A fixed price agreement (FPA) is an agreement in writing between you and your client that sets out the negotiated price and the scope of service that it covers. When that scope changes, you’ll need to use a change order to redefine the boundaries of the work, and the associated price paid by the client. Here's how to write a fixed pricing agreement quickly and effectively.
Let’s take a deeper look at what FPAs and change orders are, and how you use them to drive the value and profitability of your practice.
What to put in the fixed price agreement
The FPA is an absolute necessity if you’re implementing value pricing and are not using timesheets. But FPAs are also a very good idea even if you are using time sheets, allowing you to clearly and unambiguously set out the scope of the engagement.
We’d recommend that you always have a FPA when using value pricing. With this agreement in place there can be no question about the price and (equally importantly) no question about the scope of the engagement.
The FPA should address the following issues:
That is where the work has exceeded the original job specifications, usually by circumstances unknown at the time the job was originally scoped. For example, the job may involve the preparation and filing of a corporate tax return and three individual tax returns for the client then, midyear, the client forms another company. The compliance work associated with the other company would need to be covered by an additional FPA or by change orders, due to the scope of the original project having expanded.
Agreeing how and when the client pays is a necessity and ensures that both parties understand and accept the payment terms. Most firms that adopt value pricing allow customers to pay over several months, with an initial payment up front. This can dramatically reduce your accounts receivable and give you a much more certain and even cash flow.
You should always give your client the peace of mind that they can terminate the arrangement at any time, provided that they agrees to pay you for work already completed – subject, of course, to the conditions detailed in your service guarantee.
Many people worry that if they guarantee (unconditionally or otherwise) their services, large numbers of clients will take advantage of them. This is a reasonable concern but it’s very unlikely to happen. The purpose of a guarantee is twofold:
- It forces you and your team members to meet your service commitments, and
- It reverses the risk that the client assumes when dealing with you.
This, in itself, is a great service value proposition and allows you to charge a higher price than you might otherwise consider appropriate. Like the other components of the FPA, it gives you sales and marketing leverage, and will differentiate your firm from most other firms in your market.
To check out a sample fixed price agreement, see Ron Baker’s article for the Journal of Accountancy by clicking here.
Project Management and Scope Creep
Here are some of the main components you should keep on top of throughout a client engagement:
- Scope of the work – and whether it’s creeping or on target
- Capacity planning – and if you’re utilising the team effectively
- Who performs the work – and whether the job is being done efficiently
- Client responsibilities – and if they’re meeting your agreed deadlines
- Resources needed – and whether the job is costing you more than budgeted
- Duration of deadlines – and if timescales and milestones are being met
No one likes surprises, especially when it comes to money.
Give your client a clear picture of what your fee is going to be and how the client can contribute to keeping it under control by providing you with all of the information you need to get the job done in a timely manner.
However well you plan, jobs can still occasionally get out of control. If the job looks like it’s beginning to drift off target, you should contact the client and let them know, as well as explaining why this has happened. If you’re using a value pricing methodology, this is a necessity because you’ll be guaranteeing the price and the quality of the work – remember, though, that scope creep can be dealt with by using change orders to redefine the scope.
Even if you’re not using fixed pricing. It’s best practice to keep your client in the loop with the status of the job and communicate clearly whether the expectations you set for the client don’t look like they are being met.
To view a sample change order, see Ron Baker’s web-exclusive for the Journal of Accountancy by clicking here.
how to write a fixed pricing agreement
Our free guide Pricing Your Cloud Services: Perfecting Value Pricing covers everything you need to know about getting the price you deserve.
You'll find out:
- The key questions to ask your clients
- The secret to structuring pricing tiers
- How to review and improve your pricing process