The covenant request that arrived without a scope
A two-partner advisory firm holds a fixed-fee engagement letter with a 40-employee manufacturer: monthly management reporting at $6,500 per month, with scope limited to the 'board reporting pack'. In month three the client's CFO emails asking for help with a bank covenant submission due in nine days. The work involves a rolling 13-week cash-flow model, covenant headroom analysis, and liaison with the lender. The manager estimates 35 hours of senior time at $420 per hour. The relationship partner is on leave for two weeks and is not contactable. The manager holds delegated authority to commit up to $10,000 in additional fees without partner approval. The client writes: 'just get started, we'll sort the paperwork later', and has paid on time for four years. The manager has six other deliverables due this week and one analyst who has never built a covenant model.
1. What must be settled before any billable work begins, and why does each item matter?
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The problem is not the client's urgency - it is that four separate things are unresolved at once.
Work through them in order of irreversibility:
- Authority. The estimate is 35 × $420 = $14,700, which exceeds the manager's $10,000 delegation by nearly 50%. Starting work does not commit the fee, but telling the client to 'get started' does, in practice. The manager needs either a scope that fits inside $10,000 or a documented delegation from someone with authority.
- Scope. The engagement letter covers a reporting pack. Covenant compliance work is a different service carrying different risk - if the lender relies on the firm's model, the firm has moved from adviser towards a party the bank may lean on. Decide explicitly whether lender liaison is included.
- Capability and capacity. One analyst who has never built a covenant model, plus six live deadlines, is the real constraint. A nine-day deadline set against that capacity is a delivery promise, not an estimate.
- Paperwork first, not later. 'We'll sort the paperwork later' is the sentence that creates fee disputes. A one-page variation - scope, fee, assumptions, exclusions, delivery date - takes 20 minutes and is the cheapest risk control available.
The reasoning that matters: urgency is a reason to prioritise documentation, not to skip it, because urgency is exactly when misunderstandings about scope become expensive.
2. The deadline genuinely cannot move. How would you accept part of the work without creating an exposure you cannot manage?
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Accept a defined, defensible slice, not the whole job on a hope.
- Sequence by dependency. The covenant headroom analysis is what the lender needs on day nine; the full 13-week model can follow. Deliver the headroom answer with a clear statement of the assumptions behind it, and phase the model.
- Buy review, not just hours. If the analyst builds, a reviewer with model experience must check it before it leaves the firm. Budget the review time in the fee - unbilled review is the first thing cut under pressure and the last thing that should be.
- Write the limits into the deliverable. State the source of every input (client-provided forecast, management assumptions), the scenarios run, and what was not tested. A caveat that names the specific limitation is worth more than a general disclaimer.
- Reduce elsewhere honestly. Six other deliverables will not all land on time. The right move is to tell those clients early, not to silently let quality drop across seven jobs.
The test to apply: if the lender later asks 'on what basis did you conclude headroom was adequate?', can the firm answer from the file? If not, the slice is still too big.
3. The partner is unreachable. What is the correct handling of the escalation, and what would you record?
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Leave is not an absence of accountability - it is an absence of availability. The manager should:
- Escalate in writing to the partner's nominated delegate (most firms of this size have one, even informally). If none exists, that gap is itself a finding to raise later.
- Contact the partner by a channel they have chosen to monitor for urgent matters. A short message stating the facts, the fee, the commitment sought and the deadline is not an intrusion; committing $14,700 without authority is.
- If no answer arrives, make the decision inside the delegation and say so. Approve a scope that fits under $10,000 now, and present the balance as an option when authority is available.
Record in the file: the request and its date, the estimate and its basis, the delegation limit, who was contacted and when, the decision made, the scope accepted, the exclusions, and the client's acknowledgement.
The reasoning: the record is not bureaucracy, it is the substitute for the conversation the manager could not have. If the engagement later goes wrong, this file is what separates a judgement call from an unauthorised commitment.