Change orders allow you to establish a price for additional services when you possess the leverage, which is critical if you are to receive the maximum value for your work. Change orders allow the customer to have control over all marginal services and gain both their ego investment and commitment on the price and terms of the additional work to be performed. Auto mechanics and contractors have used change orders for decades, with very salutary effects for pricing and cross-selling services.

In this article I provide a sample change order you can adapt to your firm's and customers' cultures, personalities and styles. Also, I will discuss a couple of innovative pricing methods that you can use in "value pricing" your change orders.

This pricing strategy stems from the theory that, ultimately, a service is worth only what someone will pay for it. Therefore, why not ask your customer directly what the service is worth? That sounds radical, but remember that radical is Latin for getting back to the root.

I began using outside-in pricing on small projects and learned that my customers would quote a price two or three times higher than I would have charged them under hourly billing. That was an epiphany for me and made me realize just how much money professionals leave on the table by talking about hours and not value.

As I gained confidence with these small jobs, I tried it with larger projects and discovered the same tendency: The customer would quote a price two or three times higher than I would have charged.

This method has many advantages:

• It has the potential to self-identify your "first-class passengers," because we know your firm has some customers who are willing and able to pay more than you are charging them.
• It involves the customer in your pricing and gets that all-important "ego investment."
• It lowers price and payment resistance; what customer will dispute a price he or she set?
• Even if your customer quotes a ridiculously low price, you do not have to accept it - but at least it gives you a starting point to educate the customer with respect to the services' value.
• It also gives you the opportunity to decline the engagement if you believe the customer does not value you highly enough. When do you want to learn the customer's value perception - before of after you do the work?

Please note that I do not advocate that you always capture 100 percent of the value; I believe you must let the customer retain a portion of it in order to invest in the relationship. That is what Total Quality Service, customer loyalty and developing partnerships with your customers are all about. But that still leaves a substantial amount of value you can tap into and you should at least get a portion of it when you can identify its existence.

Retrospective Price
This is perhaps one of the most innovative pricing techniques I have found. The retrospective price is a way to get at an approximation of what the customer thinks the full value of the service is worth. Others have called it the "TIP" clause (TIP: To Insure Performance). A sample of this clause, which can be used in a change order, follows:

"Sample Retrospective Price Clause (Non-Attest Customer).In the event that we are able to satisfy your needs in a timely and professional manner, you have agreed to review the situation and decide whether, in the sole discretion of XYZ, some additional payment to ABC is appropriate in view of the overall value of the service(s) rendered (and the financial results, if allowed by your state and professional society) achieved by XYZ during 1998."

For CPAs, this will only apply for a non-audit customer. Also, your particular state may not allow contingency fees. If so, simply remove the "financial results" portion and base the price on the customer's satisfaction alone. By predicating the price on the customer's level of satisfaction with your service, you are not charging a contingency. I frequently hear stories from CPAs about situations in which if they had used a clause similar to this, they would have received a higher price then they charged using the hourly method. One such story comes from a partner in a recent training program.

As he recounted this story to me, I felt vindicated in my view that hourly billing is a terrible way for a professional to price his or her services. And it is precisely opportunities such as this that we let slip by, at the margin, at an enormous loss in profits. Borrowing an illustration I have heard form many CPAs around the country, I informed this CPA that he made the ultimate accounting entry:

Now, I realize this story is the exception, and not the rule, in terms of the opportunities that arise daily in your practice. However, that does not mean opportunities such as these never present themselves. They do - and by using the change order, you should become more cognizant of them.

The retrospective price clause is obviously going to be used only with a customer with whom you have developed a high level of trust and respect. But this is precisely the customer who will value your services the most. Had this partner issued a change order with a minimum price to cover his efforts and left it up to the customer to decide what the value of the service (or result) was worth, he would have been much better off, and the customer would have been just as happy with the service and value provided. Good customers are not out to take advantage of professionals, especially when you help them achieve a major goal.

Why have we left so much money on the table? Because we are trapped in the paradigm of the almighty hour. It is riskier to put the pricing decision in the hands of the customer, but look at the rewards. It is no accident that the work risk in the original Arabic means, "earning one's daily bread." Risk is where all profits - and especially, super normal profits - come from. I think the risk is worth it. Do you?

Why Not Start Now?
Change orders offer a tremendous opportunity to engage in value pricing, build customer loyalty and good will, and separate your firm form the competition who are locked into the antiquated Almighty Hour pricing method.

You should begin using change orders as a standard policy in your firm anytime the scope of an engagement changes. Be sure your entire staff is aware of the policy, as the staff is usually the first to discover a scope change. Make sure you always get the customer's input and involvement in drafting the change order, form the responsibilities assumed by each party, to the price and terms of payment. This ego investment will reduce buyer's remorse and payment resistance when it is time to collect the check.

Sample Change Order

Sample Change Order

Customer:____________________

Date:________________________

Project Description (and estimated completion date, customer responsibilities, if appropriate, and any other level of detail needed):
______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

Price: $_____________________

Terms:______________________

We believe it is our responsibility to exceed your expectations. This Change Order is being prepared because the above project was not anticipated in our original Fixed Price Agreement, dated xx/xx/xx. Customer XYZ, and ABC, CPAs have mutually agreed upon the price for the above project. It is our goal to ensure that XYZ is never surprised by the price for an ABC service; therefore, we have adopted the Change Order Policy. The price above is due and payable upon completion of the project described (or payable up front, or in installments, etc. - whatever you and the customer agree to).

If you agree with the above project description, price, and terms, please authorize and date the Change Order below. A copy is enclosed for your records. Thank you for letting us serve you.

Sincerely,
Allan Somnolent, Partner
ABC, CPAs

Agreed to and accepted:
By:_____________________
Customer, President
XYZ
Date:___________________

RETURN TO STORY

Author's Note: The preceding change order does not replace your firm's standard engagement letter. You still must use engagement letters for each major service you provide, in accordance with your professional liability carrier's guidelines.

The only modification you need to make to your standard engagement letter is where it discusses price. In that section, I simply refer to the change order, dated xx/xx/xx. The engagement letter is where you maintain all of the legal language (such as mediation and arbitration, costs in the event of a lawsuit, interest charged on past due amounts, the right to stop work for nonpayment of services, etc.). Nothing in your firm's present engagement letter should change, with the exception of the price clause, as a result of using a change order.