IT Employment

Advice for creating client retainer fees

When one IT consultant asked for advice about creating a retainer fee program at his firm, our members came through. Read their recommendations and warnings about this alternative to hourly fees.

What’s the best approach to establishing a retainer fee program? TechRepublic member Jeffrey W. Mortenson asked that question recently in our Technical Q&A section when he was trying to determine the feasibility of establishing a retainer for an IT support initiative at his workplace.

Many consultants use retainers—monies paid for a set number of on-call service hours at an agreed rate for a specific time—as an alternative arrangement for clients who aren't interested in launching a new project but occasionally need help with troubleshooting and maintenance for systems or hardware. Several members answered Mortenson's request for advice. Here are recommendations they provided along with suggestions from former TechRepublic columnist Alan Weiss.

Why create a retainer fee program?
As the IT manager at Piltz, Williams, LaRosa & Company, a CPA firm in Biloxi, MS, Mortenson is helping his firm establish a new department that will service everything from a few desktop computers to large networks. His firm wants to set up a plan and documentation about how to call for support and how much clients can expect to pay for support calls.

Mortenson said the plan is to spell out everything to manage client expectations and avoid being "clobbered" by clients who might take advantage of such a setup. He said clients will value the monthly preventative maintenance and on-call support, while the firm will benefit from a stable revenue stream.

"Instead of working from job to job and hour by billable hour, we're looking to get a steady income to show we can support a staff of people,” he said.

The firm has an established client base but hasn't offered this type of IT service. "Our clients know what to expect from our accountants, but since the IT department is so new, they don't know what to expect," Mortenson said.

Advice from TechRepublic members
Several members submitted comments to Mortenson’s inquiry and explained why they've used the retainer fee strategy to bill clients. Shawn Murphy, a project analyst for Minnesota Life Insurance Company in St. Paul, MN, said he sets up contracts with monthly retainer fees because he's not willing to provide what the client has requested unless they're willing to pay up front.

"For example, I put an inventory management database together for a manufacturing company that received its shipments between 2:30 A.M. and 6:30 A.M.," Murphy wrote. "I told them that the only way I could be 'on call' during those hours was with a monthly service contract."

Calculating the fee
Jason Hastain runs his own firm, Hastain Consulting, in Chico, CA. His firm provides a wide variety of services, from administering client networks to Web design to setting up ERP solutions. He said he set up retainer fees with some of his clients to balance their needs with his need to pay the bills.

To determine what he needed to charge, Hastain said he reviewed his billing statements to a particular client for the previous four months and calculated an average monthly billing to use as a baseline. Then he counted the number of computers, peripherals, and pieces of network hardware that he'd be supporting for the client and divided that number into the baseline. That figure represents the fee Hastain might be paid on a per-incident basis if he uses the baseline figure as a monthly retainer fee.

"I decide if I can live with that, and if so I bump the average cost up 10 percent and take it to the client," Hastain said. "Then I let the client talk me down or I offer him 10 percent off because he is such a good client, and he goes away happy."

This only works, Hastain said, because most of his clients have simple networks and standard PCs. Anything more challenging might create more service calls than anticipated, causing you to provide more work than you've charged for.

"I have only had to eat my own time twice under a retainer, but the steady flow of money from it justified it in the long run," Hastain said.

If the month is almost over and his clients haven't had to call him, Hastain said he often visits the client to provide some simple maintenance. This practice keeps the client happy and makes them feel as if they're getting their money's worth, he said.

Another member, HiBeamR, uses a slightly different method to calculate her retainer fees. She said she uses a variety of support coverage options with prices based on the quantity of support hours requested. She also offers levels of guaranteed response time for emergency support. The more hours of coverage the client contracts for, the greater the discount she offers.

For example, HiBeamR offers two plans. Plan 1 provides 20 hours of support with a normal response time of 24 hours and an emergency response time of eight hours. Plan 2 provides 40 hours of support with a normal response time of eight hours and an emergency response time of four hours. She gives a 10 percent discount over her normal hourly rate for Plan 1 and a 20 percent discount for Plan 2.

"The retainer fee would be based on the support hour quantity chosen and my regular rate, less the discount," HiBeamR said. "So, at a regular rate of $100 an hour, the retainers for Plans 1 and 2 would be $1,800 and $3,200, respectively. Any support in excess of the set quantity of hours would be at my regular rate."

These numbers are just an example, but HiBeamR said they provide the general idea behind her method. She also explained that while the response times aren't directly figured into the equation, they're still a great way to sweeten the deal for a client. She warned against setting steep response times for multiple clients because you may not be able to deliver what you promise.

Watch the books: Retainers are a liability
Not being able to deliver quick service isn't the only hazard to consultants offering retainer fee programs. Kermit Llaurador, a management consultant with The Centurion Group in Atlanta said that Mortenson should remember that retainers represent a liability on financial sheets. While Llaurador said that shouldn't keep him from creating the retainer program, he recommended prorating the cost of service in financial records during the duration of the contracted period because the retainer balance isn't operating income until it's recognized by delivery of service.

Most small business accounting software includes specific utilities to track retainer fees. For example, QuickBooks' online Knowledge Base offers step-by-step instructions for putting retainers on invoices.

Advice from an expert
Former TechRepublic columnist Alan Weiss wrote about converting from hourly to value-based fees. He offered three key stipulations to include in contracts for value-based arrangements:
  1. State that while the time required is set up on request, it must be arranged on mutually agreed-upon dates. This condition creates an expectation of possible negotiation of dates.
  2. Stipulate that the retainer fee is charged monthly but may be paid in 90-day increments at the beginning of the quarter. This way, you can collect your fee and alleviate any fear that the engagement will be cancelled. The client should have the option to continue the arrangement through the next quarter if requested by the beginning of the final month in the current quarter. You encourage a seamless stream of money and work without a lag time for renegotiation.
  3. Don't worry about your time being abused. "No client I've ever worked with abuses such a system, just as no consultant is overwhelmed with visitors when he or she announces an open-door policy," Weiss wrote. "Your clients will use discretion."

Send us your retainer agreement or contract
We'd like to publish a sample retainer or support contract as a template for our members. If you have a great example, send it to us via e-mail. We'd also be interested in seeing any related spreadsheets, formulas, or templates that help you track your clients who've paid a retainer. If we publish your sample, we'll reward you with a TechRepublic mug or up to $50.

 
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