The quarterly retainer audit we run on ourselves
Retainers drift. Scope grows in small, reasonable steps until nobody can say what the fee is for. Four questions, every quarter, keep ours honest.
Most of our revenue comes from retainers. About two thirds last year, across 19 clients. Retainers are good for a boutique agency because they let us staff steadily and know a client's business well. They are also the easiest place for an agency to quietly stop earning its fee, or quietly start giving work away.
Three years ago we lost a client we had served for six years. The exit conversation was polite and short. They said the work was fine, but they could no longer explain to their CFO what they were paying for. They were right. Our original scope had been brand and paid social. By the end we were also writing their email program, building landing pages, and pulling a weekly dashboard nobody had asked for in writing. None of it was in the agreement, and none of it had been priced.
After that, Derek Halvorsen, our CFO, and I built a quarterly audit. It is not complicated. It takes each account lead about two hours, and we review every retainer together in one long afternoon at the end of the quarter.
Question 1: What did we actually do?
We pull hours by workstream from our time system and compare them with the scope document. Not the proposal, the signed scope. We flag any workstream that consumed more than 10 percent of hours and is not named in the agreement.
The first time we ran this, 11 of 17 retainers had at least one unnamed workstream. Most were small and defensible. Two were large enough that we were losing money on the account.
Question 2: Would the client describe it the same way?
This is the uncomfortable one. The account lead writes three sentences describing what the retainer delivers, as if explaining it to the client's CFO. Then, at the next quarterly business review, we ask the client to do the same thing before we share ours.
When the descriptions match, we move on. When they do not, that is the conversation for the meeting. Usually the gap is that we think we are delivering strategy and they think they are buying production, or the reverse.
Question 3: Is the team the right size?
We look at who is assigned against who is actually doing the work. Retainers tend to accumulate people. A designer helps on one campaign and stays on the staffing plan for a year. A senior strategist gets pulled in for a launch and never rolls off.
The rule we use is simple. If a person logged fewer than eight hours on an account in a quarter, they come off the staffing plan unless the account lead can name the work coming up that needs them. It keeps our utilization reports honest and keeps client teams from wondering who all these people are.
Question 4: What is the margin, really?
Derek runs fully loaded margin per retainer: salaries, benefits, software, and a share of overhead, not just billable rates. We target 35 to 40 percent gross margin at the account level. Anything under 25 percent for two quarters in a row triggers a rescoping conversation with the client.
That conversation is not always about raising the fee. About half the time we propose cutting scope back to what the fee covers, and the client agrees because they did not value the extra work much anyway.
What changed
We have now run the audit for eleven quarters. A few results stand out.
Average retainer gross margin went from 27 percent to 36 percent. Some of that was repricing. More of it was dropping work nobody valued.
Retainer renewals improved. In the three years before the audit we renewed about 70 percent of retainers at term. In the three years since, it has been closer to 85 percent. Clients tell us the quarterly description exercise is the most useful part of the business review.
We also turned down more expansions. When a client asks for something new, the account lead can now say it would be a scope change and show the numbers. That used to feel confrontational. Now it is just how we work.
If you run an agency
You do not need our spreadsheet. Pick one retainer this week, pull the hours, and write down in three sentences what the client is paying for. Then ask them to do the same. The difference will tell you most of what you need to know.
If you are a client and want to see the template we use, email me. I will send it.