Monday, February 19, 2007

How should lawyers charge for services?

There are three ways to charge for legal services: hourly, fixed fee or contingency. I typically charge for work on an hourly basis. Even when I offer clients a "fixed fee", I have to estimate the amount of time it would take and base the estimate on some equivalent amount of time. Other lawyers charge on a contingency, but that is not generally appropriate unless the matter has a significant payout and easily definable objectives.

So how should lawyers charge for their time? Lawyers are are split as to whether to charge for a fixed fee vs. hourly.

Tom Kane, a marketing consultant and former practicing attorney, suggests that small firms can gain an advantage over large firms by "looking seriously at alternatives to billing by the hour".

Chris Marston, founder of Exemplar Law Partners, LLC, a firm that claims to be the "first corporate law firm in the nation to exclusively adopt a fixed price model", believes that fixed pricing must be based on "value to the client".

Jeffrey Lalloway, a divorce lawyer in California, advises "not to hire a lawyer that is not willing to work on a fixed fee basis."

Joseph Grasmik, a business immigration lawyer in New York, publishes "typical fees" on his website with detailed FAQs, but then invites potential clients to request an estimate for a specific matter. Mr. Gasmik also publishes a "do-it-yourself" engagement letter that clients are supposed to fill out and sign based on quoted fees.

My approach is not to be strictly limited to either fixed fee or hourly rates. For some matters, like incorporation, a fixed fee is appropriate because the nature of the work is known and can be estimated based on prior experience. For other matters, the time or work is not known and may be disproportionate to what the matter is worth objectively (because the client wants to pursue it for non-monetary reasons). What is important is to set expectations reasonably and to put the client in control of deciding what services they wish to buy.

In yesterday's blog, I wrote that Knowledge Management will drive law firms of the future. If law firms develop high quality knowledge systems, how will that affect pricing? Will that make fixed fee billing more likely to be offered?

How do you think lawyers should charge for services?


Roy J. Watson, Jr. said...

I believe that there is another way of billing, and that would be to charge a "Minimum Estimated Fee." As an experienced lawyer, you can reasonably esitmate the costs of most cases. You set as a "Minimum" fee a cost equal to that number of hours. It is a number which, presumably the client agrees is a fair price to accomplish the end result. If you - by some miracle - are able to accomplish the result the client wants in less time than estimated, you keep the entire fee. The client doesn't care how you got it done, just that you got it done for the price agreed. If, however a complication arises that was unforeseen, then you are not "locked in" to the fixed fee arrangement that forces you to eat the cost. Presumptively on the fixed fee (with exceptions noted by Roger) you have some exceptions written in, but I find the MEF a far better (and fairer to both sides) way of charging a fair price for the attorney, but also protecting yourself on the other side.

V-lawyer said...

Excellent suggestion! Although the MEF seems to favor the lawyer, it really does help to set expectations and guarantee the downside. It also gives the lawyer an incentive to handle the matter most efficiently.

Scott A. Joseph said...

Our firm has used a similar model in which we quote an estimated fee and collect a retainer in the estimated amount (or slightly higher if the client is not an existing client or is someone whom we are unsure of creditworthiness). Clients are always happy when a portion of the retainer is returned at the end of the matter.