What it means
A consulting team records work valued at $1,500,000 using its internal rate schedule, then removes $180,000 before invoicing under a defined write-down rule. The illustrative ratio is 12%, but it does not mean $180,000 of cash was lost.
Recorded work, invoices and collections must be kept separate, because professional-service contracts and accounting policies decide what could legitimately be charged. Start by defining the numerator: time removed before billing, an agreed fee discount, or a bad-debt write-off after invoicing.
These categories arise at different stages and may have different causes, owners and accounting treatment, so they should not be combined without a clear reason. Then choose the matching denominator, such as recorded billable value, invoiced fees or collectible receivables.
For a pre-bill write-down, divide the eligible value removed before billing by the comparable recorded billable value; in the illustration, $180,000 divided by $1,500,000 gives 12%. Be careful with standard hourly rates, which may not be the agreed client rates, because a comparison at standard rates can overstate the apparent loss.
A fixed-fee engagement may also show many hours above budget without any right to bill for each one, so those hours point to pricing, scope or delivery efficiency rather than stolen revenue. A post-invoice bad debt relates to collections, not pre-bill realisation, so track it separately.
A client credit for a service problem can be a fair remedy rather than merely a failure to sell. Record the reason for each write-down, such as a scope dispute, duplicated work, training, client agreement or error, and keep reasons specific enough to guide improvement without exposing confidential details.
Review work in progress before billing, because old unbilled work can later need larger adjustments if concerns are ignored. Set clear engagement terms and change control, since unapproved extra work often leads to fee disputes.
Train staff to record time accurately even when they expect a partner might adjust the bill, and never pressure teams to hide time to flatter the rate, as missing records prevent honest cost analysis. Inspect write-downs by matter type, client and service line with suitable confidentiality safeguards, and show amounts alongside percentages because one large strategic engagement can move a period's ratio.
Check whether staff rates, discounts or coding policies changed before comparing years, since a high rate may reflect poor scoping, avoidable rework or an intentional investment in a relationship, while a low rate can coexist with poor service or aggressive billing. For collection write-offs, consider invoice age and the dispute process, check tax and accounting treatment with qualified advisers under the relevant local jurisdiction, and pair the rate with realisation, WIP days, debtor days and matter profitability, remembering that professional obligations and client agreements govern what is proper to bill.
In practice
Real-world examples.
Example
A firm removes $180,000 of $1,500,000 in comparable recorded billable value before invoicing, yielding 12%. The partner records the reason for each reduction, so the team can see how much came from scope disputes and how much from duplicated work.
Example
A client discount agreed before billing is reported separately from a later unpaid-invoice write-off. The finance team keeps both on the matter file, because they have different owners, causes and accounting treatment.
Example
A fixed-fee marketing agency engagement exceeds its time budget by 120 hours. Instead of claiming extra fees it has no right to bill, the agency reviews its pricing and scoping process and adds a change-control step for future projects.
Formula
Calculation
Illustrative pre-bill write-down rate = eligible recorded billable value removed before invoicing / comparable eligible recorded billable value x 100. Define post-bill write-offs separately.
Worked example: a consulting team records $1,500,000 of billable value in a quarter and removes $180,000 before invoicing. The rate is $180,000 / $1,500,000 x 100 = 12%. The invoiced fees are therefore $1,500,000 - $180,000 = $1,320,000.
Now suppose the client pays only $1,254,000 of that invoice and the firm writes off the remaining $66,000 as bad debt. The post-invoice write-off rate is $66,000 / $1,320,000 x 100 = 5%. The two rates use different denominators and should be reported side by side, not added together.Case study
Seen in the real world.
In this fictional case, Cedar Legal found repeated pre-bill reductions on poorly scoped matters. Partners had been removing time at the end of each month without recording why, so the firm could not tell whether the cause was pricing, rework or client disputes. Cedar Legal revised its engagement estimates and began tracking recorded time, billed fees and collections separately.
It also asked partners to choose a reason code for every write-down and reviewed unbilled work each month. Within a year the team could point to specific matter types that needed better scoping. The case is invented and makes no real legal or accounting claim.
Watch out
Common mistakes.
- Mixing pre-bill write-downs with bad-debt write-offs.
- Valuing fixed-fee excess hours as automatically collectible revenue.
- Hiding time entries to improve the reported rate.
Questions
People also ask.
Is a write-down lost cash?
Not necessarily. It may be recorded work that was not billable under the agreement.
Is a bad debt the same measure?
No. It concerns an invoice already issued and should be reported separately.
What can a high rate signal?
It may point to scope, pricing, rework or a deliberate, documented client decision; investigate the reasons.
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