Flat Fees, High Fixed Estimates, and Hybrid Contingency Fees
Many non-lawyers may not be aware of it, but the legal market has changed dramatically in the past decade. To be sure, the market has become saturated with lawyers. But more importantly, there is more and more discussion about alternative billing schemes. While the vast majority of law firms still bill their clients on an hourly basis, many solo practitioners have adopted alternative pricing schemes to better meet their clients’ needs.
No matter the service — legal, accounting, etc. — most people find the billable hour annoying. Even some lawyers say that the billable hourly rate must die. Yet the norm in most law firms is the billable hour.
The problem with the billable hour is that clients never really know exactly how much a service is going to cost in the end. The other problem is that the billable hour does not give the lawyer an incentive to work efficiently for the client’s benefit.
These problems can be resolved if the lawyer quotes a fixed fee or quotes a “high, fixed estimate.” When it comes to money, clients want a sense of finality.
Let me give some examples.
1. When I review a commercial landlord-tenant contract, or draft an operating agreement, or draft a release from liability, I have a good idea how long it will take, so I offer clients a flat rate fee.
2. Before I review a child’s educational and medical file, I ask the client how old the child is, how many years the child has had special education services, and how many evaluation reports have been issued. Based on that answer, I have a good idea how long it will take to review the entire file, so I offer a flat rate fee.
3. If a client asks me to represent her in court on a complex matter, there is no way of telling how long litigation will take without knowing the facts of the case and the complexity of the case. If the case involves a legal area that I am familiar with — labor and employment law, non-compete agreement, special education — I will bill by the hour and give a high, firm estimate on different stages of the case.
What is a “high, firm estimate”? It’s equivalent to a “cap.” It is an estimate that is based on an hourly rate multiplied by the time I believe it will take to resolve the case. If the actual time to resolve the case exceeds the expected time, I take the risk of the financial loss. If the actual time to resolve the case is less than the expected time, the amount of the retainer fee less the actual amount billed is returned to the client.
4. In limited circumstances, a contingency fee or hybrid contingency fee may be appropriate. This is generally limited to cases that where the facts are favorable to my client and there are statutory shifting attorney fees. Hybrid contingency is one in which the client shall be responsible for costs, such as court fees, mailing costs, depositions, etc. Another possible approach to hybrid contingency fee is to bill clients a percentage of the normal hourly rate. Naturally, hybrid contingency fee arrangements are dependent on the type of case and the facts of the case.
Just as it is important for lawyers to develop alternative pricing schemes, so too, it is important that potential clients understand that there are many variables that must be factored in when that “magic number” is announced. These factors may include:
1. The attorney’s experience;
2. The attorney’s areas of expertise;
3. The facts of the case;
4. The complexity of the case;
5. The venue (Federal court, state court, Office of Administrative Law);
6. The client’s expectations;
7. The estimated amount of time that will be spent on the case; and
8. How quickly things need to be completed.
I am not so certain that the billable hour will go away. Sometimes, the the billable hour is the right approach, particularly when it comes to litigating complex matters. Because complex litigation is unpredictable, we can never know with any absolute certainty how long litigation will take. Some cases may take a few months to resolve; others take years.
Solo practitioners are in an excellent position to devise and implement alternative billing practices because there is often little overhead, no associates, and few staffers (if any). Alternative billing schemes work especially well for discrete tasks. For more complex work, it can take a while to develop an alternative billing practice. Sometimes, it takes trial and error. In the end, clients like having a sense of finality and appreciate knowing what to expect in the long run.