A while back I came across an interesting article that aimed to give some tips and advice to people that are new to the SR&ED program. One thing that stuck out for me was the discussion about fees, specifically on different types of time and material agreements versus contingency fees. The first thing was a word of caution about contingency fees, and how some consultants charge a percentage of the ITCs, but then add interest on top of that. Pretty soon, the fees can add up to more than the agreed upon percentage. I hadn't ever run across that before, and I'm glad it's not something that we do, as it seems unfair that a consultant could let the process drag on in order to increase their percentage. Any fee arrangement should be of mutual benefit, as SR&ED services are a partnership between the consultant and the client. Both parties should be in a better position if the claim is accepted quickly. I've also heard that some firms will quote a certain percentage (say 1% lower than their competition), but in their agreement they include provisions for charging additional expenses. Again, this is an unfair practice, as all it does is obscure the additional fees in the fine print.

The article goes on to talk about the differences between time and material (fee for service) and contingency. It discusses how the fee for a larger claim can be more affected by a contingent fee, while the consultant may be motivated to spend less time on each project in order to process more claims. I've certainly seen that this can be the case in some firms (ie. large accounting firms, where individual performance is measured on the basis of recovery rate, or the dollar value earned per unit of time spent working.) In private firms, though, this is not usually the case. I like to inform my clients that I will spend as much time as is necessary on each claim to ensure that our team is comfortable that we have done the best possible job. In the long run, this pays off for RDFM, because we have fewer reviews and can feel more confident with each claim that we prepare.

The reasons given for choosing a contingency model are risk and expense. Certainly, a shared risk model seems to be what the vast majority of clients prefer. There is no cost up-front with RDFM, unlike many other firms that usually charge a retainer fee before starting work, and then take the remainder when the claim is paid by CRA. By not doing this, RDFM is able to add the most value to our clients' business at the least amount of expense and risk. One thing the article mentions is that there isn't much risk, and that in either case (T&M or Contingent), the consultant should be able to estimate the likely tax credit, plus or minus 20%. I think that is somewhat true based on experience, but there are still cases that come up which can have surprising results, so there is always an element of risk. I also think that if the contingent fee is fair, it should compare reasonably closely with the T&M model, with some allowance for the shared risk factor. It can be difficult to estimate how long a claim is going to take to prepare, especially with new clients because you don't know how good their documentation is or how well their development team can articulate the work they did on a project. Often we are looking back 2 years or more for first time claimants, and this can add significantly to the time needed to gather the necessary information.

The article also talks about the risk of putting in a "dodgy or aggressive claim" and warns against this, which I agree with. Clients need to be well informed about what is eligible and what is not. Too often, consultants will tell the client that "everything is eligible". If you hear this, I suggest walking away - they are likely trying to oversell themselves, and are just playing a numbers game. That is, they know the likelihood of getting an audit and when one claim goes bad, they will simply walk away from it. A good consultant should know what is eligible and explain the risks of a claim to their client. The other end of the spectrum is consultants that will fight to the death for claims that they know are not eligible. Again, this only puts the client in a bad spot, and makes CRA take a dim view of the claimant and the consultant - not a good thing for anyone! My practice is to put in what I believe is the right claim for each client, and that takes experience and knowledge of each clients' individual business, culture, etc, as well as an understanding of CRA's evolving requirements and trigger points. The only real way to add value for each client is to be up-front with them about the SR&ED process and give a clear and honest evaluation of their work in light of the program. If everyone goes into the process with their eyes open, their should be no surprises at the outcome.

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