Agency retainers: pricing, profit and invoicing

The work covered by the monthly fee

Pick a completed reporting month. For each retainer, record the agreed deliverables, the fee attributable to that period and any approved changes.

If a client pays in advance, that money may cover work you have not delivered yet. Compare the month's fee with the work it actually covers, not just the date the invoice was sent or paid. Confirm the treatment for your contracts and accounting basis with the person responsible for your accounts.

For companies applying the revised FRS 102 revenue model, income follows delivery of the promised goods or services under the relevant contract criteria. FRC guidance on revenue from contracts with customers, section 2, step 5.

Match the delivery costs to that work too. A month can look unusually profitable if its freelancer bill or unfinished work has been left for the next report.

Calculating delivery costs

Give each client or project a consistent code across time records, freelancer bills and client-specific purchases. Include account management, meetings and revisions as well as production work where they consume delivery time.

Employee time needs a cost rate. Use payroll cost, including relevant employer costs, and a documented number of paid hours for the same period. A blended team rate can be a starting point when the mix of people is similar. A retainer delivered by an executive may cost less than one requiring regular work from a strategist or creative director; a single average rate can hide that difference. Include senior review and client-call time, then use role rates where the difference would affect the decision.

Here is a fictional method. A team costs £14,400 for the month, including gross pay, employer National Insurance and employer pension costs. It has 480 paid hours on the chosen allocation basis. That gives £14,400 ÷ 480 = £30 per paid hour.

Assign that cost to client delivery hours, then retain the rest against other clients or non-client time. The cost of holidays, internal meetings, business development and unused capacity remains in the agency's accounts even when it cannot be attributed to a paying client.

If you use a different rate based on expected delivery capacity, document it and reconcile the allocations back to payroll. In either method, the full staff cost must still appear in the agency-wide picture.

If owner delivery time is not captured in payroll costs, show a separate commercial estimate when considering pricing and capacity. That estimate is not an additional payroll expense.

Worked example: two £5,000 retainers

The following example is fictional, not an industry benchmark or an IGO client result. It covers a completed month's work, assumed fully earned at £5,000 per client on the agreed management basis. Both clients have been invoiced. All figures below exclude VAT, and any input VAT is assumed recoverable.

The £30 hourly allocation comes from the fictional team above and assumes a comparable staff mix across the two clients. Freelancer costs cover services delivered in the month, including any agreed estimate where the bill has not yet arrived. Shared overheads, non-client staff time, financing costs and tax are outside this client contribution measure.

Retainer A leaves £5,000 − £3,800 = £1,200. Retainer B leaves £5,000 − £2,700 = £2,300. The difference is £1,100, despite identical fees.

The two clients account for 170 of the team's 480 paid hours. The remaining £9,300 of team cost belongs to other clients or non-client time and remains in the wider report. Neither client's contribution is the agency's final profit.

Now put the collection position alongside it:

In the actual collection schedule, show the full invoice and outstanding balance, including VAT where charged, together with dates and receipts.

A's payment does not change its delivery cost. B's unpaid invoice does not erase the work's contribution. Persistent non-payment can still damage the economics, so keep credit risk, collection costs and any required bad-debt adjustment visible too.

Which customer contracts are profitable?

Rank contracts by contribution per delivery hour, not by fee. Retainer A earns £1,200 ÷ 100 hours = £12.00 an hour. Retainer B earns £2,300 ÷ 70 hours = £32.86 an hour. Same fee, nearly three times the return on the team’s time. Contracts at the bottom of that list are the first to reprice or rescope.

Scope changes and extra work

Before telling A that the fee needs to rise, find out what created the extra work. “Twelve social posts” is not the whole delivery promise if each post needs three format versions, scheduling, comment moderation and separate approval from two client stakeholders. Check those tasks against the agreed scope rather than treating the headline output count as the workload.

Revision rounds need the same attention. Consolidated feedback on one version and a fresh brief after sign-off are different pieces of work. Record the reason for the extra round, who authorised it and whether an additional fee was agreed. Split feedback may call for one client approver; a change in direction may need a revised brief and price.

If the client asked for more and the scope allows additional charges, agree the work and price through the contract's approval process. If your own handoff caused the rework, improve that handoff. The same extra hours can have different causes.

Also keep a visible list of deliverables carried into next month because access, assets or approval are missing. A quieter delivery month may have created a later capacity problem. Check what the retainer says about rollover or reserved availability before calling the unused time spare capacity.

Do not automatically turn every unbilled hour into extra revenue or a customer debtor. A time record supports the delivery-cost review; the contract and accounting basis determine whether there is anything to recognise or invoice. FRC guidance distinguishes contract balances from an unconditional trade receivable. FRC guidance, section 3, contract balances.

Freelancer bookings and reporting periods

Suppose you book another £600 of freelancer work for a future delivery month. Put it in that month's expected delivery costs and the payment schedule. It does not reduce the completed month's £1,200 contribution merely because you have made the booking now.

If the £600 actually relates to work already delivered in the month under review, check whether it belongs in that month's costs even though the invoice is missing. If it is already included in the £3,800, adding the commitment again would count the cost twice.

A useful booking record therefore needs four things: the client, delivery period, amount and whether the cost is already included in the accounts. Add the expected payment date for the cash view.

How to price an agency retainer

Start from cost, then add the margin you need. Fee = (hours × cost rate + freelancer costs) ÷ (1 − target margin).

Watch the markup trap. Adding 40% to cost gives £2,200 × 1.4 = £3,080, which is only a 28.6% margin (£880 ÷ £3,080). Write the hours the fee assumes into the scope, so extra work can be priced when it comes.

Retainer invoicing: in advance vs in arrears

A retainer is usually a continuous supply of services. Its VAT tax point is the earlier of the date you issue a VAT invoice and the date you’re paid.

• In advance. Better for cash, and the client commits before the work. A VAT invoice dated 1 October puts the VAT in that quarter even if the client pays in November. The income still belongs to the month the work is done, so the unearned part sits as deferred income.
• In arrears. Easier to bill extra work on the same invoice, but you fund a month of delivery and the tax point is the invoice date.
• VAT before payment. To keep VAT in line with cash, send a request for payment that is not a VAT invoice and issue the VAT invoice when paid, or use the cash accounting scheme if taxable turnover is £1.35 million or less.

• HMRC VAT Notice 700: tax points and continuous supplies
• HMRC: cash accounting scheme

Deciding what to change

There is no universal contribution percentage in this table. Your required result depends on overheads, capacity, risk and the work you want to take on.

Agree who completes the month's delivery records and who handles billing and payment follow-up. They may be the same person in a small agency. Unresolved items should have someone responsible for following them up.

In Good Order can prepare recurring management reports and maintain the supporting customer and supplier records. We can also review how completed work reaches invoicing.

You provide the delivery and scope information; the reporting method and responsibilities are agreed around it. Credit control, forecasts and specialist contract-accounting work need an explicit scope.

If you need help with the accounting work, let's talk. The initial conversation is free, with any further work agreed separately.