In professional services, the most common charging model is based on time and materials, which, in theory, considers both the complexity of the work and the time it will take to deliver. Big differences in hourly rate show the relationship between these two variables. An experienced head should know the answer quickly versus a junior who will need to research, review and then have their homework checked.
Second to time and materials is the use of a fixed fee model where scope and price are agreed in advance of delivery. This gives certainty to all parties, but can unravel when the scope creep inevitably kicks in.
The least common across professional services is a contingent fee arrangement. This is a dominant model in specialist areas such as corporate finance and R&D tax relief. It is also known as a success fee or performance fee, based on achieving a desired goal. The quantum of the fee will depend on the value of the client outcome.
Increasingly, there is pressure on time and materials models. Do they give the right outcomes or drive the right behaviours? What are the implications if there is a rapid rise in instances where AI is doing the groundwork?
There have been some well-placed concerns about contingent fees and the potential poor conduct that this can incentivise.
But are we now at a place when fixed fee work is the only way forward?
How much does R&D tax credit advice cost and what’s the right model?
When I think about R&D tax advice, I always come back to a contingent fee being the most suitable. This has always been my belief (see this contingent fees Knowledge hub), but my view has evolved and I now think change is needed for the benefit of both the client and advisor. The ground rules should establish what is reasonable and ensure that the client receives excellent advice and service. But this shouldn’t drive the advisor into the wrong behaviours or force the client to write a blank cheque.
Humour me for a second whilst I defend contingent fee models in R&D tax credit services. Very simply, there is uncertainty about the outcome, the scope of work, and the risk. So understandably a risk-sharing model is the only way to get to an equitable position between client and advisor. For maturing businesses, where those uncertainties become clearer, many stay contingent but make sure that percentage is fair, reasonable and appropriate for the work done.
However, I think that the scope of the work has become more uncertain in recent years. With R&D tax, it isn’t a case for rinse and repeat, year in, year out. It never was. That mindset fundamentally destroys the integrity of the scheme. Of course some businesses will be R&D dependent every single year, but that doesn’t mean the world around them hasn’t moved the baseline or that the project from 2 years back still is ‘ongoing’. And of course contractual relationships with clients and suppliers will have changed.
The merged scheme has more clarity in what the expectation is now over and above doing the work diligently. We also know we live in a world of an active, often unpredictable and sometimes frustrating HMRC enquiry environment. The risk of the work, for both client and advisor, remains.
Future fee structures for R&D tax credits
This leads me to my view on the future of fee structures in R&D tax relief work.
Engagement or minimum fees – I now believe that this is needed and being 100% contingent is no longer right. There is always a certain amount of work that goes in and, for many reasons, a claim may not be possible. This is only discoverable by running a thorough process which should not be free of charge. It undermines the value of this specialism as well as risking a claim being forced through to make it worth the time investment by the advisor.
My view is that this engagement fee should be cost neutral or very marginal. No one should lose their shirt, and no one should be banking thousands in profit for what is ultimately limited financial reward.
The client is buying certainty that the process is right and thorough and not engineered to reach a certain outcome. This can apply to initial assessments of claims as well as running an HMRC enquiry.
Reasonable contingent fee percentages – with the protection of an engagement fee, it does not seem at all appropriate for contingent fees to be 20%+. Yes, the fixed element may well equate to more, but that should be the exception. Why, when there is quality choice in a market, should a client be willing to pay such a high premium? What I have seen is that it is the hallmark of an unscrupulous advisor or indeed business who thinks nothing ventured, nothing gained. Simply, there is no place for it.
Fixed fees – where there is a clear scope of work, a project-based fixed fee can be the right answer for all parties. Take HMRC enquiry support. This can be accurately scoped by an experienced advisor reviewing a known set of documents, giving an opinion and running the expected tussle with HMRC. I also prefer fixed fees here so there is no risk of advisors running up the clock on time and materials. HMRC enquiries are never welcomed by a business and the ‘go away’ factor can make fee-charging diligence a little shaky by some. I roll my eyes when some critics of contingent fees worry about client interest when the same critics are quite happy making up hours as they go along.
Fixed + performance – my prediction for the market is the most common model being an element of fixed plus a risk-aligned performance fee. With established clients where a known quantity of work is needed but things move up and down from year to year, a business is acquired, a project takes off, or a different accounting treatment impacts the benefit, then the risk-sharing mindset is exactly what is needed. This is achieved through contingent fee models. Some of our very best work is because we want to follow our nose, go to more sites than we planned, go deeper into the interviews and external research because we want to achieve a holistic, maximised and robust claim for our clients. Why stop that intent by having a fee or scope change conversation – just do the right thing and know everyone will benefit by getting the right answer.
You get what you pay for
We are all guilty of focussing on price in our decision-making, and the adage rings true: you get what you pay for, regardless of the fee model. The business need should decide the best approach, nothing else.
At Source Advisors, we have a blend of options, with contingent models continuing to be the most sought after by our clients. We consider the client’s history, stage of evolution, scope and sector to help find the right model. It helps us to stay close to our current clients. For prospective clients, we want to invest in our understanding upfront, so everyone feels good when the work is done.
And no one enjoys overrun bills, so spoiler alert: Source Advisors never issues them.
