Rising Star
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Three day weekends really need to be a thing. ASAP.
Waiting on comp calls like...🙊
Still cannot believe I gave in my 2 weeks
I think Canvas took the holiday today
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Jobs are very rarely charged based on the actual hours and engagements will have a fixed fee agreed to by the client. The less hours to the engagement results in a higher profit margin which makes the partner look good.
Thank you MD1. Sounds so slavery
First very few jobs are per hour most are fixed fees. Second the average fee on tax compliance engagements is $300 per hour. That includes all levels. If you are billing 1700 a senior is billing 850, manager 450, director 300 and partner 150 on a well leveraged engagement and the $300 needs to cover their salaries and benefits as well as all over head. A profitable tax engagement yields a 30% margin meaning $1mil in fees yields $300k in profit and we have many large engagements well below this amount. So what you are computing doesn’t really reflect what an engagement costs and although you are “billed” at $300 most codes are set up to accrue at 1/2 of that amount. You math is only if we are getting 100% of rates which is not reality, also doesn’t take into account benefits or overhead.
Depends on group and job. No compliance work is getting 75% margins and 50% is definitely not standard
Chief
Not really. It’s funny money math.
Let’s say you have a large audit contract valued at $5 million/yr in fees. Because this is a large client that has been with the firm forever, they know how much work an audit takes, so they just sign a contract for $5M.
You then have a staff who is booked to that client 40/hr week for 6 months, 50 for 2 months, and 60 for 2 months. That’s 1840 hours.
If the staff works more than 1840, the partner makes no more money but the engagement looks less profitable because more time gets charged to it.
If the staff works less than 1840, the partner looks better for keeping costs down even if it really cost the firm the exact same.
Plus let’s remember, even for T&E contracts, the price actually billed to the client is usually much less than the list price for the hours, and there’s almost always a cap.
Chief
There’s a difference between eating hours and making sure people aren’t billing overtime for playing on their phones in the off season (this happens…)
But yes, the eating hours thing isn’t great. Largely depends on the team culture more than firm culture. I’ve never once been told to eat hours in my time at the firm, but I’ve also been on great teams.
So I will preface this by saying the system is broken. I work for a mid tier so my reply may not jive with Big 4 practices.
In general, what I have found is that, though we don’t really say we have “fixed fees”, the deets have often been worked out in advance that we will bill the client for specific services within a range. This is determined by setting up job budgets. If staff goes over the budget due to inefficiencies (often the case), the added hours will not be billed to a client, but of course staff still get paid the same amount.
If staff exceeds budget due to client inefficiency (also often the case) there may need to be additional negotiation on amount to be billed.
Additionally, the hourly rate incorporates all of the overhead that needs to be covered (CPE, conferences, advertising, office rent and utilities, etc). Though the rates seem high in comparison to employee pay, unless people want to give up all the perks that make this job a little more bearable, there is likely to continue to be a large gap between billing rate and staff pay rates.
You have over simplified the issue by inferring that every hour you charge to a client results in $300 of revenue. That would be a dream, but in my experience is rare. Understaffing is a huge problem in PA, partially driven by the seasonality of the workload (difficult to staff for the high times and then carry excess staff through lower work seasons.
I don’t know the answer, but this has been an issue in PA as long as I have been in it.
Rising Star
I first wanted to know the relationship between chargeable hours and actual billed hours from the perspective of the partner to see why they want the staff to work more hours other than to make more even more profit when the job is already profitable while paying the staff the same or some other reason. I worked at a local firm and their clients are more predictable so most if not all clients were on high margin fixed fees and we never worked more than 60 hours during busy season and had about 1500 chargeable hours a year and the partners didn’t care because they were still making bank. Just trying to understand when firms charge clients by the hour.
Chief
Not sure I understand the question, but salary means you have a lower limit on pay. You may get a bonus if you do more and the firm makes more.
Is this a fixed fee engagement or rates & hours? Is there anything else to do?
If you are too much of a superstar, the astute partner will see the need to throw an extra manager on there to “thoroughly” review things. He can also load up the partner time
Don’t worry, very few jobs come in under planned hours- most of the time it’s the other way around
If it’s indeed an hourly billing client and you are allowed to bill the client $300 for each and every fraction of hours spent, then yes, you being efficient will lower the firm’s revenue. But it’s a wishful thinking to be able to bill each and every hour. There’s always inefficiency time that don’t get billed to the clients.
It's fake math. A lot of the annuity work is on a fixed fee basis so if you work 1000 hours or 10 they are getting the same amount from the client
Rising Star
That’s what I figured but I wanted to confirm. The main reason for leadership to work more hours is to take on more work and more make more money which is fine because it’s a business. My issue is that chargeable hours and timesheets get so much attention that people manipulate it for the fake math.
Public accounting is a scam, simply put. People who bill by the hour should get paid by the hour.
You also have benefits and the firm has fixed costs other than labor right? Like rent, etc.
Rising Star
I know that, I wasn’t trying to show the excess profit but just how the relationship of chargeable hours and billing work.
Whatever the fees are for the engagement, that’s what the engagement makes. 250k compliance engagement, doesn’t matter if a senior manager bills 500 hours or 1 hour. Now, there’s internal metrics that they use to see if “budget was blown.” I’ve seen internal budgets with 80% discounts. Take your standard hourly rate times the discount, that’s the rate. When you work an hour that’s what hits the code. End of the engagement they take what’s in the code compared to the 250k and boom you get a credit (under budget) or debit (over budget). You want credits to build up so you can use them to offset engagements that came in over budget. That’s how they budget even though it’s weird. If the engagement came in at a debit, it means either A) the fees were unfair, or B) there are inefficiencies that need to be ironed out. As for Utilization and hours, they are basically metrics used to see if they need to hire more people.
Yep, it also brings up out of scope opportunities. Like why did this take so long? Well we did x, y and z which wasn’t built into our budget
Every staff person has a revenue $ and a cost $ assigned to them. The fee assumes X number of hours at a given level (ie given revenue rate and cost) which results in Y engagement revenue.
Even if you are billing the client by the hour, you want to make sure the engagement is efficient. If no staff is assigned and a manager does all the work, then margin will be very low and nobody will be happy even if you stayed within budget. It’s a complicated game of pulling the right levers. It look me several years before it made sense to me.
Chief
PwC5, when I was in school many moons ago, one of the professors said that the firms aren’t following GAAP and use an internal basis of accounting (again, they’re not producing external financials…), so my understanding has always been that they operate on some blend of cash and accrual accounting.
That’s way above my pray grade, but if you think about it though, something closer to a cash basis of accounting makes a lot more sense for a private partnership where the reason for its existence is distributing cash to partners.
Even if they’re using GAAP, it’s a choice of method in how to recognize revenue and thus when to incur costs. You could easily do a milestones or percentage of completion method, which would arguably be more accurate. Using hours to do it is just one way from a financial accounting perspective.
My understanding has always been on the hours that it’s more of a managerial accounting motivation than financial accounting, and if you’re looking at it that way, it’s very much made up numbers that provide metrics for internal measurements. That has a use, but it’s not that the amounts accurately reflect actual cost and revenue. It’s mainly a tool for comparison.