How should you bill your client? The pros and cons of hourly, contingent and flat fees
There are many different ways to charge for your services. You can bill hourly, on a contingency, give a flat fee, or use various hybrid approaches. Below are the most commonly used methods and how to determine what to charge.
Billing by the hour
Hourly billing is probably the most prevalent method of billing among lawyers. It is simply the amount of time spent working on a matter multiplied by a billing rate. Time spent is tracked, often to the nearest tenth of an hour, and recorded. Billable rates can vary from attorney to attorney, for staffing levels (partner versus associate versus paralegal), and even across different practice areas.
· Because it is simply time multiplied by a set amount, hourly billing is easy to calculate.
· Billable rate can be adjusted for the specific situation.
· It can easily take into consideration changes of scope or unexpected situations.
· Requires careful tracking of time.
· Is subject to write-offs—if the bill “feels” too high or to compensate for time spent learning the subject area.
· Client does not know how much is owed until after the work has been performed and client receives a bill.
· Penalizing efficiency and implementing technology.
· Work tends to get handed “downhill” to the person with the lowest billable rate rather than the most knowledgeable or experienced person.
· Potential duplication of charges for multi-attorney meetings.
· Clients tend to treat estimates as set quotes for what they will be paying, while the attorney doesn’t feel bound by the estimate at all since he or she knows it is mostly a guess.
A contingent fee is one where the amount is based upon the occurrence of something. Contingent fees are most often used in personal injury cases and similar matters, where the attorney’s fee is a set percentage of the award or settlement obtained on behalf of the client. However, contingent fees can also be used to compensate an attorney for money saved a client, such as in a tax dispute with the IRS.
· Align the interests of the client and attorney, as both want to get as much money as possible.
· Are the de facto norm in cases such as personal injury.
· A client may not be responsible for any fees if the attorney is not successful.
· Often the attorney will not get any fee, despite performing work on behalf of the client, if the attorney is not successful.
· Payment is usually not received until the matter is complete, which can negatively impact cash flow.
· Contingent fees are prohibited in certain types of cases, such as domestic relations.
A flat fee is a set amount charged for a specific task or matter. Unlike hourly billing, it doesn’t rely on time tracking to determine; flat fees are independent of the amount of time a task takes. They are often quoted in advance, although they can be set later after the work is complete.
Flat fees are flexible and can be used in a variety of ways. Offering services a la carte or unbundled, individual tasks are priced out separately and clients can pick and choose what they want from a given menu. For instance, a client can choose from a simple will for $400, a power of attorney for $100, and a living will for $50. The client has the power to choose only the services he or she wants.
Packages are the opposite; tasks are bundled together and offered together for a set price. You could offer an estate planning package with a basic will, power of attorney, and living will for $500. Packages can be set up to provide a discount over choosing the individual services a la carte, and can be a good way to direct the client to a particular set of services.
Flat fees can also be used to create subscription services. For a set regular fee, usually monthly, you can offer specific work to the client. A good example is for business services. A business attorney can provide a “general counsel” subscription service where the attorney will be available for any basic legal questions the client may have, will review a set number of documents each month, and the client can call the attorney “his lawyer.” Clients like the predictability of a set amount owed each month, and the attorney enjoys monthly cash flow.
· If discussed beforehand, the client knows exactly what he or she will be paying and can therefore budget for it.
· Prices can be tied to value received by the client rather than time.
· Promotes efficiency and rewards the use of technology.
· Work can be performed by the person who is best suited to do it rather than the person with the lowest billable rate who is competent at the work.
· Collaboration between attorneys is promoted since it doesn’t add to the fee.
· It can be difficult to use for newer, inexperienced attorneys or for issues that the attorney is unfamiliar with.
· The scope of the engagement can become enlarged, with no accommodating increase in fee, if the attorney isn’t diligent.
· Some types of cases, particularly those that normally are done on a contingent fee, do not lend themselves as well to flat fees.
· Where a matter contains fee-shifting provisions, courts tend to default to hours worked when determining an award of attorney’s fees.
By Bradley W. Miller, Esq.
From “Show Me the Money!”