Price is where a firm's strategy meets the client. How a firm prices decides what work it prefers, how it treats efficiency and who carries the risk of the unexpected. The models are few, the trade-offs are real, and the rules on fees are narrower than many firms assume. This article compares the models and sets out how to move from one to another.
The four models
Hourly
The client pays for time at stated rates by level. It is simple to explain and to bill, and it pays the firm for uncertainty.
- Strength. The firm is paid for work done, so scope surprises do not hurt the firm.
- Weakness. Efficiency lowers revenue, the client bears the unknown and every invoice invites a conversation about hours. It rewards slow work and punishes the investment in tools and training.
- Best for. Open-ended work, such as litigation support and projects with unclear scope. See litigation support under SSFS No. 1.
Fixed fee
A stated price for a defined scope, billed on a schedule.
- Strength. The client knows the cost. The firm keeps the gain from efficiency.
- Weakness. The firm carries scope risk, so a vague scope turns into unpaid work.
- Best for. Recurring work with a known shape: tax returns, compilations, reviews and audits of stable clients.
Retainer or subscription
A recurring fee for a service package, such as monthly bookkeeping, controllership and advisory calls.
- Strength. Predictable revenue and a continuing relationship.
- Weakness. Scope creep inside the package. Clients may use more than priced.
- Best for. Client advisory services. See fractional CFO and client advisory services.
Value pricing
The price reflects the value to the client and the firm's cost, risk and capacity, not the hours expected. The firm sets the price before the work, from a scoping conversation about the client's problem and what a good result is worth.
- Strength. Aligns the firm's incentive with efficiency and results. Supports advisory work where time and value diverge.
- Weakness. Needs good scoping, confidence to quote and a clear scope document. A price set too low is locked in.
- Best for. Advisory projects, planning and special engagements, such as a valuation or a transaction analysis.
Value pricing is not the same as a contingent fee. A value price is fixed before the work and does not depend on the result. A contingent fee depends on the outcome.
What the rules say
Circular 230 section 10.27 states that a practitioner may not charge an unconscionable fee in connection with any matter before the IRS. It also says a practitioner may not charge a contingent fee for services in connection with any matter before the IRS, with exceptions for the IRS examination of an original return or of an amended return or refund claim filed within 120 days of written notice of the examination, for claims for credit or refund filed solely in connection with the determination of statutory interest or penalties, and for judicial proceedings arising under the Internal Revenue Code. The rule defines a contingent fee as one based in whole or in part on whether a position avoids challenge or is sustained, including a fee based on a percentage of the refund or of taxes saved, and fee arrangements where the practitioner reimburses the client if a position is challenged. A "matter before the IRS" includes tax planning and advice and preparing or filing returns. In 2014 a federal district court, in Ridgely v. Lew, held the contingent fee ban invalid as applied to the preparation of ordinary refund claims, and section 10.27 has not been amended in response, so get advice before relying on that decision.
The consequence for value pricing is practical. Pricing a tax planning engagement as a percentage of taxes saved is a contingent fee and is prohibited outside the listed exceptions. Price tax work on scope and value drivers other than the tax result. The AICPA Code has its own contingent fee provisions, and SSFS No. 1 prohibits performing certain forensic services for a contingent fee. Check each applicable rule before quoting a fee that depends on a result.
Section 10.28 also requires a practitioner to promptly return, on request, the client records the client needs to comply with federal tax obligations. A fee dispute generally does not relieve the practitioner of that duty, subject to state-law rules on retention in a fee dispute. Fee collection practices should not rely on holding records.
Choosing a model by service line
| Service | Typical fit |
|---|---|
| Individual and business tax returns | Fixed fee by complexity tier |
| Tax planning | Fixed or value price, not tied to tax saved |
| Compilation, review, audit | Fixed fee with a stated scope and assumptions |
| Bookkeeping and controllership | Monthly retainer by volume and complexity |
| Advisory, fractional CFO | Retainer plus project pricing |
| Valuation, forensic, litigation | Time-based or fixed; check the contingent fee limits first |
Building a price
- Define the scope. Deliverables, periods, entities, client responsibilities and exclusions.
- Estimate the effort. Use the firm's own history by task and staff level. See engagement economics.
- Add risk. A first-year client, weak records or a tight deadline raises effort and error risk.
- Check value. Ask what the work is worth to the client and what alternatives cost.
- Set the price and the assumptions. State the assumptions on which the price depends, such as records ready by a date and a stated number of transactions.
- Add a change-order clause. Work beyond the assumptions is priced separately.
Moving a practice from hours to prices
- Start with recurring work where past hours give a base.
- Quote the first fixed fee at a level that covers history plus the improvement the firm expects.
- Reprice annually, using actual hours and scope changes. See realization rates and billing write-downs.
- Keep timesheets even when billing fixed fees, since the data drives the next price.
- Tell clients early and explain what they get.
Engagement letters
The fee terms belong in the engagement letter: the price, the scope, the assumptions, the billing schedule, the change-order process and the effect of late payment. See audit engagement letter and engagement letter limits on liability and independence.
FAQ
Can a CPA price tax planning as a share of the savings?
Circular 230 defines that as a contingent fee and prohibits it for matters before the IRS except in the listed situations.
Is value pricing legal?
Yes. A fee fixed before the work and independent of the result is not a contingent fee.
Should a firm drop hourly rates?
Keep them for open-ended work and for change orders.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- IRS, Circular 230 (Treasury Department Circular No. 230), sections 10.27 and 10.28: https://www.irs.gov/pub/irs-pdf/pcir230.pdf
- Journal of Accountancy, AICPA forensic accounting standards (September 2019): https://www.journalofaccountancy.com/issues/2019/sep/aicpa-forensic-accounting-standards/
- The Tax Adviser, D.C. District Court invalidates regulation that bans contingent fees for preparing refund claims (Ridgely v. Lew, 2014): https://www.thetaxadviser.com/issues/2014/nov/tax-clinic-04-nov-2014/
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