Found a rate class error for a client in Baton Rouge with Entergy Louisiana. The utility agreed to reclassify the account which will save about $2,100/month going forward and they issued a $28,000 refund for past overbilling. My engagement says 40% of recovered savings. Does that mean 40% of the $28K refund only, or do I also get 40% of the ongoing $2,100/month savings? And if so, for how long?
How do you calculate your fee on ongoing savings vs one-time refunds?
This is the most important question in fee structuring and it needs to be crystal clear in your engagement agreement before you start the audit. My standard agreement says 40% of any refunds or credits received, plus 40% of verified monthly savings for a period of 12 months. So on your example I'd get 40% of the $28K refund ($11,200) plus 40% of $2,100 x 12 months ($10,080) for a total fee of $21,280. Some auditors use 24 months on the ongoing savings which would push that number higher.
I use 12 months for ongoing savings on most engagements but I've seen others go as high as 36 months. The longer the measurement period the bigger your fee but also the harder it is to collect because clients lose patience paying you monthly for something you did once. My advice is 12 months — it's fair, it's easy to collect, and clients don't push back on it. Anything beyond 24 months and you start getting resistance.
This is one of the most fundamental aspects of your engagement agreement. Jack's 12-month approach for ongoing savings is the most common in the industry. The key terms to define: what counts as a 'verified saving' (the difference between what the client was paying and what they now pay), when the measurement period starts (date of first corrected bill, not date of your report), and how you verify the savings each month (compare actual bills to the pre-audit baseline). Put all of this in writing before the audit begins.
Updated my engagement template based on this discussion. Going with 40% of refunds plus 40% of monthly savings for 12 months calculated from the first corrected bill. Client in Baton Rouge signed it without pushback. The total fee on this engagement should come out around $21K which is fair for the work involved.