Understanding Scope Creep in Accounting Firms: A Partner's Starter Guide

What is Scope Creep?

We've all been there. The client asks for something that falls outside the scope of work in their engagement and, wanting to keep the client happy, the accountant rushes to do the extra work without a thought to additional compensation. The client's on a monthly fixed fee agreement anyway, so we still get paid right? What's the big deal?

Scope creep occurs when accountants rush to provide services for clients outside the scope of what's contained in their engagement, resulting in overservicing clients and undercharging them.

In the accounting industry, additional requests from clients are common, but additional fees? Not so much.

Why does Scope Creep matter?

Many accounting firms could easily be losing as much as 20% of their annual revenue due to scope creep. But most firms can't see it and that's a big problem because you can't manage what you don't measure. "Out of sight, out of mind" as the old saying goes.

Maybe you're already aware you're losing profits due to scope creep, but what's stopping you from fixing the problem? Chances are it's a scarcity mindset.

We hear it all the time:

"I don't want to lose the client."

"We have to keep the client happy, they already think they're paying too much."

"The accountant across the road is cheaper than my firm."

But what if fixing scope creep not only made your accounting firm more money, it also improved client service and strengthened client relationships?

Before we look at how this can happen in your own firm, let's look at the various reasons scope creep happens in the first place so we can deal with the problem and not the symptom.

How does Scope Creep happen?

While  scope creep can happen for a bunch of different reasons, it's important to remember the problem can be summarised simply as follows:

Scope creep is when you overservice clients and undercharge them.

Scope creep happens for five main reasons:

1. Undefined scope of service

Many firms struggle to provide annual engagements to their clients, and even where such engagements exist, the scope of service may not be detailed enough to include what's required by the client. Scoping the job for new clients can be especially difficult, with firms frequently wearing the additional cost of the client work for the first year and trying to fix the problem in the subsquent year's engagement.

The problem is there's a lag between additional service and additional fees and you're always playing catch up.

2. Client growth outpaces their engagement

We've all seen it; in the first year the client is a simple employee, an Individual Tax Return, however, the following year the client purchases two investment properties using money inherited from a grandparent. The project scope has increased, but due to poor management the engagement letter does not include the extra tasks required and the firm fails to charge for them, resulting in scope creep.

We all want our clients to grow; if their businesses grow, our firm grows, but only if we manage to charge for the extra services client growth brings.

3. Accountants are too client-focused to the detriment of their own businesses

Too often dealing with scope creep takes a back seat to managing client relationships. Accountants will bend over backwards to accommodate their clients with little thought to their own remuneration. We react to a client request instinctively, but fail to charge for the extra tasks where a client request falls outside the annual engagement.

Responding quickly to client requests is the hallmark of high quality service in accounting firms. And that shouldn't change. What should change is the zero-sum-game mindset many accountants have where good client service comes at the expense of failing to recover project costs through updated agreements.

4. Accountants sell time

Regardless of whether accountants do timesheets or charge by the hour, it's an unavoidable truth that we sell time. Accounting firms are service-based businesses after all. Fixed fee agreements cover the project costs in the same way charge out rates do in WIP-billing firms, but when you can't see your costs easily it can be hard to know whether you're fully covering them in the current fee agreement with the client.

Fixed fee agreements aren't an "all you can eat buffet". They are based on a budget that includes the team's time in completing the work and any fixed fee agreement should be able to be divided into billable hours that correspond with industry average charge out rates.

5. Accountants aren't good “salespeople” as a rule

"Sales" is a dirty word in our industry. Accountants don't like to think of themselves as sales people; they chose the accounting profession after all. If they wanted to be in sales they wouldn't be accountants. But here's the thing; if you're managing clients, it may not feel like it, but you are in fact in sales. Think of it like this; it's your job to stop the client from leaving the accounting firm, which means keeping the client happy, but also serving the client in every way you can.

If you find conversations around fees uncomfortable, you're less likely to have them, the result being you do the extra work but fail to charge the client for it.

Strategies to help you avoid Scope Creep

The best remedy to help avoid scope creep is to prevent scope creep before it happens. In other words, it's best to have a proactive approach.

With that in mind, these are the five solutions for each of the five main causes of scope creep:

1. Project scope at the start of the engagement

Whether it's a new client who you're onboarding or an existing client you've had for many years who's requesting exra work like advisory services, getting good at scoping the project before you start is key to avoiding scope creep. A good car mechanic calls the car owner before they do the extra work required, not after.

"It's better to ask for permission to charge for the extra work requested, than to ask for forgiveness after the work has already been done and the additional invoice sent."

2. Renewing client engagement letters annually

Every new financial year is a new opportunity to do project planning per client and review the existing scope of work outlined in the service agreement. It's far easier to mitigate scope creep when you do an annual project scope per client and update the engagement letter accordingly. A big part of client management is managing expectations.

Avoiding scope creep requires you to be proactive and that means reviewing the work done in the prior year and updating the engagement letter where necessary.

3. Managing client requests

It's very common for clients to request additional tasks throughout the financial year. Most clients don't do this to avoid paying additional fees; they simply require more work to be done. Handled well, this is a good thing, because the more you serve the client the "stickier" they become to your accounting firm, and additional work results in additional fees.

Managing these additional client requests as opposed to simply reacting to them and getting to work is the hard part. You need to set clear boundaries as to what is inside the scope of the engagement which constitutes the original agreement and manage client expectations as to what will require an additional fee. It's your job to amke sure the client fully understands the deliverables. More on that below.

4. Track project's budget

Regardless of whether you're a fixed-fee firm that charges the clients a monthly fee or you bill the WIP on completion of the job, if you're a manager it's your responsibility to know how much the work is costing the firm in terms of the hours of the team members. You should keep detailed records of each job which includes billable hours of each team member and how much was ulitmately recovered in the fixed fee agreement.

If you don't have timesheets currently, the easiest way to track whether or not you're incurring scope creep is to divide the fixed fee by the average charge out rate in your geographic location and see how many hours per month you get. If the team is spending more hours per month than is budgeted, you're likely losing money to scope creep. In this instance the scope creep may not be additional tasks, it may be a result of a failure to properly scope the number of hours required to deliver the service for the client.

5. Manage client expectations

As a partner, it's your job to ensure you and the client are on the same page when it comes to the scope of the engagement. If the client understands what's in their engagement then great, but if they don't, it's your responsibility to be proactive about scope creep management because ulitmately, it's not just about protecting the accounting firm's profits, it's about protecting the firm from legal liabilities as well.

By managing scope creep you're actually doing the client a favour. When you manage the client's expectations by putting a dollar value on the additional work requested by the client you help them determine whether or not they really want the work to be done in the first place.

Stop scope creep in your firm

Managing scope creep isn't just a way to increase revenue for your accounting firm, it's one of the best ways to increase customer satisfaction. We've found that having a process is really helpful with stopping scope creep from occurring.

Review annual engagements for current work

Scope creep starts for a good reason; your clients are growing. At the start of every financial year, determine whether the current engagement is adequate in terms of services and fees. If it needs to be updated because the client has outgrown the previous engagement, then communicate this with the client and get the engagement updated before starting the work.

Manage client expectations on additional fees for extra work

Communicate to the client how much completing more work will cost them before starting the work, not after. Once they have agreed they want you to do the work, update the engagement letter. Doing so will improve the client experience.

Know how much to price your services and how much it will cost the team to deliver

As a manager, it's your job to know how much time it will take you or your team to complete the extra work requested by the client, so that you can put an accurate price on the additional work. It's helpful to have an internal price guide for all the services your firm provides.

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