it very well known within the company that if I stop providing services to them for any reason, he is immediately resigning (it was a serious comment). He does not need to work, so it's just pleasure to him. I found that interesting, and a nice comment concerning my perceived value.

By design, my clients are going to pay me if I ask, since I don't over-charge them.

By design, my clients also pay me if I ask. If they didn't, they would soon discover they are no longer my clients.

Yes. I meant, they pay me without complaining or even questioning. Of course, the conventional wisdom is that if none of your clients complain about your fee, you aren't charging enough.

Of course, the conventional wisdom is that if none of your clients complain about your fee, you aren't charging enough.

True in many regards. My counter is that when a client does begin complaining about my fees, I disengage from them fairly quickly. I am extremely profitable for a reason, and have virtually zero turnover against my will. My will for client disengagement is something seems fishy, or they complain about fees or take too long to pay.

Clients can be trained. It seems too many professionals do not understand that concept, and how to actually do it. CPAs seem to live in perpetual fear of clients leaving, and I have personally found that to be nonsense despite my effective hourly rate being VERY high.