How much should lawyers charge? (And how to raise fees)
When starting up your law firm, it can be a challenge to figure out how much to charge for your time. While it may be premature to expect $3,000 haircuts and custom, hand-tailored cashmere suits—you shouldn’t be stuck eating canned beans for lunch every day. And, let’s face it, law school is expensive. You shouldn’t settle for less than you’re worth.
Whether you’re planning to bill by the hour, with set rates, or through contingency arrangements, you’ll first need to know what you’re time is worth. Below, we’re going to look at how to set your value expectations—and how to raise them.
First, let’s look at what the market expects from an educated, trained, and experienced lawyer.
The Value of Legal Service
Before you lower your rate expectations, however, it’s important to recognize the scope of service, and value, a lawyer provides. There is no doubt that lawyers earn more than people in other professions—and there’s a good reason.
I don’t know if the public really appreciates what a lawyer agrees to do for her clients when we sign a retainer. In fact, I think some lawyers need to be reminded… After a client signs a retainer with me, I look them in the eye and tell them ‘Okay, you don’t have to worry about this any more. Your problems are now my problems.’ It is just a thing I say, but it is a true thing I say.
Lawyers take on people’s most worrying and pressing problems—often with the risk of high-consequence. It’s a significant obligation that demands a high degree of specialized knowledge, tact, and professional responsibility—which can be life-encompassing.
That said, it’s important to keep in mind the rules of professional conduct, which expect legal fees to be “reasonable.” Aside from attributing billable work to detailed time-records, let’s look at how to set some baseline expectations for what is reasonable for you and your firm.
Cost of Doing Business
What you bill isn’t just about what you get paid. Your legal fees also need to cover everything that keeps your door open and your lights on. This is one of the benefits to running a leaner practice; less of what you earn goes to paying overhead—and there’s less of a barrier to getting your firm up and running.
There are three components to estimating annual cost: salary, business expenses, and profit expectations.
Salary Equivalent. While you should expect to be paid, lawyers often make the mistake of subtracting the capital from their law firm when a client pays their bill. A better method is to “pay” yourself a salary, a fixed amount monthly that leaves capital in the firm for lean months or to invest back into the firm.
For you to run your practice, you need to make sure that your work salary covers your cost of how you want to live. Think deep: student loan payments, mortgage payments, car expenses, child care, vacations, taxes, and everything else that keeps a roof over your head.
Business expenses (non-reimbursable). When calculating your non-reimbursable business expenses, you’ll need to account for everything that keeps your office running, on an annual basis. This may include: office space, software subscriptions, an accountant, equipment, furniture, utilities, postage and delivery fees, business insurance, bar memberships, medical insurance, and travel expenses—among others.
While money earned is generally meant to go into your own pocket, it’s important to continually invest in your business, which means you’ll need to set aside money for the firm. Reported profit margins for AmLaw 200 firms average at 36.5%
(with a median of 35%)—with some reporting as high as 60%. This money can then be invested in new marketing initiatives, new equipment, or professional development opportunities. Having funds on reserve in your firm will also help you weather any slow billing periods, or offset any potential cash flow—or collections—issues throughout the year.
Let’s say you’re looking to take home $100,000 per year in salary and have annual non-reimbursable business expenses of $30,000. If you’re looking to earn a profit margin of 40%, you’ll be looking to bring in another $52,000 (($100,000 + $30,000) x 40% = $52,000).
To calculate your annual cost of doing business, add these numbers together: $100,000 + $30,000 + 52,000 = $182,000. Next, we’ll divide this number by your planned number of billable hours for the year.
Calculate Your Number of Billable Hours
Let’s say a given year has 260 weekdays (which can range from 259 to 262 days, given the year). With ten national holidays in the United States, that brings your total number of regular work days down to 250. If you plan to work eight-hour days, that leaves you with 2,000 potential billable hours.
Chances are, you’ll need to take some vacation time to avoid burnout, and it might be good to plan for a few sick days. Let’s factor in an additional three weeks, or 15 working days (120 hours), of being out of office, bringing our total office hours down to 1,880 (2,000 – 120 = 1,880).
Put It All Together
Once you’ve figured out and calculated the above, divide your cost to do business by the number of billable hours you expect for the year. In this case, it will be: $182,000 / 1,128 = $161.35/hour.
Before making any judgment on whether this number seems high or low, let’s look at a few other factors that can affect your planning.
Compare Market Rates
Market rates can vary according to geography and specialization, and there might be room for you to bump your rates where your services are in high demand. The ABA Journal has put together a resource that looks at average salaries for lawyers in different states, which can range from $40,820 to $192,000 per year
. Many state bar associations also post industry salary trends with breakdowns of firm type and practice areas. It’s also a good idea to talk to colleagues or mentors for information and advice based on their experience in the market.
Make Yourself More Valuable
Increase Productivity, Bill More Hours—And Track Your Targets
If you’re unhappy with your current rates, another way to raise expectations for yourself is to look at ways to increase productivity and the number of hours you bill per day. Setting yourself up with the right practice management software and finding ways to automate repetitive tasks can increase the time you devote to clients.