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REVENUE GROWTH 6 mins 28 Mar 2024 by Dave New
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Key takeaways

  • Scope creep can significantly impact the profitability of accounting firms. 
  • Identifying red flags early can mitigate the risks associated with scope creep.
  • Implementing robust strategies within your accounting firm can transform scope creep into a revenue opportunity.
  • Accurate, well-defined client engagement letters are crucial for managing client expectations and scope of work.
  • Regularly reviewing and updating client engagement letters further helps capture out-of-scope work.
  • Clearly communicate to clients any extra charges they will incur for out-of-scope work to maintain customer satisfaction.
  • Automation technology can play a key role in efficiently managing and monetising scope creep.

Scope creep is threatening the industry. If you don’t efficiently and effectively manage it, it will kill your profits.

In my years in the accounting technology industry, I've seen firsthand the impact of unrecovered out-of-scope work. In fact, in another recent article, I highlighted that Australian accounting and bookkeeping firms are losing upwards of $103,000 a year, on average, because of this issue.

Throughout my career, from my time at Xero, Receipt Bank (now Dext), and Spotlight Reporting, to my current role as Managing Director for APAC at Ignition, I've always been on the lookout for ways to help firms run more efficiently and profitably. 

The key is having the right strategies and tools in place to manage, monetise, and make the most of scope creep, so you don’t end up losing money, too.

Read on for red flags to look out for, as well as tips and tricks for mitigating your scope creep risk. 

Watch for signs of scope creep

For accountants and bookkeepers, scope creep often stems from initial client engagements, when the full extent of the required work has been underestimated. 

The discrepancy between the estimated time and actual time necessary to complete a job can leave firms significantly out of pocket.

But estimating the time you're going to spend on a job and coming up with appropriate fees as a result is not always easy, even if it may seem so at the time. 

When you take on a new client, you have no idea whether their current financial situation is the truth beyond what they've told you. You don't know whether their affairs are in order. You don't really know yet the time you’ll be required to spend. 

Here’s a real life example

As one of our customers put it about clients, until you really get “under their hood”, you're going to go with gut feel. 

But let's say a couple of investment properties suddenly come to light or there are an excessive number of vehicles available for business use. 

Straightaway, you know these facets are going to require more time. So recognising that… that's the biggest challenge. 

In fact, we've heard stories from customers in which actual time versus estimated time can be as significant as double! 

The upshot? It's dangerous to estimate too early in the game.

Then, in addition to being significantly out-of-pocket, accountants and bookkeepers can strain the client relationship, because clients aren't always as compassionate about a bad estimate as you may hope they’d be. 

This can lead to some awkward conversations – and nobody likes those. 

Of course, additional tasks – or additional “asks” – that the client may not have anticipated when they first engaged you do come up from time to time. 

For example, you agree on an engagement, then the client assumes that advice on capital gains tax is included in their annual tax return preparation, when it's actually a separate service.

The good news is, this is an opportunity for both you and the client. 

They want your extra help; they need your services. You need them to understand that there will be an extra charge for those extra asks. 

The key to ensuring that understanding is your client engagement letter. Because unless you capture the additional work in that client engagement letter and edit it as necessary, it can be difficult for you to recoup your time – and get paid what you deserve.

So essentially, the challenge is being aware of those extra tasks and asks, and not overcommitting yourself until you've got a better feel for the requirements.

Managing and mitigating the financial impact of scope creep

Managing and mitigating the financial impact of scope creep is a topic I'm passionate about. Fortunately, accounting firms can implement a number of strategies to do so effectively.

First, a robust client engagement strategy goes a long way to managing scope creep. 

Start by having annual engagements for all your clients that detail services that you know you’ll provide during the year. Keep in mind – it’s important to clarify both what your services include and what they don’t include. 

I'll give you an example. Let's say you’re providing payroll services, but you don’t include award interpretation. 

In your engagement letters, you need to be quite specific about the inclusions and exclusions to your payroll services.

Second, you want to create a culture with your team of consistently referring back to the engagement, just to make sure that the work they're doing is indeed in scope. 

Third, you need a policy in place for ad hoc, out-of-scope services in your engagement. That way, when additional work does come up, you can easily edit the engagement and add it in. (Because stuff will come up, and you want to be able to invoice for that in a timely manner.) 

Alternatively, you can simply send a new engagement for the new piece of work. The option you choose may vary depending on the nature of the work. 

A quick ad hoc item might not need a whole new engagement, but a change to an ongoing service or a larger project with specific terms or a large fee should ideally have a new stand-alone engagement.

Finally, why not include a clause in your client engagement letter that addresses how you’ll manage out-of-scope items? 

This minimises surprises for your clients and effectively communicates that as these items come up, you reserve the right to charge for them.

Technology to help you manage scope creep

Technology can play a huge role in managing scope creep. With Ignition, all of your client engagements can be quickly accessed so you and your team can easily review the terms and services of the engagement. 

This also means you can efficiently manage scope creep before you or your team spends any time – that potentially becomes unrecoverable – on a job. 

For example, Ignition's customisable proposal and engagement letter templates and service library enables your practice to standardise services and terms. 

This ensures that you and your clients are on the same page from day one, and agree on any out-of-scope work before you get started. 

Defining project scope with clients

As I’ve mentioned, when considering the kind of work that usually falls out of scope, it’s often a service you don't know needs to be included when you initially take on the client relationship. Or, one that the client didn't initially consider or want, but that has subsequently come up. 

As a result, you generally can't include these services in your annual engagements. Expanding on what I said earlier, this leaves you with two options: 

  • The first is you send out an updated engagement letter that includes the additional work and get sign-off from the client before you start. 
  • The second is to just jump in, do the work, and take on all the responsibility (with no protection). This might be okay for some of your longer-standing clients, but all the risk falls to you, and whether or not you get paid can be a bit up for grabs. 

Option one is clearly the smarter option. It will naturally result in an increase in fees, because you're including it in your engagement and charging for it. 

It also trains your clients to expect an extra cost for the extra service and helps them understand more fully what the scope of your current engagement is. 

This option also has the advantage of compliance. The guidance of the tax agent boards, such as the Accounting Professional & Ethical Standards Board (APESB), basically says accountants should produce a new engagement letter if there's a change to the service that they're providing. 

It would seem that option one is the no-brainer, but a lot of accountants still have a tendency to go down the path of option two.

Automating and streamlining processes for managing and monetising scope creep

To further help with managing and monetising scope creep, Ignition’s automated client engagement letters and the templates we provide aim to save you significant time. 

They’re sent out automatically and signed by the client – with agreed payment terms and authority to take payment on completion of the service.

What’s more, Ignition offers features such as Service Edits, which allows you to edit an engagement at any time to capture changes to existing work that's in scope. 

Plus, our Instant Bill feature effectively allows you to charge for those additional ad hoc requests for cases in which the service isn’t part of the engagement. 

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Meet the author

DAVE NEW headshot
Dave New

Managing Director, APAC  Ignition

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Published 28 Mar 2024 Last updated 28 Mar 2024