Should you use project-based or retainer-based accounting?

From tax filings and monthly books to cleanups and year-end reporting, your financial needs don’t stay static; they’ll grow alongside your business. 

You might be researching how to hire a startup accountant, or maybe you’re already relying on outsourced finance support and thinking about what comes next. Before you make any moves, it’s important to understand the trade-offs between project-based vs. retainer-based accounting, and how to decide what will work best for your early- to mid-stage business as it evolves. For example, which outsourced accounting model will help you reach your goals and support your company as it scales? Choosing the wrong accounting model can lead to under-service, overpaying, and financial chaos. But choosing the right model can not only ensure you have clarity around your business's budgeting and cash flow, but also help you operate with confidence knowing accounting processes are smooth, predictable, and well-managed.

In this article, we’ll show you a framework for choosing the right outsourced accounting model based on your business’s stage, complexity, and needs — and explore some red flags you shouldn’t ignore when working with an outsourced accountant.

You’ve probably heard of both project-based and retainer-based accounting before, but do you know what each accounting model entails? To help you determine the right one for your needs, here’s the key information you should understand about each model.

Project-based accounting

A common type of outsourced accounting for startups, the project-based accounting model has a defined scope of work for one-time tasks and clearly defined deliverables. Think: tax filing, bookkeeping cleanup, system implementation, and audit prep. Project-based accounting is for short, single engagements only. 

Retainer-based accounting

If you have continuous, reoccurring work, you’ll need a startup accounting retainer for ongoing services. Tasks that repeat on a regular basis — such as month-end close, payroll, bookkeeping, and reporting — are ideal for an outsourced, retainer-based accountant.

Pro tip: Keep in mind that you aren’t limited to one accounting model. You always have the option to use both if the need occurs. For example, you could consider a retainer-based model for reoccurring tasks, with a project-based add-on for one-time tasks.

There’s no such thing as the single best accounting setup for startups. It all depends on your business's requirements and goals. Consider the pros and cons of each model to help you figure out how to outsource accounting for your company.

How you build your startup’s finance team structure will depend on the stage of your business as well as your short- and long-term goals. 

Pre-seed

A company’s financial needs are usually infrequent and simple in the pre-seed stage, so a project-based model will likely work for you here. Tasks may include initial bookkeeping setup, basic chart of accounts, simple financials for investors, and historical cleanup. However, if your revenue is already complex, a light retainer may serve you best. 

Seed

In the seed stage, your accounting needs are shifting, and you’ll likely require monthly bookkeeping, regular close and reporting, payroll, sales tax coordination, investor updates, and more. At this stage, founders want reliable numbers on a regular basis. A light retainer or hybrid model will work best because of recurring accounting needs.

Series A

Accounting is now a strategic function during the series A stage, and you’ll need budgeting and forecasting, board-level reporting, audit readiness, and cash-runway management, in addition to regular monthly finance tasks. You may even consider including a controller or chief financial officer-level support as part of your scope. With continuous and time-sensitive work, a retainer or in-house hire may be the best decision for your company.

In addition to considering your business’s stage, here’s a simple framework that can help you decide how to outsource accounting: frequency plus complexity plus headcount. Here’s how to break down this formula:

• Frequency: How often do you need accounting support? If it’s occasionally, project-based accounting is best. More? Then you should get a retainer. 
• Complexity: How complex are your finances? If you have multiple revenue streams, entities, and compliance needs, go with a retainer. With a simple revenue stream, project-based is doable. 
• Headcount: How many people in your organization rely on finance professionals to make business decisions? If it’s just the founders, a project-based accounting model can work. But if it includes managers, the board, investors, and others, you may require a retainer.

There are many benefits of fractional finance support, but your outsourced accounting model can also be a source of risk, if it’s not managed well. Watch out for these red flags, so you can take action right away.

Surprise monthly bills

If your accountant sends you invoices that fluctuate wildly, this can be a big cost risk. In this scenario, budgeting becomes unpredictable and you’ll begin to lose financial clarity. Ask for fixed-scope projects or a clearly defined monthly retainer. Set escalation rules before any “extra” work begins.

Lack of deliverables

If you’re paying monthly but aren’t really sure what you’re getting in return, there’s an accountability issue at play. Clarify the retainer scope and establish a monthly close timeline that also includes monthly reports. Tie the retainer to operational outcomes, like cleaner data or more accurate forecasts. 

Gaps in continuity 

Project-based accounting promises delivery, and this model is handy when your business needs help with a specific situation. But this approach can also mean that there’s no continuity, since you’re often bringing on a new accountant for each project. To solve this issue, move core work, like month-end close and bookkeeping, to a retainer. This way your accounting team can build institutional knowledge, and you can save time and avoid unnecessary onboarding. 

Unclear processes

Regardless of whether you have a project-based or retainer model, you’ll need written processes. Poor documentation leads to fragile finance operations, which lack consistency and don’t have compound knowledge. Collaborate with your outsourced finance team to develop written checklists and processes for the scope of work.

Here’s the scoop on each type of outsourced accounting model.

When it comes to project-based vs. retainer-based accounting, consider your company’s stage, level of complexity, monthly budget, and other factors. Remember that your choice can change. You can easily move from a project-based model to a hybrid or retainer-based model as your business grows and evolves. 

To help founders build your company’s core financial operations stack with smart solutions, Mercury offers accounting automations, expense management tools, financial workflows, and so much more. Plus, you’ll also get expert insights to help guide you as you scale your business.