Why can PwC charge such superhuman fees? It’s all in the power of bargaining

The liquidation of Carillion continues to feature prominently in the news.

Last week, the story was the fees being charged by PwC, the accountancy firm tasked with salvaging money from the wreckage.

It emerged that PwC’s fees, which take priority in terms of being paid over the various creditors and pensioners, amounted to £20.4m for the first eight weeks’ work. The special manager with overall responsibility has a rate of £865 an hour.

The fees were described in parliament as “superhuman”.

We might reasonably ask how these rates are determined. Why are they not half their actual value? The remuneration would still be very substantial. Equally, why are they not double?

The answer from a basic economics textbook would be that it is a matter of supply and demand. The wage – if such a proletarian term is acceptable in these elevated circles – is set at a level which ensures that there are just enough bean counters to carry out the amount of work which exists.

But it is hard to sustain this argument. The Big Four accountancy firms in the UK take on around 5,000 graduates every year. They receive almost 100,000 applications. There is a long process of whittling down. Eventually, nearly 10,000 get to the final stage, an interview with a partner.

Clearly, many graduates have very strong qualifications. But the wage rate is not bid down by this over-supply.

The argument about how prices, in this case the hourly PwC rate, are set goes back a long way in economic theory.

In the decades just before the First World War, two highly accomplished mathematicians who occupied the top chairs in economics, Alfred Marshall at Cambridge and Francis Edgeworth at Oxford, wrangled over the issue.

Appropriately enough in the week following Cambridge’s triumph in both the men’s and women’s boat races, Marshall was the victor at the time. But, to employ another sporting analogy very much in the news, there was a certain amount of ball tampering along the way.

Edgeworth thought that, in most situations, there was an inherent indeterminacy about the price which emerged. He wrote: “it may be said that in pure economics there is only one theorem, but that it is a very difficult one: the theory of bargain”.

Marshall simplified matters dramatically. He assumed that there are so many economic agents in a market that no single one of them can influence the price. This enabled him to draw, in his own best-selling textbook, the supply and demand curve diagrams familiar to generations of students.

But it was a simplification too far. If no one can influence the price, how is it set?

A lot of modern economic theory is about developing Edgeworth’s view that economics is essentially about bargaining. It makes it much more difficult, but more realistic.

There is no inherent economic justification for the hourly rates which the Big Four accountants charge. They have simply got the best of the bargaining process. Companies need to wake up and start to insist on lower fees.

Paul Ormerod 

As published in City AM Wednesday 28th March 2018

Image: PWC by  Bjørn Erik Pedersen is licensed under CC by ShareAlike 3.0

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e: aobyrne@volterra.co.uk
t: +44 020 8878 6333

Alex O’Byrne, Associate at Volterra, is an experienced economic consultant specialising in economic, health and social impact, economic strategy, project appraisal and socio-economic planning matters.

Alex has led the socio-economic and health assessments of some of the most high profile developments across the UK, including Battersea Power Station, Olympia London, London Resort, MSG Sphere and Westfield. He has significant experience inputting to EIAs and s106 discussions as well as drafting economic statements, employment and skills strategies and affordable workspace strategies.

Alex is also experienced at economic appraisal for infrastructure. He was project manager of the economic appraisal for the City Centre to Mangere Light Rail in Auckland. He also led the economic and financial appraisals of the third tranche of the Transport Access Program for Transport for New South Wales, in which Alex developed and employed innovative methodological approaches to better capture benefits for individuals with reduced mobility.

He is interested in the limitations of current appraisal methodologies and ways of improving economic and health analysis to ensure it is accessible to as many people as possible. To this end, Alex recognises the importance of transparent and simple to understand analysis and ensuring all work is supported by a robust narrative.

Alex holds a BSc (Hons) in Economics from the University of Manchester and he was a member of the first cohort of the Mayor’s Infrastructure Young Professionals Panel.


Senior Partner

e: eevans@volterra.co.uk
t: +44 020 8878 6333

Ellie is a partner at Volterra, specialising in the economic impact of developments and proposals, and manages many of the company’s projects on economic impact, regeneration, transport and development.

With thirteen years experience at Volterra delivering high quality projects to clients across the public and private sector, Ellie has expertise in developing methods of estimating economic impact where complex issues exist with regards to deadweight, displacement and additionality.

Ellie has significant experience in estimating the economic impact across all types of property development including residential, leisure, office and mixed use schemes.

Project management of recent high profile schemes include the luxury hotel London Peninsula, Battersea Power Station and the Nova scheme at London Victoria. Ellie has also led studies across the country estimating the economic and regeneration impact of proposed transport investments, including studies on HS2 and Crossrail.

Ellie holds a degree in Mathematics and Economics from the University of Cambridge.